Actuarial Valuation as required under LKAS 19 Date : 10th December, 2012RudreshPanditShraddhaVora
Accounting Standards • Accounting Standards are Definitive benchmarks prescribed by a country’s Accounting Standard Board.
ACCOUNTING STANDARDS:SLAS 16 V/S LKAS 19 • Comparison • Measurement • Disclosures & Recognition under expense in the Income Statement and Balance Sheet
Employee benefits-types • Short-Term Employee Benefits • Other Long-Term Employee Benefits • Post Employment Benefits • Termination Benefits
Accounting Standard-requirements • Requires a best estimate of likely Future Benefit Payment. • Future Payments are to be Discounted back. • Gains/ Losses: Deviations between Actual and Expected
Method Of Valuation • Projected Unit Credit Method : Present Value of All Accrued Benefit on valuation Date on Projected Salaries at Exit (PBO) • Required Under LKAS 19. • Required Under ASC 715 (US-GAAP) • Required Under IAS-19 (IFRS)
Assumptions for Valuation Demographic Assumptions Mortality Turnover/Attrition Retirement Age…………...
How to set these Assumptions? Setting the Assumptions is a Group Work. • Salary Escalation, Attrition Rate best Known by the Employer • Disount Rate is market driven • Other related assumptions are taken on a best estimate from past trend.
Gratuity As per Payment of Gratuity Act (1983)- ‘Gratuity is the payment made by the employer to an employee in appreciation of continuous service rendered by the employee.’ Gratuity is payable immediately on the “EXIT” of employment of the employee after he/she has rendered a continuous service of not less than 5 years • On retirement/early exit, or • On death, or • Exit due to disablement , accident or disease.
Gratuity Valuation • Required Information • Identification of the Employee • Date of Birth • Date of Joining • Date of Valuation • Monthly Salary • Retirement Age • Benefit Description • To determine • Age • Past service • Discontinuance liability • Actuarial Liability
Example Gratuity • Benefit : 15 days salary per year of service • Past Service = 10 Years • Age = 40 Years • Current Salary = 10,000 • Rate of Discounting = 7% • Vesting Period = 5 Years • Retirement Age = 60 Years • Method of Valuation = Projected Unit Credit Method
Calculation of Benefit Payableand Actuarial Liability - 1 • Future Salary Growth = 5% Benefits = 15/30*10,000*10 = 50,000 Actuarial Value = 50,000*(1.05/1.07)^(60-40) = 34,283 Actuarial Value differs due to uncertainty of early withdrawal and mortality
Calculation of Benefit Payableand Actuarial Liability - 2 • Future Salary growth = 4% Benefits = 15/30*10,000*10 = 50,000 Actuarial Value = 50,000*(1.04/1.07)^(60-40) = 28,311 Actuarial Value differs due to uncertainty of early withdrawal and mortality
Calculation of Benefit Payableand Actuarial Liability – 3 • Future Salary growth = 9% Benefits = 15/30*10,000*10 = 50,000 Actuarial Value = 50,000*(1.09/1.07)^(60-40) = 72,414 Actuarial Value differs due to uncertainty of early withdrawal and mortality
LKAS 19 DISCLOSURES • General description of the type of plan • Principal actuarial assumptions • Accounting policy for recognizing actuarial gains & losses. • Reconciliation with movements during the period of the liability in the balance sheet. • Details of total expense (income statement)
Actuarial Loss/(gain)Actual liability- Expected liability 28.25 150 4 Extra year’s interest and benefit accrual 100 Benefit Payments (leavers) 124.25 Liability Liability Loss Year Start Year End Year End Expected Year End Actual
Actuarial Gains/Losses SLAS 16 Hit to Income statement
Volatility & OCI LKAS19 • Full and immediate recognition outside Income statement via Other Comprehensive Income (OCI). • This results in Reduction Of Volatility in profits and losses of company.
How Corridor Approach works? • LKAS19 • “Corridor approach” can be used to delay recognition of losses / (gains) • “Corridor Approach” amortizes over employees’ future service periods any unrecognized gains or losses in excess of 10% of greater of projected benefit obligation or fair value of plan assets
Net gain/loss subject to recognition Unrecognized net gain/loss “Corridor” = 10% Max(PBO, Fund Assets) “Corridor” = 10% Max(PBO, Fund Assets) How Corridor Approach works?