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Learn how to prepare inputs for Actuarial Valuations under Gratuity and Leave Encashment Plan in compliance with AS 15 (Revised 2005) & IndAS 19. Understand key technical points for accurate results.

How to prepare Employees Data and inputs for Actuarial Valuations in compliance of AS 15 (Revised 2005) & Ind AS 19

How to prepare inputs for Actuarial Valuations under Gratuity and Leave Encashment Plan

This article is prepared to help the company officials (i.e. HR, Accountant, Finance Managers, & Company Secretary) involved in the preparation of Actuarial Inputs for Actuarial Valuations in compliance with AS 15 (Revised 2005) & IndAS 19 to understand various technical points while preparing the Inputs.

Background

As per Sections 128, 129 & 133 of the Companies Act 2013, all Indian Public Sector, Private Sector, and Multinational Companies need to prepare the Financial Statements such as Balance Sheet & Profit/Loss Accounts at the closure of each financial year as per the provisions of Section 129 of the Companies Act 2013. Also, as per the provisions of Section 133 of the Companies Act 2013, Financial Statements should be prepared in compliance with Accounting Standards as stipulated by the Ministry of Corporate Affairs so that they can give a true and fair view of the state of affairs of the company. I reproduce hereinbelow the main portion of the above 3 Sections for quick reference –

Section 128 – Every company shall prepare and keep at its registered office books  of  account  and  other  relevant  books  and  papers  and  financial  statement  for every  financial  year  which  give  a  true  and  fair  view  of  the  state  of  the  affairs  of  the  company. 

Section 129 – The financial statements shall give a true  and  fair  view  of  the  state of  affairs  of  the  company  or  companies,  comply  with  the  accounting  standards  notified  under  section  133 and  shall  be  in  the  form  or  forms  as  may  be  provided  for  different  class  or  classes  of  companies  in Schedule III, Provided  that  the  items  contained  in  such  financial  statements  shall  be  in  accordance  with  the accounting  standards.

Section 133 – The Central Government may prescribe  the  standards  of  accounting  or  any  addendum  thereto,  as  recommended  by  the  Institute  of Chartered  Accountants  of  India,  constituted  under  section  3  of  the  Chartered  Accountants  Act,  1949  (38 of  1949),  in  consultation  with  and  after  examination  of  the  recommendations  made  by  the  National Financial  Reporting  Authority.

It is understood from the above Sections of the Companies Act 2013 that all Indian Public Sector, Private Sector, and Multinational Companies have to follow the Accounting Standards. The most crucial and complex accounting is related to the following Employee Benefits: –

1. Gratuity – Regulated by the Payment of Gratuity Act 1972 (a)

2. Earned Leave Benefit – Regulated by various Labor Laws

3. Sick Leave Benefit – Regulated by various Labor Laws

4. Long Term Service Awards – Regulated by company for Retention of Employees

5. Pensionary Benefits – Regulated by CCS Pension Rules 1972 (a)

6. Post Retirement Medical Benefits

7. Long Term Allowances

The above employee benefits fall in the category of Defined Benefit and further categorized as Post Employment Benefit Obligation & other Long-Term Benefits. Accounting and Disclosure requirements for the above Defined Benefit Plans are laid down in the following 2 Accounting Standards as issued by The Institute of Chartered Accountants of India (ICAI):-

1. Accounting Standard 15 (Revised 2005) – AS 15 (Revised 2005)

2. Indian Accounting Standard 19 – IndAS 19 

The main objectives of the above Standards are to prescribe the guidelines and disclosures for Accounting for Defined Benefit Plans (i.e. Gratuity, Leave Encashment, Pension, etc.). In order to comply with the above standards, a company is required to recognize:

(a) a liability when an employee has provided service to the company in exchange for defined benefits to be paid in the future, and

(b) an expense when the company consumes the economic benefit arising from service provided by an employee in exchange for defined benefits.

Inputs in Actuarial Valuations

The preparation of inputs for Actuarial Valuations plays an important role in the Actuarial Results, so it is really important for the preparer to understand the implications of inputs on the Actuarial results. In this section, we will give a list of important Actuarial Inputs to be prepared by the company officials for Actuarial Valuations in compliance with IndAS 19 & AS 15 (Revised 2005). The list of inputs required for Gratuity and Leave Encashment Plan is as under: –

1. Inputs for Actuarial Valuation under Gratuity Plan

All companies with 10 or more employees are required to comply with Section 7 of the Payment of Gratuity Act, 1972 and required to make the payment of gratuity within 30 days from the date of exit from the company, and as Gratuity falls in the category of long-term employee benefits, hence companies are required to comply with Accounting Standard 15 (Revised 2005) for making the provision in the balance sheet as per the Actuarial Report issued by the Actuary. The following details are required to be prepared by the company for getting the Actuarial Valuation Certification from Actuary under the Gratuity Plan:

i. Employee Data – The components of employees data on the date of valuation are as under:-

1. Employee Code

2. Name of the Employee

3. Date of Birth

4. Date of Joining

5. Qualifying Wages for Gratuity Computations (i.e. Basic plus DA or as per company policy)

ii. Assumptions – The following Assumptions are required to be submitted by the company for valuation after analysis of past 5 years :-

1. Financial Assumptions: –

iii. Rate of Salary Increase

Discount Rate (as per para 78 of AS 15R & Para 83 of IndAS 19)

Demographic Assumptions: –

1. Rate of Withdrawal

2. Mortality Rate (Currently IALM 2012-14 is used as per guidelines of Insurance Regulatory and Development Authority (IRDA))

3. Retirement Age

iv. Gratuity Policy of Company for making the payment of Gratuity – The following details about the Gratuity Policy are required to be submitted by the company for valuation: –

1. Details about the Formulae for Payment of Gratuity

2. Details about Ceiling Limit on the Gratuity Amount

3. Details about the waiting condition for eligibility of Gratuity

4. Details about any special feature about Gratuity Policy, if applicable.

v. Details about the benefit paid during the Financial Year or the period for which actuarial valuation is required – Detail about any Gratuity Paid to the employees is a part of disclosure of the actuarial report under Gratuity Plan.

vi. Details about the Fund held in the Gratuity Trust – If company as created a Income Tax Approved Gratuity Trust in terms of Part C of Schedule IV Of Income Tax Act, 1961 then following details are required to be submitted :-

1. Value of Assets at the Start of the Accounting Period

2. Interest

3. Contribution made the company during the Accounting Period

4. Claim received by the company during the accounting Period

5. Closing Value of Plan Assets at the End of Accounting Period.

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I hope the above details may help Chartered Accountants (CAs), CS, Directors, Auditors of the company in the preparation of Inputs for Actuarial Valuation in compliance with AS 15 (Revised 2005) & IndAS 19. For any clarification or query on the above subject, you may call me at 011-452961651 or email your query at [email protected], [email protected].

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Preventing Non-Compliance: CA, CS, Auditors’ Role for AS 15 & IndAS 19 Actuarial Valuation for Accounting of Gratuity Benefits – Ind AS 19 & AS-15 Options available to Indian Private & Multinational Companies to Discharge Gratuity Liability How Companies can comply with requirements of Payment of Gratuity Act 1972 Applicability of Ind AS 19 on NBFC’s, Banks & Insurance Companies View More Published Posts

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