Businesses of all types, in general, irrespective of their form and size, have the bent in expressing a desire to comprehend the regulatory framework that forms the cornerstone to carry out actuarial valuations. More than ever, this holds good for the gratuity scheme – one of the most common employee benefits in India. This article gives an explanation of the actuarial valuation of gratuity India in diverse instances.

For what reason or purpose do accounting standards require actuarial valuation?

If truth be told, on the words of experts from actuarial companies India, the accounting standards,for example, AS 15 and Ind AS 19 are in want of actuarial valuations to:

  • Recognize the liability in the event of an employee having provided service to compensate for the employee benefits which the employee is entitled to be recompensed with henceforth.
  • Distinguish expenditure when an enterprise capitalizes on the economic benefits arising out ofservice offered by an employee in return for qualified employee benefits.

At what regularity is the actuarial valuation of the gratuity scheme needed?

  • For financial reporting at year end

When every accounting period comes to an end actuarial valuations become necessary for the prime intent to prepare financial statements.

For all enterprises, this is obligatory, with the proviso that AS 15 or Ind AS 19 finds applicability either partially or fully.

  • For pro term financial reporting

Carrying out an actuarial valuation of gratuity in India becomes compulsory especially for enterprises that are obliged to submit pro tem financial results in keeping withAS 25. This is referred to as Interim Financial Reporting.

Meant for an interim period the provisions relating to gratuity and different classified benefit schemes are determined resting on a year-to-date basis.

This method of actuarial valuation makes use of the actuarially calculated rates at the close of the preceding financial year. The interim financial reporting is adjusted contingent on major market fluctuations that have taken place since that time. Considerations for the adjustment are also made depending on significant restrictions, settlements, and other exceptional one-time events.

Thus it’s inferred that actuarial valuation isn’t a mandatory deliberation as far as interim financial reporting is concerned.

However, Ind AS 19 calls for the generation of an entity to ascertain the net defined benefit asset or liability with enough consistency. This ensures that the amounts getting reflected in the financial statements don’t exhibit a substantial variation when compared to the amounts deduced once the reporting periodconcludes.

That’s to say, except for the situation where the magnitude of any actuarial gains and losses ever since the last valuation, is presumed to be of no consequence, an actuarial valuation should be acted upon.

Lastly, given that the economic environment is highly volatile, it may be indispensable on the part of an entity to get a valuation done at every interim balance sheet date.

Closing Stages

Payment of Gratuity Act is applicable if your company has more than 10 employees. Actuarial consultants in India hint at the following two different circumstances where the subject of an actuarial valuation of gratuity becomes imperative.

  1. In case Ind AS 19 is relevant to your company then the actuarial valuation of gratuity is essential for both final and interim financial reporting.

Supposing that AS 15 is pertinent to your entity, you need an assessment to check your entitlement for any exemption or relaxation. This holds true for entities in Level II or Level III category or being an SMC. In all such scenarios, you can avail the same.

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