Actuarial Valuation-AS 15, Accounting - Auditing

[Siraj Shaikh]

Dear All,

Want to know the above concept and on what basis the entries for the above are passed based on the Actuarial Valuation Certtificate. Will appreciate, if explained with Illustrations.

Thanks

Posts / Replies

[Pradeep Khatri]

Actuarial valuations

Actuarial valuations in India are mostly done for accounting purposes - under AS 15 (revised, 2005), IAS 19 or US GAAP (FAS 87/88/158), as they are mandatory requirements issued by the relevant accounting body. However, actuarial valuations are also done for calculating contribution rate for funded schemes and during mergers & acquisitions.

Types of schemes covered under AS 15 (revised, 2005)

Within Indian accounting framework, AS 15 (revised, 2005) deals with the accounting of employee benefits. AS 15 requires that actuarial valuation should be done in respect of following employee benefits:

1. Gratuity

2. Leave benefits (for both encashable and non-encashable leaves)

3. Pension schemes (including both defined benefit and defined contribution schemes which guarantee a minimum investment return)

4. Exempt Provident Fund (those PFs managed in-house and not by EPFO)

5. Long-term service awards (e.g. awards given on completion of certain number of years of service or at retirement)

6. Bonus and profit-sharing arrangements

7. Leaves for leisure and travel purposes

 

Please note that actuarial valuation is not required for:

1. Defined Contribution pension schemes where no investment return guarantee is provided

2. Leaves which cannot be carried forward beyond one year

Actuarial valuation results

The actuary calculates the following as per provisions of AS 15 for each applicable employee benefit scheme, which then need to be disclosed in company's annual accounts:

1. A liability in respect of the benefits in company's balance sheet

2. An expense in respect of the benefits in company's P&L account

Companies covered under AS 15 (revised, 2005)

AS 15 (revised, 2005) is applicable on the following firms:

1. Listed companies on any stock exchange in India

2. Banks/FIs/Insurance companies

3. Companies having turnover of more than 50 crores

4. Companies having borrowings or deposits of more than 10 crores

5. Companies employing more than 50 employees

6. Holding or subsidiary company of any of the above

Above-mentioned companies must get actuarial valuation done externally as per AS 15 by a certified actuary atleast once a year (usually 31 March). Company officials or auditors cannot do this valuation by themselves.

Companies which do not fall within any of the above six categories also need to consult a qualified actuary whether they need actuarial valuation or not. The need for actuarial valuation is determined by the actuary in consultation with the auditors after assessing materiality issues. Therefore, requirement of actuarial valuation falls more or less on every registered company.

 

Certificates by insurance companies (applicable only for funded schemes)

Companies who have funded the liabilities with an insurance company can get AS 15 valuation certificates from their respective insurance companies if they agree to provide the same. Companies need to ensure that such certificates are signed by a qualified actuary and are prepared as per the provisions of AS 15.

Contributions made to insurance companies in respect of employee benefits cannot be booked as expense in P&L as per AS 15 - the expense has to be calculated by an actuary using actuarial methods.

More information

Numerica Quantitative Services is a professional services firm providing actuarial valuations for corporates and insurance companies. For more information on specific issues (e.g. simplified calculations of liability, sample AS 15 disclosures, funding vs accounting), please refer to www.numerica.in or write an e-mail to info @ numerica.in

[Pradeep Khatri]

Here is a sample with reference to gratuity liability calculation:

Suppose a person (X) aged 55 exact is about to retire exactly after 5 years after attaining age 60 and has already rendered exactly 5 years of service. Also suppose X is earning Rs 10,000 a month now and that it is expected that his salary will increase 10% per annum for the next five years.

At retirement, X’s salary is expected to be Rs 10,000 x (1 + 10%) ^ 5 = Rs 16,105 per month and till that time, X would have service for 10 years. His gratuity benefit at retirement is expected to be 15/26 x Rs 16,105 x 10 = Rs 92,913

Therefore, a benefit of Rs 92,913 will be paid to X at retirement, if his salary increases at the assumed rate of 10%. This future benefit results in a liability now, which is equal to the present value of this benefit. Assuming the discount rate to calculate the present value is 15% pa, the liability is calculated as:

Rs 92,913 / (1 + 15%) ^ 5 = Rs 46,194

i.e. the expected benefit of Rs 92,913 is discounted for 5 years, since the benefit is expected to be paid in 5 years’ time.

Note: The example is very simplified and specifically excludes the probabilistic nature of calculations.

[Siraj Shaikh]

Thanks Pradeep for your prompt reply.

Can you display a hypothetical Actuarial Valuation Certificate and then post the accounting entries one need to pass.

[Pradeep Khatri]

Dear Siraj,

Being a law graduate, I do have only basic knowledge of accoutancy.  Therefore, I would request you to kindly discuss this matter with CA.

Best Regards

Pradeep Khatri