Gratutity Accounting in Company's books
This query is : Resolved
12 September 2024
Private Limited Company - Holds fund in LIC for Gratuity and have actuary consultant as well. Now the situation, the present obligation amount payable under LIC & Present obligation amount as per actuary consultants report are not matching.. huge variance.
is there any way to reconcile that.. we are able to match only the fair value of assets between LIC & Actuary consultants report.
Kindly help its very urgent. Thanks in advance
is there any way to reconcile that.. we are able to match only the fair value of assets between LIC & Actuary consultants report.
Kindly help its very urgent. Thanks in advance
12 August 2025
Got it—gratuity accounting can get tricky when LIC’s fund value and the actuary’s present obligation differ. Here’s how to understand and reconcile this:
Key Points:
Gratuity Liability (Present Obligation):
This is the defined benefit obligation (DBO) calculated by the actuary using actuarial assumptions (like discount rate, salary growth, employee turnover, etc.). It represents the present value of the company’s liability to pay gratuity.
Fair Value of Plan Assets (LIC Fund):
This is the amount invested in LIC to meet future gratuity payments. It represents the plan assets available to fund the liability.
Why the Variance?
The DBO (liability) and plan assets (LIC fund) are measured differently.
The DBO includes actuarial assumptions about future salary increases, discounting, and expected employee exits.
LIC fund value is just the current fund value with LIC (market value or surrender value).
It’s common for the DBO to be more or less than the fund value.
How to Reconcile:
Understand that Liability ≠ Fund Value
The actuarial valuation focuses on liabilities, while LIC shows assets. These two figures naturally differ.
Match Only Fair Value of Assets
It’s correct that only the fair value of plan assets (LIC fund) should match between LIC and actuary’s report.
The actuary usually provides both:
Present value of defined benefit obligation (liability)
Fair value of plan assets (should match LIC’s fund value)
Accounting Treatment (Ind AS 19 / AS 15):
The net liability or asset is the difference between DBO and fair value of plan assets.
Recognize the gratuity expense in the P&L as per actuarial valuation.
Disclose reconciliation of opening and closing balances of defined benefit obligation and plan assets.
Steps to Resolve the Variance:
Ensure actuary and LIC are using the same valuation date.
Confirm actuary’s plan assets valuation matches LIC’s fund value (market value).
If discrepancies remain, ask actuary to review assumptions or get a fund statement from LIC.
Check for any contributions or payouts in between valuation date and reporting date.
Key Points:
Gratuity Liability (Present Obligation):
This is the defined benefit obligation (DBO) calculated by the actuary using actuarial assumptions (like discount rate, salary growth, employee turnover, etc.). It represents the present value of the company’s liability to pay gratuity.
Fair Value of Plan Assets (LIC Fund):
This is the amount invested in LIC to meet future gratuity payments. It represents the plan assets available to fund the liability.
Why the Variance?
The DBO (liability) and plan assets (LIC fund) are measured differently.
The DBO includes actuarial assumptions about future salary increases, discounting, and expected employee exits.
LIC fund value is just the current fund value with LIC (market value or surrender value).
It’s common for the DBO to be more or less than the fund value.
How to Reconcile:
Understand that Liability ≠ Fund Value
The actuarial valuation focuses on liabilities, while LIC shows assets. These two figures naturally differ.
Match Only Fair Value of Assets
It’s correct that only the fair value of plan assets (LIC fund) should match between LIC and actuary’s report.
The actuary usually provides both:
Present value of defined benefit obligation (liability)
Fair value of plan assets (should match LIC’s fund value)
Accounting Treatment (Ind AS 19 / AS 15):
The net liability or asset is the difference between DBO and fair value of plan assets.
Recognize the gratuity expense in the P&L as per actuarial valuation.
Disclose reconciliation of opening and closing balances of defined benefit obligation and plan assets.
Steps to Resolve the Variance:
Ensure actuary and LIC are using the same valuation date.
Confirm actuary’s plan assets valuation matches LIC’s fund value (market value).
If discrepancies remain, ask actuary to review assumptions or get a fund statement from LIC.
Check for any contributions or payouts in between valuation date and reporting date.
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