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.
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
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.
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 firstname.lastname@example.org, email@example.com.