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7 issues to consider for auditing actuarial valuation reports

Posted by Nasrat Kamal on 18-Sep-2017 10:00:00

The usual approach taken by auditors in reviewing and validating actuarial valuation reports requires a fundamental shift. Often the approach used fails to uncover significant errors.

Audit of actuarial reports is a challenging task. Reviewing a piece of work of such a technical nature is a significant ask from anyone who doesn't have an actuarial background. The situation is often exacerbated by the fact that the essential details are often missing in actuarial valuation reports. Auditors therefore end up making guesses and answering their own questions.

This post sets out some of the issues that auditors must be aware of when they review the actuarial reports. 

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Topics: Actuarial valuation, AS 15, Ind AS 19, Actuarial services, IAS 19

FAQ: Setting the discount rate for actuarial valuation

Posted by Anuradha Sehgal on 07-Aug-2017 10:36:00

Setting the discount rate is considered to be the most important aspect of any actuarial valuation. In this post, we have summarised some of the most common questions our clients and their auditors ask about choosing the right discount rate.

1) What is the correct way to set discount rate for AS 15, Ind AS 19 and IAS 19 valuations?

Setting the discount rate involves constructing yield curves from the raw trading data. As an overview, this involves calculating the yields-to-maturity using traded Government Securities. Different traded bonds will have different YTM, depending on the term of each bond and therefore yields would be different for each term. They would then need to be smoothed, interpolated and extraopolated to produce the full yield curve. The discount rate can be read off for the specific duration of Defined Benefit Obligation.

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Topics: Actuarial valuation, Discount rate, Actuarial assumptions

Understanding actuarial loss in an AS 15 report

Posted by Nasrat Kamal on 27-Jul-2017 17:30:27

The concept of actuarial loss is central to any actuarial valuation, but is widely misunderstood. A clear understanding of this concept could pre-empt a range of questions and free up time and resources tied up in the actuarial valuation process.

An understanding of actuarial loss under AS 15, or 'remeasurement' under Ind AS 19, can be considered the holy grail of an actuarial valuation. Questions related to changes in liability or expense year on year, and most questions auditors ask from a company, have their answers hidden in the actuarial loss figure. A proper understanding of actuarial loss can also help uncover errors in an actuarial valuation.

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Topics: Actuarial valuation, AS 15

Frequently Asked Questions about gratuity funding

Posted by Anuradha Sehgal on 19-Jun-2017 10:30:00

The topic of funding of gratuity scheme remains unclear for many companies, due to a lack of regulatory framework and a general lack of understanding of actuarial principles. 

We have examined the issue to consider for gratuity scheme funding in our prior postThis post sets out a list of frequently asked questions, from our own experience working with our clients:

1. My company's gratuity scheme is funded with LIC. Do we still need to get the actuarial valuation done for AS 15?

Yes, the fact that your gratuity is funded doesn't change anything as far as reporting under AS 15 is concerned. AS 15 is an assessment of your gratuity liabilities and how much you hold in assets to back them.

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Topics: Actuarial valuation, Gratuity valuation, Funding, Funding valuation

3 issues to understand about insurer-managed gratuity funds

Posted by Nasrat Kamal on 15-Jun-2017 09:19:00

Many employers choose to fund their gratuity liabilities by paying regular contributions to an insurance company. However, employers often do not fully understand what to expect from these arrangements.

A significant proportion of Indian companies set aside funds with an external fund manager, mostly an insurance company like the LIC, to pay out gratuity benefits payable to their employees in future. There are three issues to understand about this arrangement:

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Topics: Actuarial valuation, Gratuity valuation, Funding, Funding valuation

How to set the employee attrition assumption for actuarial valuation

Posted by Nasrat Kamal on 01-Jun-2017 10:30:00

Employee attrition rate is an important assumption that can have significant impact on the actuarial liability of employee benefit schemes. An incorrect assumption will invariably lead to erroneous liability to be recorded in the balance sheet.

In our last post, considerations for setting the salary escalation rate were discussed. In the same post, we also provided some context about the roles and responsibilities in regard to setting actuarial assumptions and owning the process of actuarial reporting in general. In a nutshell - prior to 2005, actuarial valuation, including the assumptions, was largely controlled by the actuary. This situation changed when AS 15 was revised in 2005 and the responsibility for all aspects of actuarial valuation was shifted to the reporting companies.

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Topics: Actuarial valuation, AS 15, Ind AS 19, Actuarial assumptions

How to set the salary escalation assumption for actuarial valuation

Posted by Nasrat Kamal on 29-May-2017 10:45:00

Salary escalation rate is the second most significant assumption used in an actuarial valuation after the discount rate. However, unlike the discount rate, the reporting enterprise has a much greater role to play in setting this assumption. It is important to understand the complexities involved.

Actuarial reporting requirements for employee benefit schemes in India, such as gratuity and leaves (also known as compensated absences), have evolved rapidly over the last few years. Prior to 2005, before AS 15 was revised, the actuary had the overall responsibility for many important aspects of actuarial valuation. 

When the AS 15 was revised, the responsibility for actuarial valuation was shifted from the actuary to the reporting enterprise. All the amendments to AS 15 since then, and the introduction of Ind AS 19, have only increased the responsibility on the reporting enterprise.

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Topics: Actuarial valuation, AS 15, Ind AS 19, Actuarial assumptions

Governance framework to set actuarial assumptions

Posted by Nasrat Kamal on 16-May-2017 09:15:00

Setting the right actuarial assumptions is central to the accuracy of any actuarial valuation. However, there is a general lack of understanding among the stakeholders about how the assumptions should be set.

No matter how much care is taken in doing an actuarial valuation, the results could still be useless if assumptions are not set correctly. For certain companies, choosing the wrong assumptions could mean that he liability in the books of accounts could be understated or overstated by as much as 50% or even more. From our own experience, accountants and auditors, irrespective of the size or reputation of their firms, have misconceptions about several key aspects.

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Topics: Actuarial valuation, AS 15, Ind AS 19, Actuarial assumptions

5 issues to consider for Gratuity scheme funding

Posted by Nasrat Kamal on 25-Apr-2017 10:10:00

Under the right circumstances, a decision to set aside funds to back a gratuity scheme could deliver significant benefits to the companies.

Gratuity is a statutory benefit - employers are required to pay a lumpsum benefit to their employees who have served for at least five years. The lumpsum is generally calculated as 15 days of eligible salary for each year of service.

Unlike certain other benefits like salaries, bonuses and life insurance, an employee receives gratuity only at the exit from the company and not while in service.

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Topics: Employee benefits, Actuarial valuation, Gratuity valuation, Funding

4 issues to understand about actuarial valuation of leave benefits

Posted by Nasrat Kamal on 04-Apr-2017 08:45:00

Treatment of leave schemes under AS 15 and Ind AS 19 is widely misunderstood. Companies end up spending resources on actuarial valuation on schemes that may not require any, while fail to identify schemes that may require one.

Background

Companies run several types of leave benefit schemes for their employees. Privilege leaves (also known as earned or annual leaves), sick leaves, casual leaves, maternity leaves, jubilee leave awards etc. may all be available to the employees.

Indian accounting standards, AS 15 and Ind AS 19, both require that a liability should be recognised in the reporting companies' balance sheets in respect of these leave schemes. 

What is the current market practice?

Unlike gratuity, companies have a high degree of flexibility in designing the terms and rules of their leave benefit schemes. For example, companies can choose how many leaves need to be awarded each year (subject to any regulatory minimum), whether these leaves can be carried forward and for how long, whether unused leaves can be encashed and whether they can be encashed while in service or only on exit.

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Topics: Actuarial valuation, AS 15, Ind AS 19, Compensation and benefits, Leave valuation, Compensated absences

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