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.


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

4 ways in which Ind AS 102 can affect your company

Posted by Megha Agarwal on 27-Mar-2017 10:15:00

Ind AS 102 will bring much needed uniformity in valuation and accounting of share-based benefits. However, the cost for the affected companies is likely to increase significantly. 


What Ind AS 102 is all about?

Ind AS 102 prescribes financial reporting in respect of share-based benefits and is relevant for companies which remunerate their employees by share-based (or stock option) schemes, such as Employee Stock Options (ESOP), Share Appreciation Rights (SAR), Phantom Equity, Share Purchase Plans (SPP) etc. A brief introduction of these schemes is provided in the white paper at the end of this post.

How are share-based benefits accounted currently?

Currently, there is no accounting standard that deals specifically in the accounting of share-based benefit schemes. Guidance Note No 18 (GN 18) issued by the Institute of Chartered Accountants of India (ICAI) provides 'guidance' on how these schemes should be treated, but it does not have the force of an accounting standard. Consequently, many companies that run material stock option schemes do not make any disclosure or allowance in respect of these schemes.

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Topics: Compensation and benefits, Share-based schemes, SAR, Ind AS 102, GN 18, ESOP

Increase in gratuity limit and the impact on gratuity valuation

Posted by Nasrat Kamal on 13-Mar-2017 09:45:00

The Government of India is all set to increase the maximum limit of gratuity to ₹20 lakhs. Companies reporting under Ind AS 19 will be affected more than those reporting under AS 15.

But first, we need to be clear about what is actually going to change. A formal notification on the matter is yet to be released. However, the media reports suggest that the 'gratuity limit' on gratuity for private sector employees to ₹20 lakhs.

The increase in gratuity limit as reported by the media can have two possible interpretations:

1. The amount of maximum gratuity payable under the Payment of Gratuity (PG) Act, which is currently capped at ₹10 lakhs will increase to ₹20 lakhs. This would lead to an increase in the liability and P&L expense of the affected companies.

2. The second interpretation is that the amount of gratuity that can be taken 'tax-free' by employees, which is also capped at ₹10 lakhs, will increase to ₹20 lakhs. Many media reports are referring to this 'tax-free' limit, but this interpretation seems less likely. If we go by this interpretation, there will be no impact on the gratuity liability.

Rest of this post is based on the first interpretation.

Payment of Gratuity Act 1972

Currently, the Payment of Gratuity Act 1972 ('PG Act') prescribes that a lump sum gratuity be provided to any employee who resigns, dies or retires from the company after completing about five (5) years of continuous service. 

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Topics: Employee benefits, Actuarial valuation, Compensation and benefits, Gratuity valuation, Regulatory update

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