Businesses of all types and sizes need to know the rules for actuarial valuation of gratuity. This is especially necessary for the most common benefit in India. They need to understand the regulatory framework for the gratuity scheme. Today, we will explore when actuarial valuation is needed for gratuity.
But before we get into that, let’s first understand which businesses must offer gratuity benefits to their employees. You can look at the aspect in the following ways:
Actuarial valuation for gratuity is a process used by companies to determine the amount of money they will need to pay their employees as gratuity in future. It is the sum of money that companies need to set aside for future payments.
Gratuity is a sum of money paid by an employer to an employee in gratitude for the employee’s service upon retirement, resignation, or death. Companies are required by law in many countries to provide gratuity benefits to employees who have completed a certain number of years in service.
Actuarial valuation helps companies calculate the present value of these future gratuity payments, taking into account factors such as the employees’ salaries, years of service, and expected future salary increases. This valuation is important for companies to ensure they have enough funds set aside to meet their gratuity obligations and to comply with legal requirements.
The Payment of Gratuity Act, 1972, gives employees a legal right to gratuity if they have worked for 5 years continuously in a company and leave their job due to retirement, resignation, death, or disability.
If your organization is required to run a statutory benefit scheme, you might need an actuarial valuation. According to Chapter IX of the Companies Act, 2013, every company must prepare its accounts following the relevant Accounting Standards. These accounting standards are issued by the Institute of Chartered Accountants of India (ICAI). One such standard, AS 15, requires actuarial valuation for certain employee benefit schemes, including gratuity.
Corporate entities are classified as either Small and Medium Sized Companies (SMCs) or Non-SMCs according to the Companies (Accounting Standards) Rules, 2006. SMCs have some exemptions and relaxations when it comes to complying with AS-15. You can check if you are considered an SMC by referring to the rules.
Understanding whether your organization falls under the SMC or Non-SMC category is important for determining the applicability of actuarial valuation. SMCs have some exemptions and relaxations, while Non-SMCs must comply with AS-15 for actuarial valuation of employee benefit schemes.
Appendix-II of the Accounting Standards addresses the applicability of these standards to non-corporate entities such as Limited Liability Partnerships (LLPs), Partnerships, Proprietorships, etc.
Non-corporate entities are classified into three categories by the Institute of Chartered Accountants of India (ICAI). For Level II and Level III Enterprises, there are some relaxations and exemptions in complying with AS-15, which deals with Employee Benefits.
Since April 1, 2017, Ind AS 19 is compulsory for the following companies:
Other companies can choose to adopt Ind AS for financial statements since April 1, 2015.
AS 15 and Ind AS 19 require actuarial valuations because they help organizations in the following way:
Actuarial valuations are needed at the end of each accounting period to prepare financial statements. This applies to all enterprises if AS 15 or Ind AS 19 is applicable, either fully or partially.
Key Points for Gratuity and Actuarial Valuation:
Applies if your company has more than 10 employees.
Requires actuarial valuation for both interim and final financial reporting if applicable to your company.
Assess if your entity qualifies for any exemptions or relaxations as a Level II or Level III entity or as a Small and Medium-Sized Company (SMC), and utilize them if eligible.