Actuarial Valuation of Gratuity report
Introduction
Before we discuss applicability of actuarial valuation of gratuity report, let us discuss applicability of gratuity scheme as per Payment of Gratuity Act, 1972. In other words, before we discuss if an actuarial report is required for gratuity? Let us determine if you even need to pay Gratuity?
Please note, Social Security Code will soon replace Payment of Gratuity Act. We will discuss about it in another blog and update this blog once applicable.
Do I need to pay Gratuity to my employees?
If you have (or ever had) 10 or more employees, then the short answer is “Yes”, you need to pay Gratuity to your employees.
As per Payment of Gratuity Act, 1972, it applies to “every factory, mine, oilfield, plantation, port and railway company;” and to “every shop or establishment within the meaning of any law…, in which ten or more persons are employed”
Further, once the Act becomes applicable, i.e., once an employer hires more than 10 or more employees, the Act would continue to apply even if the employee count reduces below 10.
How to account for Gratuity Liability?
Once it is established that Payment of Gratuity Act is applicable, the employer will need to pay gratuity to the eligible employees at the time of their exit using the following formula:
The employers therefore need to book a Gratuity Liability as per the applicable accounting standards. And “Yes”, you should opt for an actuarial report for valuation of Gratuity liability (discussed further below).
You may also choose to fund your scheme by contributing regular premiums with LIC or any other insurer. You will then have a “Gratuity Fund”. You will book this as an Asset, thus reducing your Net Liability.
Applicability of Actuarial Valuation of Gratuity
Both IndAS 19 and AS 15 reports rely heavily on actuarial valuation of Gratuity liability. As such, they encourage companies to use the actuarial services by a qualified actuary for such Gratuity report.
As per AS 15, “While it is the responsibility of the reporting enterprise to measure the obligations under the defined benefit plans. However, it is recognized that for doing so the enterprise would normally use the services of a qualified actuary”.
On the other hand, IndAS 19 “encourages, but does not require, an entity to involve a qualified actuary in the measurement of all material post-employment benefit obligations. For practical reasons, an entity may request a qualified actuary to carry out a detailed valuation of the obligation… “
Conclusion
Actuarial valuation of Gratuity liability is not mandated by either of the accounting standards. However, for all practical purposes, it could be concluded that actuarial valuation of Gratuity report is required.
Interesting fact: The word “actuarial”, appears more than 90 times in AS15 and IndAS19 text respectively. Thus, highlighting the importance of actuarial valuation of Gratuity scheme.