actuarial valuation of gratuity, leave and pension schemes

What is IAS 19 and how to be compliant?

With the introduction of International Financial Reporting Standards (IFRS) in Saudi Arabia, all companies will need to get an actuarial valuation done in respect of End of Service Benefits. International Accounting Standard No 19 (IAS 19) sets out in detail how EOSB must be valued and accounted for. For the first time reporting under IAS 19, last two years worth of comparatives will also need to be calculated.

In addition to EOSB, many companies offer other Defined Benefit schemes to their employees, such as Compensated Absences, Pension or Deferred Income Plan. IAS 19 requires actuarial valuation for those as well.

This post provides more information on IAS 19 and it’s application to End of Service benefit schemes.

How is an actuarial valuation done?

The purpose of an actuarial valuation is to calculate the ‘present value’ of payments that would be made to employees in future as part of an employee benefit plan.

Actuaries start by making assumptions about future salary increment rates, attrition and mortality rates. The assumptions are then used to project the benefit payments that will be made form the employer to its employees, as per the rules of the plan.

Actuaries choose another assumption called the discount rate, to convert the future payments into a present value. This is the liability that you will need to disclose in your financial statements.

Actuarial valuation is generally meant to include not just an estimate of liability, but extended disclosures in the form of an actuarial report.

How to set actuarial assumptions?

Wrong actuarial assumptions lead to wrong liability estimates. Therefore, you need to have a thorough understanding of the accounting standards applicable on your company.

Most accounting standards, including AS 15, Ind AS 19, IAS 19, ASC 715 and FRS 17, place the responsibility for all actuarial assumptions on the Board of Directors of the reporting enterprise. Read this to understand the regulatory context and governance around actuarial assumptions.

Actuarial valuation process requires the following assumptions:

  • Discount rate – arguably the most important assumption, this is set based on yields on the central government bonds. This post explains how you should set the discount rate assumption.
  • Salary escalation and attrition rates – these are the reporting enterprise’s best estimates of future salary increments and attrition. This post explains the method for setting the salary escalation assumption and this post explains the considerations for attrition assumption.
  • Other assumptions, include mortality, leave availment, disability etc. are relevant and important for specific schemes.

Interpreting the results in an actuarial report

The process of actuarial valuation does not end with getting an actuarial report from an actuary. You need to understand the results, validate and challenge them. The auditors must carry out their own assessment of the actuarial report.

By far the most important part of an actuarial report is the exhibit related to ‘reconciliation of Defined Benefit Obligation’. This disclosure presents an analysis of movement of the DBO and is required under most accounting standards. This post explains how to interpret this disclosure in the context of an AS 15 report.


About Numerica

Numerica is a leading provider of actuarial and valuation services to clients in India. We provide full range of actuarial services including actuarial valuation of gratuity, leave and pension plans. We have also introduced a range of other non-traditional actuarial services to Indian companies.