Which accounting standard do your financial statements follow?
- Indian Accounting Standards (Ind AS)Employee benefits are covered by Ind AS 19.
- Accounting Standards (AS)Employee benefits are covered by AS 15.
Employee benefits, year-end accounts
Actuarial Valuation Services in India: AS 15 and Ind AS 19 Compliance
A report that puts a measured figure on what your company owes its employees for gratuity, leave encashment and other long-term benefits as on the balance sheet date, with the assumptions, movement and disclosures the auditor needs. For the finance head or accountant closing the year under AS 15 or Ind AS 19.
What the report measuresThree promises, one figure each, as on the balance sheet date
- 1Gratuity
What each employee has earned for service to date and would be paid on leaving, measured today for a payment that falls due years from now.
- 2Leave encashment
The leave balance the company will pay out in cash, or carry forward and pay later, under its own leave policy.
- 3Other long-term benefits
Long-service awards, sabbaticals and similar promises that are earned now and paid well after the year they are earned in.
In short
What an actuarial valuation of employee benefits is
An actuarial valuation of employee benefits is the measurement of what a company owes its employees today for benefits it will pay later: gratuity when they leave, leave balances it will pay in cash, and other long-term benefits it has promised. The figure is a present value. Every expected future payment is weighed by how likely it is to be paid and discounted back to the balance sheet date. That figure is the obligation in the year-end accounts, and the change in it from last year is what the profit and loss account and, under Ind AS 19, other comprehensive income carry.
"Actuarial" describes how the figure is reached, not what it is for. An actuarial method takes each employee's age, service, salary and the plan's terms, applies assumptions about salary growth, attrition, mortality and the discount rate, and turns promises that fall due over decades into one figure for one date. A company cannot read that figure off its payroll. The payroll knows what was paid this year; it does not know what has been earned and not yet paid.
- 1Employee data
Each employee as on the balance sheet date: date of birth, date of joining, the salary the plan uses, leave balance.
- 2Plan terms
The gratuity formula and ceiling, the leave policy, any funding with an insurer, any other long-term benefit scheme.
- 3Assumptions
Discount rate, salary growth, attrition, mortality and retirement age, set with management and written into the report.
- 4The figure in the accounts
The obligation at the year end, its movement during the year, and the disclosures in the standard's order.
Applicability
Which companies need one
Two questions settle it before the audit starts: which accounting standard the financial statements follow, and which benefits the company has promised.
Which benefits has the company promised?
- GratuityPaid on leaving, earned over the whole period of service.
- Leave that is encashed or carried forwardEarned this year, paid in cash or taken in a later year.
- Other long-term benefitsLong-service awards, sabbaticals and similar promises.
What does not decide it
- Headcount
The number of employees answers a different question from the one this report answers.
- The gratuity statute
Which law governs gratuity, and from when, changes what is promised, not whether the promise is measured.
- A gratuity policy with an insurer
Funding the promise and measuring it are two different things.
Process
How the valuation is done
Six steps from the closing date to a report the auditor can work from. What you send and what comes back at each step.
- 1
Scope and the valuation date
Which plans are to be valued (gratuity, leave, others), for which entities, as on which balance sheet date, and when the auditor needs the report.
You sendThe closing date, the list of plans and entities, last year's report if there is one.You get backA written scope and the data format for step 2. - 2
Employee data as on the date
One row per employee from payroll: date of birth, date of joining, date of leaving for those who left during the year, the salary the plan's formula uses, leave balance in days, and benefits paid during the year.
You sendThe data file in the agreed format, with the plan rules and leave policy.You get backA receipt of the data as on the date, with the headcount and totals read back to you. - 3
Data checks
Missing dates, salaries that do not agree with payroll, employees who left after the date, duplicates, and leave balances not as on the date. Every query goes back to you before anything is valued.
You sendAnswers to the data queries, and corrected rows where needed.You get backThe reconciled data summary that the report will rest on. - 4
Assumptions
Discount rate, salary growth, attrition, mortality and retirement age, set with management, compared with last year's, and written into the report with the reason for any change.
You sendManagement's view on salary growth and attrition, and the retirement age in the policy.You get backThe assumption sheet for sign-off before the valuation runs. - 5
Valuation
The obligation is computed employee by employee, using the projected unit credit method named in the report, and rolled forward from last year's figure so that each movement can be traced.
You sendNothing new at this step; queries, if any, go to the person who sent the data.You get backThe draft report for a reading before it is signed. - 6
Report and auditor queries
The signed report with the disclosures in the standard's order, and answers to the auditor's questions on the data, the assumptions and the movement during the year.
You sendThe auditor's queries, as they come.You get backThe signed report, the data summary and the answers, in a form the audit file can carry.
Documents
Employee data and documents required
Three folders. The first is the employee list as on the valuation date, and it is the one that decides how quickly the rest goes.
A
The employee list, as on the date
One row per employee on the payroll on the balance sheet date, and one for each employee who left during the year.
- Employee code and, where the plans differ by category, the category or grade
- Date of birth
- Date of joining
- Date of leaving, for those who left during the year, and the reason (retirement, resignation, death)
- The salary the plan's formula uses, as on the date
- Leave balance in days, as on the date, under each leave type that is encashed or carried forward
- Gratuity and leave encashment paid during the year, employee by employee
B
The plan terms
What the company has promised, in writing, so that the valuation measures the promise as it stands.
- The gratuity policy: the formula, the vesting period, any ceiling, any benefit above what the law requires
- The leave policy: accumulation limit, encashment rules, carry-forward rules, what happens on leaving
- Any other long-term benefit scheme: long-service awards, sabbaticals, deferred bonuses
- Where the gratuity plan is funded with an insurer: the policy and the fund statement as on the date
- The retirement age in the employment terms
C
Last year's position
So that this year's figure can be rolled forward from last year's, and each movement traced.
- Last year's valuation report, with its assumptions and data summary
- The obligation carried in last year's accounts, plan by plan
- Any change in the plan terms since the last valuation
- For a first valuation: the opening position the company has been carrying, and on what basis
What stalls a valuation
- A list not as on the dateA payroll extract run a month later includes joiners and drops leavers; the list must be cut on the balance sheet date.
- Missing dates of joiningService is the core of the gratuity figure; a missing date is a missing employee until it is found.
- The wrong salary columnGross salary where the plan's formula uses a narrower figure, or the other way round, moves every row.
The report
What the valuation report contains
Nine parts, in the order the auditor reads them. There is no sample file on this page: the report follows the standard's disclosure list and the company's own plans, and no two are the same.
Actuarial gains and losses are the part most readers ask about. They are the difference between what was assumed last year and what happened: salaries rose faster or slower than assumed, more or fewer employees left, the discount rate moved. They are not errors. They are the correction the method makes every year, and they are shown separately so that the auditor can see what moved the figure and why.
- 1Summary of results
The obligation at the year end, plan by plan, and the figure to be carried in the accounts.
- 2Data summary
Headcount, average age, average service and average salary, with last year's beside them.
- 3Assumptions
Discount rate, salary growth, attrition, mortality and retirement age, this year and last, with the reason for any change.
- 4Obligation at the start and end of the year
Last year's closing figure as the opening, and this year's closing figure.
- 5Movement during the year
Current service cost, interest cost, benefits paid, and the actuarial gain or loss that reconciles the opening to the closing.
- 6The split between profit and loss and other comprehensive income
Which part of the movement goes through profit and loss and which through other comprehensive income, where the standard requires the split.
- 7Actuarial gains and losses
Split by cause: changes in assumptions, and the difference between assumption and experience.
- 8Sensitivity
How the obligation moves if the discount rate or the salary growth assumption changes by a stated step.
- 9Expected benefit payments
The pattern of payments expected in the coming years, from the same data.
The two standards
AS 15 and Ind AS 19 in brief
Both are titled "Employee Benefits". Both ask for the same kind of measurement. Which one your company follows decides the disclosure list and where the movement is shown.
Accounting StandardsAS 15
Employee Benefits, for companies that report under the Accounting Standards
- What it asks for
- The gratuity, leave and other long-term benefit obligations measured on an actuarial basis, with the assumptions and the movement during the year disclosed in the accounts.
Indian Accounting StandardsInd AS 19
Employee Benefits, for companies that report under Ind AS
- What it asks for
- The same obligations measured on an actuarial basis, with a longer disclosure list: the split of the movement between profit and loss and other comprehensive income, sensitivity to the main assumptions, and the expected pattern of payments.
Read next
Three pages on this site go deeper into the standards and into gratuity itself. Their links wait on one decision.
- The standardInd AS 19 Employee Benefits, explainedThe standard's text, the method and the disclosures, in detail.
- The comparisonAS 15 vs Ind AS 19Where the two standards differ, line by line, with the recognition rules.
- The benefit itselfGratuity computation and complianceHow gratuity is computed for payroll and paid out, as distinct from how it is measured for the accounts. Read: Gratuity Compliance.
Fee
Fee
Starting from INR 9,999/yr (Exl GST and Govt. Charges)
One report, one entity, one valuation date, for the plans named in the scope. The fee is confirmed in writing before the data is asked for.
What moves the quote
- More than one planGratuity, leave and each other long-term benefit is a separate valuation with its own data, assumptions and disclosures.
- More than one entityEach company in a group carries its own obligation and needs its own report for its own auditor.
- More than one valuation dateA company that reports at interim dates needs the figure at each of them, not only at the year end.
- Data that needs rebuildingA list not cut on the date, missing joining dates or the wrong salary column add reconciliation work before anything is valued.
Start your valuation
Start your actuarial valuation
Tell us the closing date, which benefits the company has promised and roughly how many employees and entities. A chartered accountant reads the request and sends back the scope and the data format before any work starts.
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Have these ready
- The balance sheet date the report is for
- Whether the accounts follow AS 15 or Ind AS 19
- Which benefits are promised: gratuity, leave, others
- Roughly how many employees, and how many entities
- Last year's report, if there was one