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Actuarial valuation of gratuity, leave and pension schemes (Actuary)     04 September 2009
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Dear Group members:



While going through few discussions here and also from the general understanding of our new clients, I believe that there is a gap in general understanding regarding what actuarial valuations are all about. Being from a professional actuarial firm and qualified actuary myself, I think I should take steps to increase awareness about the same - hope this post proves helpful to fellow HR and Finance professionals.


Need for actuarial valuations

Actuarial valuations in India are mostly done for accounting purposes - under AS 15 (revised, 2005), IAS 19 or US GAAP (FAS 87/88/158), as they are mandatory requirements issued by the relevant accounting body. However, actuarial valuations are also done for calculating contribution rate for funded schemes and during mergers & acquisitions.


Types of schemes covered under AS 15 (revised, 2005)

Within Indian accounting framework, AS 15 (revised, 2005) deals with the accounting of employee benefits. AS 15 requires that actuarial valuation should be done in respect of following employee benefits:

1. Gratuity

2. Leave benefits (for both encashable and non-encashable leaves)

3. Pension schemes (including both defined benefit and defined contribution schemes which guarantee a minimum investment return)

4. Exempt Provident Fund (those PFs managed in-house and not by EPFO)

5. Long-term service awards (e.g. awards given on completion of certain number of years of service or at retirement)

6. Bonus and profit-sharing arrangements

7. Leaves for leisure and travel purposes


Please note that actuarial valuation is not required for:

1. Defined Contribution pension schemes where no investment return guarantee is provided

2. Leaves which cannot be carried forward beyond one year


Actuarial valuation results

The actuary calculates the following as per provisions of AS 15 for each applicable employee benefit scheme, which then need to be disclosed in company's annual accounts:

1. A liability in respect of the benefits in company's balance sheet

2. An expense in respect of the benefits in company's P&L account


Companies covered under AS 15 (revised, 2005)

AS 15 (revised, 2005) is applicable on the following firms:

1. Listed companies on any stock exchange in India

2. Banks/FIs/Insurance companies

3. Companies having turnover of more than 50 crores

4. Companies having borrowings or deposits of more than 10 crores

5. Companies employing more than 50 employees

6. Holding or subsidiary company of any of the above


Above-mentioned companies must get actuarial valuation done externally as per AS 15 by a certified actuary atleast once a year (usually 31 March). Company officials or auditors cannot do this valuation by themselves.


Companies which do not fall within any of the above six categories also need to consult a qualified actuary whether they need actuarial valuation or not. The need for actuarial valuation is determined by the actuary in consultation with the auditors after assessing materiality issues. Therefore, requirement of actuarial valuation falls more or less on every registered company.


Certificates by insurance companies (applicable only for funded schemes)

Companies who have funded the liabilities with an insurance company can get AS 15 valuation certificates from their respective insurance companies if they agree to provide the same. Companies need to ensure that such certificates are signed by a qualified actuary and are prepared as per the provisions of AS 15.


Contributions made to insurance companies in respect of employee benefits cannot be booked as expense in P&L as per AS 15 - the expense has to be calculated by an actuary using actuarial methods.


More information

Numerica Quantitative Services is a professional services firm providing actuarial valuations for corporates and insurance companies. For more information on specific issues (e.g. simplified calculations of liability, sample AS 15 disclosures, funding vs accounting), please refer to or write an e-mail to info @


I hope the information turns out to be useful to the audience here. Looking forward for your thoughts and comments on the issues highlighted here.


With regards


sarabjeet (Team Lead)     05 September 2009

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"Hi, Thanks for your informative article & I think this may surely help people to choose their pension plans. Here is an online tool which helps people to plan their insurance according to their needs & budget. Please check this out at -"
CA. Amit Daga

CA. Amit Daga (Finance Controller CA. CS. CFA. CIFRS. M.COM. )     06 October 2009

CA. Amit Daga
Finance Controller CA. CS. CFA. CIFRS. M.COM.  
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Do you have any good article or calculation on actuarial calculation (Actuary)     06 October 2009
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Here is a sample with reference to gratuity liability calculation:

Suppose a person (X) aged 55 exact is about to retire exactly after 5 years after attaining age 60 and has already rendered exactly 5 years of service. Also suppose X is earning Rs 10,000 a month now and that it is expected that his salary will increase 10% per annum for the next five years.
At retirement, X’s salary is expected to be Rs 10,000 x (1 + 10%) ^ 5 = Rs 16,105 per month and till that time, X would have service for 10 years. His gratuity benefit at retirement is expected to be 15/26 x Rs 16,105 x 10 = Rs 92,913
Therefore, a benefit of Rs 92,913 will be paid to X at retirement, if his salary increases at the assumed rate of 10%. This future benefit results in a liability now, which is equal to the present value of this benefit. Assuming the discount rate to calculate the present value is 15% pa, the liability is calculated as:
Rs 92,913 / (1 + 15%) ^ 5 = Rs 46,194
i.e. the expected benefit of Rs 92,913 is discounted for 5 years, since the benefit is expected to be paid in 5 years’ time.
Note: The example is very simplified and specifically excludes the probabilistic nature of calculations.


CA. Amit Daga

CA. Amit Daga (Finance Controller CA. CS. CFA. CIFRS. M.COM. )     07 October 2009

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CA. Amit Daga (Finance Controller CA. CS. CFA. CIFRS. M.COM. )     07 October 2009

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Satish K Mundra

Satish K Mundra (Proprietory)     29 March 2010

Satish K Mundra
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i wanted to know as to whether provisioning for gratuity is applicable even if employee has not worked for a period less then 5 years as on closing day.

i dont know whether he is going to continue or not.

So far as my company is Concerned AS 15 gets applicable since number of employees are more than 50.



1 Like (Actuary)     31 March 2010
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Yes, provision needs to be made for each employee as on the balance sheet (closing) date, irrespective of whether the employee has completed 5 years or not. The actuarial valuation takes into account the probability that the employee may complete required number of service for award of gratuity at some future date and the liability is calculated accordingly

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C.A Rohit Gambhir

C.A Rohit Gambhir (C.A)     03 April 2010

C.A Rohit Gambhir
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Provisioning would be applicable from the day employee joins the oraganisation.

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Manohar Lal Sodhi

Manohar Lal Sodhi (Actuary)     03 April 2010

Manohar Lal Sodhi
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M. L.



Accounting & Disclosure for Employee Benefits

in Compliance of Accounting Standard (AS) 15 (revised 2005)



  • Accounting Standard (AS) 15 (revised 2005) is issued by the Institute of Chartered Accountants of India and is mandatory in nature (refer to the text of the standard for details).


  • The objective of the standard is to prescribed accounting and disclosure for employee benefits. The statement requires an enterprise to recognize:-


  • A liability when an employee has provided service in exchange for employee benefits to be paid in the future; and
  • An expense when the enterprise consumes the economic benefit arising from service provided by an employee in exchange for employee benefits.


  • Employee Benefits fall under 2 type of plans:- Defined Contribution Plans and Defined Benefit Plans.


  • Employee Benefits are further classified as:-


  • Short Term Employee Benefits
  • Post Employment Benefits such as Gratuity, Pension, Other Retirement Benefits, Post-Employment Life Insurance and Post-Employment Medial Care;
  • Other Long-Term Employee Benefits, including long-service leave or sabbatical leave, jubilee or other long-service benefits, long-term disability benefits and, if they are not payable wholly within twelve months after the end of the period, profit-sharing, bonuses and deferred compensation; and
  • Termination Benefits

 Because each category identified above has different characteristics, this statement establishes separate requirements for each category.


  • Accounting and Disclosure requirements for Defined Benefit Plans need the skill of an Actuary.


  • Most common Defined Benefits relevant in the Indian context which need the services of an actuary for compliance of the accounting standard, whilst finalizing the financial statements are:-


  • Gratuity
  • Compensated Absences (Earned Leave)
  • Compensated Absences (Sick Leave)
  • Post Retirement Medical Benefits
  • Superannuation (Pension Benefits)


  • Frequent items to be conversant with the subject are:-


  • Projected Unit Credit Method (PUC)
  • Present Value of Obligation
  • Current Service Cost
  • Interest Cost
  • Actuarial Gains/Losses
  • Employer’s Expense
  • Experience Adjustment on Plan Liabilities
  • Experience Adjustment on Plan Assets


  • *We provide actuarial services for compliance of the standard. We have expertise, experience and in-depth knowledge in this field. We have a large clientele spread in almost all sectors of the economy in Public and Private Sectors including Multinational Companies, Limited Companies, Schools, Hospitals, Banks, Electricity/Power Companies etc. etc.


  • Our services are also available for compliance of :-


  • International Accounting Standard IAS (19) - IFRS
  • Under US GAAP


For further details log on to

*Terms and Conditions will apply.

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