FAQ

Our Company started operations two years back. Do we need to keep gratuity provision in our Financials?

The Gratuity Act 1972, describes that the gratuity is payable to an employee after
completing 5 years of vesting period in case of resignation, termination or retirement.
However, the provision shall be done as per the accounting standard even if the Company
has not completed 5 years of operations. As per Para 72 of Ind AS 19/ Para 70 of AS 15,
Gratuity Provision shall be made even for service of less than 5 years.

What are the criteria for actuarial valuation of gratuity?

Payment of Gratuity Act applies to your company if you have more than 10
employees. All companies having 10+Employees need to make Provision for Gratuity as per
Actuarial Valuation method Projected Unit credit method (PUCM) to comply with AS15/ Ind
AS19.

Is actuarial valuation required to value Short-term benefits?

No, the actuarial valuation is not required for short-term benefits. In case, the
benefit paid after 12 months, the actuarial valuation is needed as per AS 15 R / IND AS 19 accounting standard.

Is actuarial valuation required for Small and medium sized Companies (SMC)?

For SMC, the actuarial valuation is required but detailed disclosures are
exempted.

What is the method to choose discount rate for actuarial valuation?

Para 78 of AS 15 states that the rate used to discount post-employment benefit
obligations (both funded and unfunded) should be determined by reference to market yields
at the balance sheet date on government bonds. Similarly, IND AS 19 also prescribe to refer
government bond yield to set discount rate. In order to set the discount rate, its critical to
keep currency and term of the bonds to be consistent with liability duration.

Is it mandatory to keep fund against actuarial liability calculated for gratuity benefits?

In India, currently there are no regulations to keep fund to back the gratuity
provision calculated by an Actuary. However, it is always encouraged to keep fund in order
to pay off liabilities on time and to avoid/reduce interest rate and reinvestment risk. Further,
there are tax advantages for funding.

How attrition rate assumption shall be set for the actuarial valuation of gratuity and leave encashment?

There are three key factors which shall be considered to set attrition assumption:
a) Company’s recent attrition experience in last 2-3 years
b) Industry experience of employee attrition
c) Management view on future attrition

Our Company has kept fund with an insurance Company and it provides an actuarial liability every year. Do we still require actuarial report from Certified Actuary?

Even if the plan is funded and managed by an Insurance Company, still the
Company need to get a separate actuarial valuation done. The reason being that an
insurance company does not provide complete disclosures as required by accounting
standard regulations and sometimes the assumptions are not fair and inconsistent with
Company’s own experience.

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