All kinds of businesses, in whatever form and size, have expressed a desire to understand the regulatory framework under which actuarial valuations are performed. This is especially true for the most common benefit in India – the gratuity scheme. This blog explains the applicability of actuarial valuation of gratuity under different instances.

But before diving into the topic, let us first understand what types of enterprises are required to offer gratuity benefits to their employees. This can be studied under two heads:

1. Applicability of Payment of Gratuity Act, 1972
2. Applicability of relevant accounting standards

1. The Payment of Gratuity Act, 1972:

• Gives a statutory right of gratuity to all the employees, who have
  • rendered 5 years’ continuous service and
  • whose services stand terminated after coming into force of the Act on account of
    • superannuation, or
    • retirement, or
    • resignation, or
    • death, or
    • disablement.
• Provides for a scheme for the payment of gratuity to employees working in establishments
  • in which 10 or more employees were employed, on any day of the preceding year.
• Applies to every form of business, including:
  • proprietorship,
  • partnership or
  • a limited company.
• Once the Act becomes applicable to an organization i.e. once an establishment hires more than 10 employees, the Act would continue to apply to the same even after the number of employees gets reduced below the minimum requirement.

2a. Applicability of actuarial valuation to corporate entities:

Once it has been ascertained that your organisation is required to run a statutory benefit scheme, you will then need to understand whether you require an actuarial valuation.

According to Chapter IX of Companies’ Act, 2013, every company must prepare books of accounts in accordance with the relevant applicable Accounting Standards as issued by ICAI. One of these accounting standards, AS 15, requires an actuarial valuation to be done for certain types of employee benefits schemes, including gratuity benefit.

Corporate Entities are classified as

• SMCs (Small and Medium Sized Companies) and
• Non-SMCs

The above classification is done according to Companies (Accounting Standards) Rules, 2006. There are few exemptions and relaxations for SMCs in complying with AS-15. To know if you are a SMC, read here.

2b. Applicability of actuarial valuation to non-corporate entities:

Appendix -II: Applicability of Accounting Standards to Various Entities, discuss the applicability of accounting standards to non-corporate entities like LLP, Partnerships, Proprietorships, etc.,

Non-corporate entities are classified into 3 categories by ICAI and there are a few relaxations and exemptions in complying AS-15- Employee Benefits for Level II and Level III Enterprises.

To know if you fall under Level II or Level III Enterprises, read here.

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In Summary:

	Corporate Entities		Non-Corporate Entities
	Non-SMC	SMC	Level I	Level II	Level III
Applicability of AS15	Fully	Partly	Fully	Partly	Partly

Contact Us to learn more on how to make best use of these exemptions and relaxations in complying the accounting standard.

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2c. Applicability of Ind AS 19 to companies:

• Mandatory:
  For the accounting period beginning on or after 1 April 2017, Ind AS 19 is applicable for the following companies:
  • all listed companies,
  • unlisted companies having net worth of Rs.250Cr or more.
  • Holding, subsidiary, joint venture or associate companies of the listed and unlisted companies covered above.
• Voluntary:
  • Other companies may voluntarily adopt Ind AS for financial statements for accounting periods beginning on or after 1 April 2015
• Please note:
  • Once a company starts following the Ind AS 19 mandatorily / voluntarily, it will be required to follow the Ind AS 19 for all the subsequent financial statements even if any of the criteria specified do not subsequently apply to it (the option is irrevocable)
  • Once a company starts following Ind AS 19, it will not be required to prepare another set of reports under AS 15
• Download our guide for transition to Ind AS 19 by clicking here

Why do these accounting standards need actuarial valuation?

Actuarial valuations are required by AS 15 and Ind AS 19,

• to recognise liability when an employee has provided service in exchange for employee benefits to be paid in future and
• to recognise an expense when the enterprise consumes the economic benefit arising from service provided by an employee in an exchange for employee benefits.

How often do we need actuarial valuation of gratuity scheme?

1. Financial reporting at year end:

• Actuarial valuations are required at the end of every accounting period for the purpose of preparation of financial statements.
• This is required by all enterprises, if AS 15 or Ind AS 19 is applicable, whether fully or partially.

2. Interim financial reporting:

• Applicable for enterprises which are required to present interim financial results according to AS 25: Interim Financial Reporting
• Provisions in respect of gratuity (and other defined benefit schemes) for an interim period are calculated on a year-to-date basis
• Uses the actuarially determined rates at the end of the prior financial year, adjusted for significant market fluctuations since that time and for significant curtailments, settlements, or other significant one-time events.
• It implies that actuarial valuation is not mandatory for interim financial reporting.
• However, Ind AS 19 does require an entity to determine the net defined benefit liability or asset with sufficient regularity so that the amounts recognised in the financial statements do not differ materially from the amounts that would be determined at the end of the reporting period.
  • In other words, unless the extent of any actuarial gains and losses since the last valuation is expected to be immaterial, a valuation should be performed.
  • In a volatile economic environment, it may be necessary for an entity to obtain a valuation at each interim balance sheet date.

Conclusion

• Payment of Gratuity Act applies to your company if you have more than 10 employees
• If Ind AS 19 applies to your company, actuarial valuation is required for both interim and final financial reporting.
• If AS 15 applies to your entity, assess if you are eligible for any exemption or relaxation being in Level II or Level III entities category or being a SMC and avail the same.

Refer to our primary topic page for more information on other topics related to actuarial valuation of employee benefits.

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Learn about basics of actuarial valuation of gratuity liability by downloading the guide below:

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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.

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