The process that encompasses accounting of leave schemes is indeed a complicated one. Here we list down 4 key issues to be cognizant of.
1. Not all leave schemes need actuarial valuation
The two main leave schemes that require actuarial valuation are:
· Type 1 scheme
o Here the employees accrue specific leaves in course of their service till date. The leaves that aren’t availed are carried forward to their subsequent years of service.
· Type 2 scheme
o Here employees are granted with a block of leaves. This happens once a pre-stipulated period of service is completed, for instance, long-service or jubilee awards are given as leaves.
o Such leaves can’t be carried forward.
o Most common types of leaves like sick leaves or non-accruing privilege leaves don’t need any actuarial valuation.
2. Avoid creating a liability for availing leaves
· The best-suggested approach to evaluate leave schemes is last-in-first-out (LIFO).
· By following this method, there occurs no existence of any liability for regularly availing leaves by employees.
· This is because availing leaves initially is always presumed to be acquired from an employee’s future leave entitlements.
· Policies centering on leave encashment in India make use of another method that assumes the likelihood that a few employees will go beyondtheir annual leave entitlement.
· Therefore, it’s been argued that availing of leaves should be valued.
· This logic, however, is a bit wobbly as although a number of employees may surpass their yearly leave entitlement, the remaining others may not, and so will realize their leave balance having been increased at the next balance sheet date.
· Hence, even though there’s a potential acceptance that over the period of next one year, existing leaves of some employees will be usedin addition to their entitlement, the same can’t be stated for all forthcoming years.
· Companies that utilize this method in actuality overrate their obligations for unfounded reasons.
3. Do remember your alternative leave schemes
· As per retirement policy in India, there are some specific leave benefits which ask for a proper liability assessment,
· However, these perks may not need an actuarial valuation. Such leaves include:
o Privilege leaves, sick leaves, and casual leaves which can’t be accumulated and still reflect as outstanding in conformity with latest balance sheet date.
o Currently availed maternity leaves.
· As far as these schemes are concerned, a liability does exist corresponding to the balance sheet date, especially for leaves which are assumed to be availed in the course of the next year or so.
· Contingent on the overall experience Type 2 leave schemes are also overlooked by employers and auditors alike from an accounting standpoint.
4. Request for a reconciliation of opening and closing Defined Benefit Obligation (DBO)
· A lot of actuaries categorize leave benefits in the form of Other Long-Term Benefit’ (OLTB).
· Obviously, they’re justified in doing it.
· As far as benefits grouped as OLTBs are concerned, accounting standards don’t necessarily recommend any special disclosures except the DBO itself.
· In fact, actuarial reports pertaining to post-employment benefits like gratuity and pension take in comprehensive disclosures, say, for example, a reconciliation involving opening and closing DBO.
· On the contrary, actuarial reports for leave schemes may not incorporate any data related to reasons that ask for a change in DBO.
· This problem aggravates when companies move to another actuary, who may consider taking a completely dissimilar perspective of their existing leave schemes.
· Actuarial consultants in India are often requested by their client companies to provide information about reconciliation between opening and closing DBO to acquire better knowledge about what precisely led to the change in DBO.