Employee benefits are valued in accordance with actuarial principles and the measurements/disclosures prescribed by different accounting standards need to be recognised and reported during the financial audit of a company. As per the criteria of the employee benefit scheme, the obligations towards the employee benefit schemes of a company will impact the company's balance sheet and profit and loss accounts. These disclosures form part of the actuarial valuation report and are disclosed under various table headings in the actuary report.
In this article, we will summarise the main components of the actuary report and explain how the figures should be reported in the profit and loss accounts / balance sheet statements, in accordance with the accounting standards. We will utilise the Model Gratuity Report under AS-15(R). For detailed information on disclosures under Ind AS 19, please also refer to our Handbook on Disclosures under Ind AS 19.
MAIN COMPONENTS OF ACTUARY REPORT
- Table 1: Net Benefit Costs Recognised in the P&L Account
- Table 2: Analysis of Actuarial Gain/Loss
- Table 3: Amounts to be recognised in Balance Sheet
- Table 3A: Current and Non-Current Provisions
- Table 4: Changes in Present Value of DBO
- Table 5: Reconciliation of Balance Sheet Items
- Table A: Summary of Employee Profile
Table 1: Net Benefit Costs Recognised in the P&L Account
Table 1 of the actuarial valuation report shows total employer expenses to be recognised in the profit and loss statement of a company, resulting out of the employee benefit plan (in this case the gratuity scheme). It contains the measurements attributed to the employer's expense for the reporting period (financial year/quarter).
The key figures disclosed via Table 1 are classified under the heads of Service Costs and Interest Costs.
Current Service Cost: This is the cost incurred to the company due to the employee rendering service in the current year.
Past Service Cost: This is the changes in present value of obligations due to plan amendments or curtailment. This arises due to changes in the nature of plan. For example, a company may amend the plan to increase the value of its defined benefit payable to its employees. This would result in recognition of the amounts that were not recognised in the earlier years. For plan curtailment, an example could be when a company curtails a bonus settlement from 3 month's salary to 1 month's salary. Thus, the employees will lose some benefits due to curtailment of the plan. These factors are captured in past service cost.
Interest Cost: This is the increase in defined benefits obligations that arise due to the passage of time.
Plan Assets consists of the assets held in the Defined Benefit Plan in an employee benefits fund, or any specific insurance policy that is designed for employee benefit schemes.
Gains/Losses arise due to changes in the actuarial assumptions. Under AS - 15(R), actuarial gains/losses are reported under profit and loss, whereas under Ind AS 19, they are reported separately via OCI table and do not impact the P&L Account.
Figure 1: Example of Profit and Loss Account disclosures under Table 1
The Defined Benefits Cost to be included in P&L account is calculated as follows:
Defined Benefit Costs = increase in liability + benefits paid – Actual return on plan asset.
Increase in Liability = current year closing liability - last year closing liability.
Table 2: Analysis of Actuarial Gain/Loss
The complete analysis of Actuarial Gains and Losses impacting the employee benefit scheme being valued is presented in this table. Since actuarial valuation involves projecting and estimating the liabilities of a future date, certain assumptions are used with respect to the financial conditions as well as demographic assessments, and these assumptions are known as actuarial assumptions. Actuarial Gains or Losses arise due to change in the actuarial assumptions used in the valuation of employee benefits.
Figure 2: Analysis of Actuarial Gain and Losses under Table 2
The actuarial gain/loss split into three components:
- Actuarial Gain/Loss due to demographic assumption changes: this figure was arrived by taking into account if any changes that occurred in the attrition rate level from last year to current year. if no changes occurred in attrition rate, then figure would be 0.
- Actuarial Gain/Loss due to Financial Assumptions changes: This gives the effect of Actuarial gain/loss due to financial assumption changes on DBO such as change in the discounting rate, change in the expected return in plan assets etc .
- Actuarial Gain/ Losses due to Experience Adjustments on DBO: This is the effects of difference between the previous year actuarial assumptions and what has actually occurred. i.e experience between the current year data with last year assumption and what has actually occurred..
Table 3: Amounts to be recognised in Balance Sheet
The Table 3 represents the amounts to be recognised in the balance sheet of the reporting entity.
The table shows the closing liability and the closing asset for current year.
The difference in figure between the closing assets and closing liability shows net assets which is surplus
/ deficit between them.
Figure 3: Example of amounts to be recognised in the Balance Sheet (shown under Table 3)
If the closing liability is more than closing asset it is termed as deficit.
If the closing liability is less than closing asset it is termed as surplus.
The items showed in the table 3 are items which are recognised in the balance sheet.
Table 3A: Current and Non-Current Provisions
The table 3A contain split-up of closing liability into current and non-current components.
Regarding funded post-employment benefit obligations, the amount due for payment to the fund created for this purpose within twelve months is treated as “current” liability. This is as per Institute of Chartered Accountants circular date December 2011.
The Guidance Note on the revised schedule 3 of the companies Act, 2013. Page 18, Sec 7.3.C reproduced below:
“Regarding funded post-employment benefit obligations, amount due for payment to the fund created for this purpose within twelve months is treated as “current” liability. Regarding the unfunded post-employment benefit obligations, a company will have settlement obligation at the balance sheet date or within twelve months for employees such as those who have already resigned or are expected to resign (which is factored for actuarial valuation) or are due for retirement within the next twelve months from the balance sheet date. Thus, the amount of obligation attributable to these employees is a “current” liability. The remaining amount attributable to other employees, who are likely to continue in the services for more than a year, is classified as “non-current” liability. Normally the actuary should determine the amount of current & non - current liability. Normally the actuary should determine the amount of current & non- current liability for unfunded post-employment benefit obligation based on the definition of current and Non- current assets and liabilities in the Revised schedule 3."
This split into current and non-current is shown in the table 3A under Funded status, row No2.
Regarding the unfunded post-employment benefit obligations, a company will have settlement obligation at the Balance Sheet date or within twelve months for employees such as those who have already resigned or are expected to resign (which is factored for actuarial valuation) or are due for retirement within the next twelve months from the Balance Sheet date. Thus, the amount of obligation attributable to these employees is a current Liability. This is shown under Line 1 of Table 3A
Figure 3A: Example of current and non-current provisions shown under Table 3A
For unfunded case, the liability split up into current and non-current liability shown same in row no 1&2.
For funded case ,
The liability split up into current and non-current liability shown in row no:1
The asset split up into current and non-current liability shown in row no:2
Table 4: Changes in Present Value of DBO
Table 4 reports the changes in present value of the DBO and the reconciliation. The table is split of Table 4A and Table 4B
Table 4A reveals the movement of liability and related figures such as service costs and interest costs for current year from last year.
Table 4B reveals the movement of plan asset for current year from last year.
Figure 4: Changes in the present values of DBO and the reconciliation shown under Table 4.
Table 5: Reconciliation of Balance Sheet Items
The table 5 shows the reconciliation of balance sheet items.
Figure 5: Movement of Balance Sheet items shown under Table 5.
It shows how the net assets of last year, if added to the P & L figure of current year, and after deducting
any contribution made to the funding, will match with the closing net assets.
Table A: Summary of Employee Profile
The Table A presents the statistics for current year employees of the company and the comparison with previous year, if available. Key factors used in the valuation such as total monthly salary, average monthly salary and average past service are shown
Figure 5: Table A shows the summary of the employee information of the company.
Table A also shows the discontinuance gratuity, which refers to the payment of Gratuity Liability on the valuation date in case the company discontinues its commercial operations.
The Discontinuance Gratuity is the sum total of gratuity payable to each and every employee including those with less than 5 years of service.
The actuarial assumptions used in the valuation are shown via Appendix B. As per the requirements of the particular accounting standard, disclosures such plan asset distribution, provisions for past periods etc are show via tables in the Appendices section.
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