Wednesday, March 6, 2024

How to prepare inputs for Actuarial Valuation required in Audit for compliance of AS 15 (Revised 2005) & IndAS 19 ?



Background

As per Section 128, 129 & 133 of Companies Act 2013- All 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. Also 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. I produce here-in-below the main portion of above 3 Sections for quick reference -

Section 128 - Every company shall prepare and keep at its registered office books  of  account  and  other  relevant  books  and  papers  and  financial  statement  for every  financial  year  which  give  a  true  and  fair  view  of  the  state  of  the  affairs  of  the  company. 

Section 129 - The financial statements shall give a true  and  fair  view  of  the  state of  affairs  of  the  company  or  companies,  comply  with  the  accounting  standards  notified  under  section  133 and  shall  be  in  the  form  or  forms  as  may  be  provided  for  different  class  or  classes  of  companies  in Schedule III, Provided  that  the  items  contained  in  such  financial  statements  shall  be  in  accordance  with  the accounting  standards.

Section 133 - The Central Government may prescribe  the  standards  of  accounting  or  any  addendum  thereto,  as  recommended  by  the  Institute  of Chartered  Accountants  of  India,  constituted  under  section  3  of  the  Chartered  Accountants  Act,  1949  (38 of  1949),  in  consultation  with  and  after  examination  of  the  recommendations  made  by  the  National Financial  Reporting  Authority.

It is understood from the above Sections of the Companies Act 2013 that all Indian Public Sector, Private Sector and Multinational Companies to follow the Accounting Standards. Most crucial and complex accounting is related to the following Employee Benefits: -

  1.       Gratuity – Regulated by the Payment of Gratuity Act 1972 (a)
  2.       Earned Leave Benefit – Regulated by various Labor Laws
  3.      Sick Leave Benefit – Regulated by various Labor Laws
  4.      Long Term Service Awards – Regulated by company for Retention of Employees
  5.      Pensionary Benefits – Regulated by CCS Pension Rules 1972 (a)
  6.       Post Retirement Medical Benefits
  7.      Long Term Allowances

The above employee benefits Falls in the category of Defined Benefit and further categorized as Post Employment Benefit Obligation & other Long-Term Benefits. Accounting and Disclosure requirements for the above Defined Benefit Plans 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.

Inputs in Actuarial Valuations

The preparation of inputs for Actuarial Valuations plays an important roll in the Actuarial Results, so it is really important for the preparer to understand the implication of inputs on the Actuarial results. In this section we will give a list of important Actuarial Inputs to be prepared by the company officials for Actuarial Valuations in compliance of IndAS 19 & AS 15 (Revised 2005). The list of inputs required for Gratuity and Leave Encashment Plan are as under: -

1.      Inputs for Actuarial Valuation under Gratuity Plan

All companies with 10 or more employees are required to comply with the Section 7 of the Payment of Gratuity Act, 1972 and required to make the payment of gratuity within 30 days from the date of exit from the company and as Gratuity falls in the category of long term employee benefit and hence companies are required to comply with Accounting Standard 15 (Revised 2005) for making the provision in the balance sheet as per the Actuarial Report issued by the Actuary. The following details are required to be prepared by the company for getting the Actuarial Valuation Certification from Actuary under Gratuity Plan: 


a.      Employee Data – The components of employees data on the date of valuation are as under:- 

                                       i.     Employee Code
                                       ii.     Name of the Employee
                                       iii.     Date of Birth
                                       iv.     Date of Joining
                                        v.      Qualifying Wages for Gratuity Computations (i.e. Basic plus DA or as per company policy)

b.      Assumptions – The following Assumptions are required to be submitted by the company for valuation after analysis of past 5 years :- 

                                                              i.     Financial Assumptions: -

a.      Rate of Salary Increase

b.      Discount Rate (as per para 78 of AS 15R & Para 83 of IndAS 19) 

                                                             ii.     Demographic Assumptions: - 

                                            a.      Rate of Withdrawal

                                            b.     Mortality Rate (Currently IALM 2012-14 is used as per guidelines of IRDA)

                                            c.      Retirement Age 

c.      Gratuity Policy of Company for making the payment of Gratuity – The following details about the Gratuity Policy are required to be submitted by the company for valuation: - 

        a.      Details about the Formulae for Payment of Gratuity

        b.      Details about the Ceiling Limit on the Gratuity Amount

        c.      Details about the waiting condition for eligibility of Gratuity

        d.      Details about any special feature of the Gratuity Policy, if applicable. 

d.      Details about the benefit paid during the Financial Year or the period for which actuarial valuation is required – Detail about any Gratuity Paid to the employees is a part of disclosure of the actuarial report under Gratuity Plan. 

e.      Details about the Fund held in the Gratuity Trust – If company as created a Income Tax Approved Gratuity Trust in terms of Part C of Schedule IV Of Income Tax Act, 1961 then following details are required to be submitted :- 

a.      Value of Assets at the Start of the Accounting Period
b.      Interest
c.      Contribution made the company during the Accounting Period
d.      Claim received by the company during the accounting Period
e.      Closing Value of Plan Assets at the End of Accounting Period

 

I hope above details may help CA, CS, Directors, Auditors of the company in preparation of Inputs for Actuarial Valuation in compliance of AS 15 (Revised 2005) & IndAS 19. For any clarification or query on the above subject, you may call me at 9211637063, 011-452961651 or email your query at tikaramchaudhary@gratuitytrustfund.com


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Tuesday, March 5, 2024

Why Non-Compliance of AS 15 (Revised 2005) & IndAS19 needs to be observed by the CA, CS & Auditors of the Indian and Multinational Companies?



I hope my below post may help you in understanding the requirement of Actuarial Valuation Services by Indian and Multinational Companies for Accounting & Disclosures of Employee Benefits such as Gratuity, Leave Encashment, Pension and Other Long-Term Employee Benefits in compliance of IndAS19 & AS 15 (Revised 2005) in their Balance Sheet & Profit/Loss Statement.

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Actuarial Valuation Services in compliance of IndAS 19 and AS 15 (Revised 2005) for Employee Benefits (i.e. Gratuity, Leave Encashment, Pension and PRMB)

 


Background

As per provisions of Section 129 of the Companies Act 2013, Indian and Multinational Companies Operating India need to prepare Financial Statements such as Balance Sheets & Profit/Loss Accounts at the closure of each financial year in compliance of Accounting Standards as stipulated in Section 133 of the Companies Act 2013, so that they can give a true and fair view of state of affairs of the company. Accounting and Disclosure Requirements  for  Employee Benefits Plans 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. 

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 recognised 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 100102);

(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.

Defined Benefit Plans for which Actuarial Valuation Certification/Reports are Needed by Indian and Multinational Companies

Actuarial Valuation Reports for the following Defined Benefit Plans is needed by the Indian and Multinational Companies for compliance of IndAS 19 & AS 15 (Revised 2005) :- 

·  Gratuity Plan.

·  Earned Leave Plan.

·  Sick Leave Plan.

·  Defined Benefit Pension Plans.

·  Post -Retirement Medical Benefit Plans.

·  Settlement Allowances on Retirement.

·  Long Service Award Plans/Incentive Plans.

·  Interest Rate Guarantee for Exempted Provident Funds.

·  Any other long term employee benefit , where actuarial inputs are needed. 

Components of Fully Compliant Actuarial Valuation Certification/Reports

Actuarial reports fully compliant with requirement of IndAS 19 & AS 15 (Revised 2005) have following components: 

·  Data – Summary of employee data as received from Company as Actuarial Input

.·  Assumptions – Demographic and Financial Assumptions as received from Company as Actuarial Input.

·  Methodology –  PUC Method

·  Results – Present Value of Obligation, Expense for the year, Experience Adjustment etc.

·  Disclosures – As given Paragraph 120 of AS 15 (Revised 2005) and various Paragraphs of IndAS19 (For more details you may visit my Tax-guru Profile at https://taxguru.in/author/tikaramchaudhary@gmail.com/) 

How to Identify the Compliance requirement for Indian and Multinational Companies ? 

The following criterion is followed by the CA, CS & Auditors to know the applicability of Accounting Standards and disclosure requirement by 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:-

1. Monitoring and enforcing the compliance with accounting standards and auditing standards, 

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 clarification, you may contact me at 9211637063 or email me your queries at tikaramchaudhary@gmail.com.

Regards

 

Tika Ram Chaudhary

Founder

Gratuity Trust Fund Consultant

(Corporate Consulting Firm providing Accounting, Actuarial, Legal, Insurance and Investment Solutions for Employee Benefits (i.e. Gratuity, Leave Encashment, Pension, PRMB etc.) Trusts in compliance of the Payment of Gratuity Act, 1972, The Payment of Gratuity (Central) Rules, 1972, CCS Pension Rules, 1972,  AS 15 (Revised 2005), IndAS 19, IAS 19 (Revised 2011) – IFRS, Part C of Schedule IV of Income Tax Act, 1961 & Rule 98-111 of Income Tax Rules to Indian and Multinational Companies)

Correspondence Address: Plot Number 16, Street Number-9, Prem Nagar, Uttam Nagar, Near Uttam Nagar West Metro Station, New Delhi -110059

Registered Office Address: R 11, F/F, R Block, Vikas Nagar, Uttam Nagar, New Delhi -110059

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