Actuarial valuations are an accounting exercise performed to estimate future liabilities arising out of benefits that are payable to employees of a company. In this article, we look at why actuarial valuation of employee benefits is required and performed as part of financial reporting by corporate entities.
TABLE OF CONTENTS
- Estimation of Employee Benefit Obligations
- Estimation of Liability
- Reporting under various Accounting standards
Estimation of Employee Benefit Obligations
As per statutory requirements under accounting standards such as Ind AS 19 and AS 15(R), various forms of benefits are available to the employees of a company. Some of the common forms of benefits available to employees include salary, leaves, gratuity, pensions and provident funds. While some of these benefits like salaries are paid every month, others such as gratuity and provident fund are paid at a later date. These benefits are not paid immediately, but accrue over the term of employment of the employee. Hence, they need to be estimated and a provision must be made in the book of accounts of the company. This exercise is known as actuarial valuation.
Estimation of Liability
Liability arises when an employee has provided service to a company over a period of time. In the actuarial valuation exercise, a liability payout at a future date is estimated using various assumptions such as discounting rate and salary growth rate. These are termed as “employee benefits”. Actuarial valuation is done to calculate the present-day value of payments that will be made to the employees as part of any employee benefits scheme. A company needs to disclose the major obligations and liabilities that arise as a result of its employees providing service to the company. Figure1 denotes the executive summary which is presented after the valuation and shows the key figures that need to be accounted for.
Figure1: Executive Summary of Actuarial valuation to disclose the assets and liabilities of the employee benefits plan.
One of the goals of actuarial valuation of employee benefits is to ensure that the company considers the benefits payable to employees, so that a situation does not arise where an employee is resigning or retiring but the company does not have the funds to pay the employee’s accrued benefits.
Reporting under various Accounting standards
Actuarial valuations are required by various accounting standards such as IND AS 19, AS – 15(R), US-GAAP and IFRS etc. Under these accounting standards, actuarial valuation is performed to estimate the liability and make provisions for the same in the balance sheet. An Actuary performs the actuarial valuation of the various benefits like gratuity, leave, provident fund and provides the estimated liability and associated disclosures that needs to be reported in the financial statements of the company.
How we can assist you?
The valuation for employee benefit schemes involves complex calculations which have to be performed by a qualified actuary, and the key results of the valuation must be then reported during the audit of a company. We can assist you with the valuation process for various employee benefit schemes. Find out more about the various services we help you with.