Enterprises, regardless of their size and nature, share a common quest to unravel the regulatory intricacies surrounding actuarial valuations. This is particularly pertinent in the Indian context, where the gratuity scheme stands as a cornerstone of employee benefits. Here, we aim to demystify the applicability of gratuity valuation for businesses.
To comprehend the specifics, let's first ascertain which types of enterprises are obligated to provide gratuity benefits to their employees. This categorization revolves around two primary aspects:
- The Payment of Gratuity Act, 1972
This act bestows a statutory right to gratuity for employees who have:
Rendered 5 years of continuous service.
Experienced termination due to superannuation, retirement, resignation, death, or disablement.
The act applies to establishments with 10 or more employees during any day of the preceding year, encompassing all forms of business structures, including proprietorships, partnerships, and limited companies. Once applicable, it continues to bind an organization even if the employee count falls below the stipulated minimum.
Applicability of Actuarial Valuation to Corporate Entities
Upon establishing that an organization is mandated to implement a statutory benefit scheme, the next step involves determining the necessity for actuarial valuation. According to Chapter IX of the Companies Act, 2013, every company must prepare books of accounts adhering to relevant Accounting Standards, including AS 15. Actuarial valuation becomes imperative for certain employee benefit schemes, including gratuity.
Corporate Entities are classified into Small and Medium-Sized Companies (SMCs) and Non-SMCs. Exemptions and relaxations exist for SMCs concerning gratuity valuation under AS-15.
Applicability of Actuarial Valuation to Non-Corporate Entities
Appendix II delves into the applicability of accounting standards to non-corporate entities like LLPs, partnerships, and proprietorships. Non-corporate entities are categorized into three levels by ICAI, each carrying exemptions and relaxations for complying with AS-15 for Level II and Level III Enterprises.
Understanding whether an entity falls under Level II or Level III is pivotal in determining the extent of compliance.
Applicability of IND AS 19 to Companies
The mandatory application of Ind AS 19 began on or after April 1, 2017, for listed companies, unlisted companies with a net worth of Rs. 250 Cr or more, and holding, subsidiary, joint venture, or associate companies of the listed and unlisted companies.
Voluntary adoption is available to other companies for financial statements for accounting periods starting on or after April 1, 2015. Once a company adopts Ind AS 19, it becomes mandatory for subsequent financial statements, and this option is irrevocable.
Once a company embraces Ind AS 19, there's no requirement to prepare another set of gratuity valuation reports under AS 15.
Why Do These Accounting Standards Require Actuarial Valuation?
AS 15 and Ind AS 19 mandate actuarial valuations to:
Recognize liability when an employee provides service for future employee benefits.
Acknowledge an expense when the enterprise consumes the economic benefit arising from an employee's service for employee benefits.
How Often Do We Need Actuarial Valuation of Gratuity Scheme?
Financial Reporting at Year End
Actuarial valuations are necessary at the end of every accounting period for the preparation of financial statements. This applies to all enterprises where AS 15 or Ind AS 19 is applicable, whether fully or partially.
Interim Financial Reporting
For enterprises mandated to present interim financial results per AS 25: Interim Financial Reporting, provisions for gratuity and other defined benefit schemes for an interim period are calculated on a year-to-date basis. Although actuarial valuation is not mandatory for interim financial reporting, Ind AS 19 requires determining the net defined benefit liability or asset regularly to align with the amounts recognized in financial statements.
In a volatile economic environment, obtaining a valuation at each interim balance sheet date may be necessary.
Conclusion
Understanding the regulatory framework for actuarial valuations demands a comprehensive grasp of the specific requirements applicable to different types of entities. It's not merely about compliance but also about making informed decisions to optimize the utilization of exemptions and relaxations available within the regulatory framework. A meticulous approach to actuarial valuations ensures not only adherence to standards but also strategic decision-making for organizational benefit.
