Used for Actuarial Valuation of Employee Benefits:
The discount and interest rates is a key assumptions used in the actuarial valuation of various employee benefits like gratuity, earned leaves, long-term awards, etc. It is used to calculate the discounted values of future cash flows.
The term of the bond which is to be taken, to determine bond yield, should match the duration of liabilities.
As per para 83 of IND AS 19, “the rate used to discount post-employment benefit obligations (both funded and unfunded) shall be determined by reference to market yields at the end of the reporting period on high-quality corporate bonds. In countries where there is no deep market in such bonds, the market yields (at the end of the reporting period) on government bonds shall be used. The currency and term of the corporate bonds or government bonds shall be consistent with the currency and estimated term of the post-employment benefit obligations.”
As per para 78 of AS 15 (R), “the rate used to discount post-employment benefit obligations (both funded and unfunded) should be determined by reference to market yields at the balance sheet date on government bonds. The currency and term of the government bonds should be consistent with the currency and estimated term of the post-employment benefit obligations.”
The Duration of liability is calculated by a scientific method called Macaulay Duration. The Macaulay Duration is the weighted average term to maturity of the cashflows from a bond. The weight of each cash flow is determined by dividing the present value of the cash flow by the price.
Example: If the duration of liability is n years then the yield on nth year Government bond is considered as the discount rate.
The discount rate used in actuarial valuations of employee benefit plans
The discount rate used in actuarial valuations of employee benefit plans
The discount rate used in actuarial valuations of employee benefit plans
The discount rate used in actuarial valuations of employee benefit plans
The discount rate used in actuarial valuations of employee benefit plans
The discount rate used in actuarial valuations of employee benefit plans
The discount rate used in actuarial valuations of employee benefit plans
The discount rate used in actuarial valuations of employee benefit plans
The discount rate used in actuarial valuations of employee benefit plans
The discount rate used in actuarial valuations of employee benefit plans
The discount rate used in actuarial valuations of employee benefit plans
The discount rate used in actuarial valuations of employee benefit plans
The discount rate used in actuarial valuations of employee benefit plans
The discount rate used in actuarial valuations of employee benefit plans
The discount rate used in actuarial valuations of employee benefit plans
The discount rate used in actuarial valuations of employee benefit plans
The Gratuity Act 1972, describes that the gratuity is payable to an employee after completing 5 years of vesting period in case of resignation, termination or retirement. However, the provision shall be done as per the accounting standard even if the Company has not completed 5 years of operations. As per Para 72 of Ind AS 19/ Para 70 of AS 15, Gratuity Provision shall be made even for service of less than 5 years.
Payment of Gratuity Act applies to your company if you have more than 10 employees. All companies having 10+Employees need to make Provision for Gratuity as per Actuarial Valuation method Projected Unit credit method (PUCM) to comply with AS15/ Ind AS19.
No, the actuarial valuation is not required for short-term benefits. In case, the benefit paid after 12 months, the actuarial valuation is needed as per AS 15 R / IND AS 19 accounting standard.
For SMC, the actuarial valuation is required but detailed disclosures are exempted.
Para 78 of AS 15 states that the rate used to discount post-employment benefit obligations (both funded and unfunded) should be determined by reference to market yields at the balance sheet date on government bonds. Similarly, IND AS 19 also prescribe to refer government bond yield to set discount rate. In order to set the discount rate, its critical to keep currency and term of the bonds to be consistent with liability duration.
In India, currently there are no regulations to keep fund to back the gratuity provision calculated by an Actuary. However, it is always encouraged to keep fund in order to pay off liabilities on time and to avoid/reduce interest rate and reinvestment risk. Further, there are tax advantages for funding.
There are three key factors which shall be considered to set attrition assumption: a) Company’s recent attrition experience in last 2-3 years b) Industry experience of employee attrition c) Management view on future attrition.
Even if the plan is funded and managed by an Insurance Company, still the Company need to get a separate actuarial valuation done. The reason being that an insurance company does not provide complete disclosures as required by accounting standard regulations and sometimes the assumptions are not fair and inconsistent with Company’s own experience.