Background
Indian Public Sector, Private Sector and Multinational Companies
needs to prepare the Financial Statement such as Balance Sheet &
Profit/Loss Accounts at the closure of each financial year as
per provisions of Section 129 of the Companies Act 2013. As per
provisions of Section 133 of the Companies Act 2013, Financial
Statements should be prepared in compliance of Accounting Standards as
stipulated by Ministry of Corporate Affairs so that they can give
a true and fair view of state of affairs of the company.
Why Actuarial Valuation for Accounting of Gratuity Benefit?
Gratuity Benefit as an Employee Benefit Falls in
the category of Defined Benefit and further categorized as Post
Employment Benefit Obligation. Accounting and Disclosure requirements
for Defined Benefit Plan is laid down in the following 2 Accounting
Standards as issued by The Institute of Chartered Accountants of India (ICAI):-
1. Accounting Standard 15 (Revised
2005) – AS 15 (Revised 2005)
2. Indian Accounting Standard 19 –
IndAS 19
The main
objectives of the above Standards are to prescribe the
guidelines and disclosures for Accounting for
Defined Benefit Plans (i.e. Gratuity, Leave Encashment, Pension etc.). In
order to comply with above standards a company is required to recognize: -
(a) a liability
when an employee has provided service to company in exchange for defined
benefits to be paid in the future; and
(b) an expense
when the company consumes the economic benefit arising from service provided by
an employee in exchange for defined benefits.
I produce here in below few para’s
of AS 15 (Revised 2005) & Guidance Note on Division I – Non Ind AS Schedule
III to the Companies Act, 2013 which may help CA/CS/Auditors to understand “Why Actuarial Valuation is
required by the Public, Private and Multinational Indian Companies with more
than 10 employees for compliance of AS 15 (Revised 2005) on Actuarial Valuation Basis instead of any
other rational Method” for Compliance of the above Accounting Standard 15 (Revised 2005) –
AS 15 (Revised 2005)” The Para 49, Para 50 and Para 51
of AS 15 (Revised 2005) prescribes requirements of Actuarial Valuation Method
for Accounting of Defined Benefits and Steps for Computation of Defined Benefit
Plans. These paras are produced herein below –
Para 49. - Post-employment Benefits: Defined Benefit Plans
Accounting for
Employee Benefit Plans falls in the category of Defined Benefit is
complex because actuarial assumptions are required to measure the
obligation and the expense and there is a possibility of actuarial
gains and losses. Moreover, the obligations are measured on a discounted
basis because they may be settled many years after the
employees render the related service. While the Standard requires that it
is the responsibility of the reporting enterprise to measure the obligations
under the defined benefit plans, it is recognized that for doing so the
enterprise would normally use the services of a qualified actuary.
Para 50. -
Recognition and Measurement
Defined benefit plans may be unfunded, or they may be wholly or partly funded by contributions by an enterprise, and sometimes its employees, into an entity, or fund, that is legally separate from the reporting enterprise and from which the employee benefits are paid. The payment of funded benefits when they fall due depends not only on the financial position and the investment performance of the fund but also on an enterprise’s ability to make good any shortfall in the fund’s assets. Therefore, the enterprise is, in substance, underwriting the actuarial and investment risks associated with the plan. Consequently, the expense recognized for a defined benefit plan is not necessarily the amount of the contribution due for the period.
Para 51. - Accounting by an enterprise for defined benefit plans involves the following steps:
(a) using actuarial techniques to make a reliable estimate of the amount of benefit that employees have earned in return for their service in the current and prior periods. This requires an enterprise to determine how much benefit is attributable to the current and prior periods (see paragraphs 68-72) and to make estimates (actuarial assumptions) about demographic variables (such as employee turnover and mortality) and financial variables (such as future increases in salaries and medical costs) that will influence the cost of the benefit (see paragraphs 73-91);
(b) discounting
that benefit using the Projected Unit Credit Method in order to
determine the present value of the defined benefit obligation and the current
service cost (see paragraphs 65-67);
(c) determining
the fair value of any plan assets (see paragraphs 100-102);
(d) determining
the total amount of actuarial gains and losses (see paragraphs 92-93);
(e) where a plan
has been introduced or changed, determining the resulting past service cost
(see paragraphs 94-99); and
(f) where a plan
has been curtailed or settled, determining the resulting gain or loss (see
paragraphs 110-116).
Where an
enterprise has more than one defined benefit plan, the enterprise applies these
procedures for each material plan separately.
Para 7.3 of Guidance
Note on Division I – Non Ind AS Schedule III to the Companies Act, 2013
For the purpose
of Schedule III, a company also needs to classify its employee benefit
obligations as current and non-current categories. While AS-15 Employee
Benefits governs the measurement of various employee benefit obligations, their
classification as current and non-current liabilities will also be governed by
the criteria laid down in Notes 1 to 3 to the General Instructions for
Preparation of Balance Sheet in the Schedule III. In accordance with these
criteria, a liability is classified as “current” if a company does not have an
unconditional right as on the Balance Sheet date to defer its settlement for
twelve months after the reporting date. Each company will need to apply these
criteria to its specific facts and circumstances and decide an appropriate
classification of its employee benefit obligations. Given below is an
illustrative example on application of these criteria in a simple situation:
(a) Liability
toward bonus, etc., payable within one year from the Balance Sheet date is
classified as “current”.
(b) In case of
accumulated leave outstanding as on the reporting date, the employees have
already earned the right to avail the leave and they are normally
entitled to avail the leave at any time during the year. To the extent, the
employee has unconditional right to avail the leave, the same needs to be
classified as “current” even though the same is measured as ‘other long-term
employee benefit’ as per AS-15. However, whether the right to defer the
employee’s leave is available unconditionally with the company needs to be
evaluated on a case to case basis – based on the terms of Employee Contract and
Leave Policy, Employer’s right to postpone/deny the leave, restriction to avail
leave in the next year for a maximum number of days, etc. In case of such
complexities the amount of Non-current and Current portions of leave
obligation should normally be determined by a qualified Actuary.
(c) Regarding
funded post-employment benefit obligations, amount due for payment to the fund
created for this purpose within twelve months is treated as “current”
liability. Regarding the unfunded postemployment benefit obligations, a company
will have settlement obligation at the Balance Sheet date or within twelve
months for employees such as those who have already resigned or are expected to
resign (which is factored for actuarial valuation) or are due for retirement
within the next twelve months from the Balance Sheet date. Thus, the amount of
obligation attributable to these employees is a “current” liability. The
remaining amount attributable to other employees, who are likely to continue in
the services for more than a year, is classified as “non-current” liability.
Normally the actuary should determine the amount of current & non-current
liability for unfunded post-employment benefit obligation based on the
definition of Current and Non-current assets and liabilities in the Schedule
III.
How to Identify the Compliance requirement for Indian and
Multinational Companies ?
As per payment of Gratuity Act 1972 (amended), All Indian
Private and Multinational Companies with more than 10 employees covered under
the preview of this Act. CA, CS &
Auditors should follow the following criteria to know the Accounting and
Disclosure requirement for Provision of Gratuity Benefit Liabilities in the
Financial Statements of the Companies: -
(i) SME Companies - SME requires to give
disclosures as per Clause L of Para 120 of AS 15 (Revised
2005) - (For more details refer MCA notification dated 07.12.2006
)
(ii) Non SME Companies – Non SME requires to
give disclosures as per Para 120 of AS 15 (Revised 2005)
(iii) Listed Companies & their subsidiaries with Net-worth more
250 cr. – In this case, companies and their subsidiaries has to
give disclosure of in compliance of IndAS 19.
(iv) NBFC (Non-Banking Financial Company) with Net-worth more
250 cr. – In this case, NBFC has to give
disclosure of in compliance of IndAS 19 with comparative numbers of
previous 2 years.
Why Non-Compliance of AS 15 (Revised 2005) & IndAS19 needs
to be observed by the CA, CS & Auditors of the Indian and Multinational Companies?
MCA vide its notification dated 13th November
2018 notified National Financial Reporting Authority (NFRA) Rules 2018. The main
functions NFRA Authority are:-
2. Overseeing the quality of Audit service and suggesting
measures for improvement,
3. Power to investigate,
4. Disciplinary
proceedings, Manner of enforcement of orders passed in disciplinary proceedings, Punishment
in case of non-compliance etc.
In view of above provisions, it becomes
mandatory for Finance Professionals (i.e. CA, CS, CMA, Finance
Professionals & Directors) involved in finalization of Financial Statements
to check the proper compliance and provisions of these Accounting
Standards.
In case of any query or clarification on the above subject you
may call me at 9211637063 or email your requirements at tikaramchaudhary@gmail.com.
Regards
Tika Ram Chaudhary
Gratuity, Leave Encashment, Supperannuation & Pension Trust Fund Consultant
(Corporate Consultant with more than 11 Years of experience in
providing Support Services to Indian and Multinational Companies
for Formation of Gratuity Trust, Formed to gain Tax Benefit available for
Companies under Section 36 (1) (v) of Income Tax Act 1961 & Specialized
Support Services for preparation of Inputs for Actuarial Valuations in
compliance of AS 15 (Revised 2005), IndAS 19, IAS 19 (Revised 2011) - IFRS &
USGAAP required by Gratuity Trust of Indian Companies)
Registered Office Address: R 11, F/F, R
Block, Vikas Nagar, Uttam Nagar, New Delhi -110059
Mobile Number: 9211637063
(All services/consultancy is subject to terms and conditions)
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