Gratuity treatment on actuarial valuation basis

Requirement of actuarial valuation services in compliance of AS-15 (Revised 2005) under various employee benefits plans such as Gratuity, Leave Encashment , Pension, etc. :-

Accounting & Disclosure for Employee Benefits in Compliance of Accounting Standard (AS) 15 (revised 2005)
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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 :-

IndAS 19 ,International Accounting Standard IAS (19) – IFRS, NAS-19 (Nepal Accounting Standard)-19 & US GAAP

For more details you may send your requirements on emails :- mlsodhi @ yahoo.co.in or you may visit website at you may visit our website : www.mlsodhiactuary.com

Season of Audit is about to start from 01.04.2025 and I hope my below write-up about the Mandatory Accounting and Legal Compliances related to Gratuity Benefits may help CA/CS/Auditors in performing the Audits of the Indian and MNC Companies:-

1. Accounting Compliance as per provisions of the Companies Act, 2013.

2. Legal Compliances as per provisions of the Payment of Gratuity Act, 1972.

3. Social Security Code 2020 (Draft) Compliances to be implemented in FY 2025-26

The details of the above compliances is as under :-

1. Accounting Compliance – Accounting Compliances are applicable to all Companies operating in 36 States/UT’s with total Number of Employees 10 or more. As per provisions of Section 129 of the Companies Act 2013, All Indian and Multinational Companies Operating India needs to prepare the Financial Statement such as Balance Sheet & Profit/Loss Accounts at the closure of each financial year in compliance of Accounting Standards as stipulated in Section 133 of the Companies Act 2013, so that they can give a true and fair view of state of affairs of the company. Accounting and Disclosure requirements for Employee Benefits Plans (i.e. Gratuity Plan) is laid down in the following 2 Accounting Standards as issued by The Institute of Chartered Accountants of India (ICAI) -

(i) AS-15 (Revised 2005)

(ii) IndAS-19

Generally, Actuarial Valuations for compliance above Accounting Standards are required for Gratuity and following Employee Benefit Plans under: –

a. Actuarial Valuation for Gratuity Plans,

b. Actuarial Valuation for End of Service Benefit Plan,

c. Actuarial Valuation for Earned Leave Plan,

d. Actuarial Valuation for Sick Leave Plan,

e. Actuarial Valuation for Defined Benefit Pension Plans,

f. Actuarial Valuation for Post-Retirement Medical Benefit Plan,

g. Actuarial Valuation for Settlement Allowances on Retirement,

h. Actuarial Valuation for Long Service Award Plans/Incentive Plans,

i. Actuarial Valuation for Interest Rate Guarantee for Exempted Provident Funds,

j. Actuarial Valuation for other Defined Benefit,

The Actuarial Valuations are required by the Indian Companies in following events :-

I. For making the Initial & Annual Contribution into Gratuity Trust Account.

II. Annually, Half Yearly and Quarterly for making provision of Gratuity Liability in BS as Accounting Standards (i.e. AS 15 Revised 2005) and IndAS 19) per Section 133 of the Companies Act, 2013

III. On The Date of Transfer of Employees from One Company to Another

IV. On the Date of Acquisition

V. On the Date of De-merger

VI. For Submission of Actuarial Reports of last 5 year in SEBI for Listing on Share Market

VII. For assessment of Actuarial Liability for Taking Grant from any Ministry

2. Legal Compliances - All Indian and Multinational Establishments with employees strength 10 or more are compulsory requires to comply with the following provisions of the Payment of Gratuity Act, 1972 & The Payment of Gratuity Rules. As per provision of Rule 3 of the Payment of Gratuity Rules – Notice of Opening, Change or Closure of the Establishment following Forms to be submitted by the all establishment to Competent Authority (i.e. DLC Office) :-

I. Form A

II. Form B

III. Form C

IV. Form F

V. Maintenance of Records other Forms as specified in Rules

VI. Compulsory Gratuity Insurance – For All companies operating in 3 States with Registered Office without any branch or unit outside in following States:

1. Karnataka

2. Telangana

3. Andhra Pradesh

The companies the above 3 States are required to Comply with Karnataka Compulsory Gratuity Insurance Rules, 2024, Telangana Compulsory Gratuity Insurance Rules, 2016 & Andhra Pradesh Compulsory Gratuity Insurance Rules, 2011and mandatorily requires to:-

a. To obtain an Actuarial Report and get Gratuity Liability assessed,

b. To Establish an Approved Gratuity Fund as per Clause (5) subsection 1 (d) of Section 2 of Income Tax Act, 1961 under Irrevocable Trust in compliance of Part C of Fourth Schedule of Income Tax Act, 1961, Rule 98 to 111 of the Income Tax Act, 1962 & Indian Trust Act 1882,

c. Trustee of the Gratuity Trust to obtain Valid Gratuity Insurance from Insurer,

d. Register the establishment in Form I or Form II & maintain Form III,

e. Maintain the Gratuity Fund equivalent to Liability computed in the Actuarial Reports in compliance of AS 15R/IndAS 19 and comply with the related Accounting/Audit/ITR7/ITR5 compliances of the Approved Gratuity Fund at the each Financial Year.

3. Social Security Code (Draft) 2020 Compliances - 36 States/UT’s have published the Drafts of Social Security Code (2020) to be implemented in FY 2025-26. The implementation of Social Security Code will be in Phased Manner :-

i. In First Phase – Indian & MNC,s Companies with 500+ Employees

ii. In Second Phase - Indian & MNC,s Companies with 100 to 500 Employees

iii. In third Phase – Indian & MNC,s Companies with below 100 employees

Few Mandatory Provisions of Social Security Code (Draft) 2020 related to Gratuity Benefits are listed below :-

I. Registration and cancellation of an establishment. – The provisions of subrule 1, 2 & 3 of rule 3 of the Chapter 1 of the Draft THE CODE ON SOCIAL SECURITY, 2020 are as follows :

i. Every establishment to which this Code applies shall be electronically or otherwise, registered within such time and in such manner as may be prescribed by the Central Government: Provided that the establishment which is already registered under any other Central labour law for the time being in force shall not be required to obtain registration again under this Code and such registration shall be deemed to be registration for the purposes of this Code,

ii. Any establishment to which Chapter III or Chapter IV applies, and whose business activities are in the process of closure, may make an application for cancellation of registration granted under this section,

iii. The manner of making application for cancellation of the registration under Sub-section (2), the conditions subject to which the registration shall be cancelled and the procedure of cancellation and other matters relating thereto, shall be such as may be prescribed by the Central Government.

II. Compulsory Gratuity Insurance –The provisions of Subrule (1), (2) & (3) of Rule 57 OF Chapter V of the Draft Rules of THE CODE ON SOCIAL SECURITY, 2020 are as follows :

57. (1) With effect from such date as may be notified by the appropriate Government in this behalf, every employer, other than an employer or an establishment belonging to, or under the control of, the Central Government or a State Government, shall, subject to the provisions of sub-section (2), obtain an insurance in the manner prescribed by the Central Government, for his liability for payment towards the gratuity under this Chapter, from any insurance company regulated by the Authority as defined under clause (b) of sub-section (1) of section 2 of the Insurance Regulatory and Development Authority Act, 1999: Provided that different dates may be appointed for different establishments or class of establishments or for different areas.

57. (2) The appropriate Government may, subject to such conditions as may be prescribed by the Central Government, exempt any employer who had already established an approved gratuity fund in respect of his employees and who desires to continue such arrangement, and every employer employing five hundred or more persons who establishes an approved gratuity fund in the manner prescribed by the Central Government from the provisions of sub-section (1).

57. (3) For the purposes of effectively implementing the provisions of this section, every employer shall within such time as may be prescribed by the Central Government get his establishment registered with the competent authority in the manner prescribed by the appropriate Government and no employer shall be registered under the provisions of this section unless he has taken an insurance referred to in sub-section (1) or has established an approved gratuity fund referred to in sub-section (2).

57. (4) The appropriate Government may provide for the composition of the Board of Trustees of the approved gratuity fund and for the recovery by the competent authority of the amount of the gratuity payable to an employee from the insurer with whom an insurance has been taken under sub-section (1), or as the case may be, the Board of Trustees of the approved gratuity fund, in such manner as may be prescribed.

57. (5) Where an employer fails to make any payment by way of premium in respect of the insurance referred to in sub-section (1) or by way of contribution to an approved gratuity fund referred to in sub-section (2), he shall be liable to pay the amount of gratuity due under this Chapter (including interest, if any, for delayed payments) forthwith to the competent authority.

Explanation.— In this section, "approved gratuity fund" shall have the same meaning as assigned to it in sub-section (5) of section 2 of the Income-tax Act, 1961.

It is important to note that the provisions of Section 4 A Compulsory insurance of the Payment of Gratuity Act, 1972, Karnataka Compulsory Gratuity Insurance Rule, 2024, Telangana Compulsory Gratuity Insurance Rules, 2016 & Andhra Pradesh Gratuity Insurance Rules 2011 & Rule 57 of THE CODE ON SOCIAL SECURITY, 2020 are having similar provisions for compliance by the Indian & Multinational Companies and once The Code on Social Security, 2020 is implemented in FY 2025-26 irrespective of Phases all companies are required to :-

a. To obtain an Actuarial Report and get Gratuity Liability assessed,

c. Trustee of the Gratuity Trust to obtain Valid Gratuity Insurance from Insurer,

d. Register the establishment in Form I or Form II & maintain Form III,

In case of any clarification or query you may connect us at Email Id - tikaramchaudhary @ gratuitytrustfund.com