Why Actuarial Valuation is required for Gratuity Fund and Gratuity Trust Money Investment by Indian Companies ?

 Background

Indian Public Sector, Private Sector and Multinational Companies need to prepare the Financial Statement such as Balance Sheet & Profit/Loss Accounts at the closure of each financial year as per provisions of Section 129 of the Companies Act 2013. As per provisions of Section 133 of the Companies Act 2013, Financial Statements should be prepared in compliance of Accounting Standards as stipulated by the Ministry of Corporate Affairs so that they can give a true and fair view of the state of affairs of the company. 

Why Actuarial Valuation for Accounting of Gratuity Benefit?

Gratuity Benefit as an Employee Benefit Falls in the category of Defined Benefit and further categorized as Post Employment Benefit Obligation. Accounting and Disclosure requirements  for Defined Benefit Plan is laid down in the following 2 Accounting Standards as issued by The Institute of Chartered Accountants of India (ICAI):- 

1. Accounting Standard 15 (Revised 2005) – AS 15 (Revised 2005)

2. Indian Accounting Standard 19 – IndAS 19

 

The main objectives of the above Standards are to prescribe the guidelines and disclosures for Accounting for Defined Benefit Plans (i.e. Gratuity, Leave Encashment, Pension etc.). In order to comply with above standards a company is required to recognize: -

(a) a liability when an employee has provided service to company in exchange for defined benefits to be paid in the future; and

(b) an expense when the company consumes the economic benefit arising from service provided by an employee in exchange for defined benefits. 

I produce here in below few para’s of AS 15 (Revised 2005) & Guidance Note on the Revised Schedule IV to the Companies Act, 1956  which may help CA/CS/Auditors to understand “Why  Actuarial Valuation is required by the Public, Private and Multinational Indian Companies with more than 10 employees for compliance of AS 15 (Revised 2005)  on Actuarial Valuation Basis instead of any other rational Method” for Compliance of the above Accounting Standard 15 (Revised 2005) – AS 15 (Revised 2005)” The Para 49, Para 50 and Para 51 of AS 15 (Revised 2005) prescribes requirements of Actuarial Valuation Method for Accounting of Defined Benefits and Steps for Computation of Defined Benefit Plans. These paras are produced herein below –

Para 49. - Post-employment Benefits: Defined Benefit Plans

Accounting for Employee Benefit Plans falls in the category of Defined Benefit is complex because actuarial assumptions are required to measure the obligation and the expense and there is a possibility of actuarial gains and losses.  Moreover, the obligations are measured on a discounted basis because they may be settled many years after the employees render the related service. While the Standard requires that it is the responsibility of the reporting enterprise to measure the obligations under the defined benefit plans, it is recognized that for doing so the enterprise would normally use the services of a qualified actuary.

Para 50. - Recognition and Measurement

Defined benefit plans may be unfunded, or they may be wholly or partly funded by contributions by an enterprise, and sometimes its employees, into an entity, or fund, that is legally separate from the reporting enterprise and from which the employee benefits are paid. The payment of funded benefits when they fall due depends not only on the financial position and the investment performance of the fund but also on an enterprise’s ability to make good any shortfall in the fund’s assets. Therefore, the enterprise is, in substance, underwriting the actuarial and investment risks associated with the plan. Consequently, the expense recognized for a defined benefit plan is not necessarily the amount of the contribution due for the period.

Para 51. - Accounting by an enterprise for defined benefit plans involves the following steps:

(a) using actuarial techniques to make a reliable estimate of the amount of benefit that employees have earned in return for their service in the current and prior periods. This requires an enterprise to determine how much benefit is attributable to the current and prior periods (see paragraphs 68-72) and to make estimates (actuarial assumptions) about demographic variables (such as employee turnover and mortality) and financial variables (such as future increases in salaries and medical costs) that will influence the cost of the benefit (see paragraphs 73-91);

(b) discounting that benefit using the Projected Unit Credit Method in order to determine the present value of the defined benefit obligation and the current service cost (see paragraphs 65-67);

(c) determining the fair value of any plan assets (see paragraphs 100102);

(d) determining the total amount of actuarial gains and losses (see paragraphs 92-93);

(e) where a plan has been introduced or changed, determining the resulting past service cost (see paragraphs 94-99); and

(f) where a plan has been curtailed or settled, determining the resulting gain or loss (see paragraphs 110-116).

Where an enterprise has more than one defined benefit plan, the enterprise applies these procedures for each material plan separately.

 

Para 7.3 of Guidance Note on the revised schedule vi to the companies act, 1956

 

For the purpose of Revised Schedule VI, a company also needs to classify its employee benefit obligations as current and non-current categories. While AS-15 Employee Benefits governs the measurement of various employee benefit obligations, their classification as current and noncurrent liabilities will be governed by the criteria laid down in the Revised Schedule VI. In accordance with these criteria, a liability is classified as “current” if a company does not have an unconditional right as on the Balance Sheet date to defer its settlement for twelve months after the reporting date. Each company will need to apply these criteria to its specific facts and circumstances and decide an appropriate classification of its employee benefit obligations. Given below is an illustrative example on application of these criteria in a simple situation:

(a) Liability toward bonus, etc., payable within one year from the Balance Sheet date is classified as “current”.

(b) In case of accumulated leave outstanding as on the reporting date, the employees have already earned the right to avail the leave and they are normally entitled to avail the leave at any time during the year. To the extent, the employee has unconditional right to avail the leave, the same needs to be classified as “current” even though the same is measured as ‘other long-term employee benefit’ as per AS-15. However, whether the right to defer the employee’s leave is available unconditionally with the company needs to be evaluated on a case to case basis – based on the terms of Employee Contract and Leave Policy, Employer’s right to postpone/deny the leave, restriction to avail leave in the next year for a maximum number of days, etc. In case of such complexities the amount of Non-current and Current portions of leave obligation should normally be determined by a qualified Actuary. 

(c) Regarding funded post-employment benefit obligations, amount due for payment to the fund created for this purpose within twelve months is treated as “current” liability. Regarding the unfunded postemployment benefit obligations, a company will have settlement obligation at the Balance Sheet date or within twelve months for employees such as those who have already resigned or are expected to resign (which is factored for actuarial valuation) or are due for retirement within the next twelve months from the Balance Sheet date. Thus, the amount of obligation attributable to these employees is a “current” liability. The remaining amount attributable to other employees, who are likely to continue in the services for more than a year, is classified as “non-current” liability. Normally the actuary should determine the amount of current & non-current liability for unfunded post-employment benefit obligation based on the definition of Current and Non-current assets and liabilities in the Revised Schedule VI.

How to Identify the Compliance requirement for Indian and Multinational Companies ? 

As per payment of Gratuity Act 1972 (amended), All Indian Private and Multinational Companies with more than 10 employees covered under the preview of this Act.  CA, CS & Auditors should follow the following criteria to know the Accounting and Disclosure requirement for Provision of Gratuity Benefit Liabilities in the Financial Statements of the Companies: -

(i) SME Companies - SME requires to give disclosures as per Clause L of Para 120 of AS 15 (Revised 2005) - (For more details refer MCA notification dated 07.12.2006 ) 

(ii) Non SME Companies – Non SME requires to give disclosures as per Para 120 of AS 15 (Revised 2005)

(iii) Listed Companies & their subsidiaries with Net-worth more 250 cr. – In this case, companies and their subsidiaries has to give disclosure of in compliance of IndAS 19.

(iv) NBFC (Non-Banking Financial Company) with Net-worth more 250 cr. – In this case, NBFC has to give disclosure of in compliance of IndAS 19 with comparative numbers of previous 2 years. 

Why Non-Compliance of AS 15 (Revised 2005) & IndAS19 needs to be observed by the CA, CS & Auditors of the Indian and Multinational Companies ?

 MCA vide its notification dated 13th November 2018 notified National Financial Reporting Authority (NFRA) Rules 2018.  The main functions NFRA Authority are:-

1. Monitoring and enforcing the compliance with accounting standards and auditing standards, 

2. Overseeing the quality of Audit service and suggesting measures for improvement,

3. Power to investigate,

4. Disciplinary proceedings, Manner of enforcement of orders passed in disciplinary proceedings, Punishment in case of non-compliance etc.

In view of above provisions, it becomes mandatory for Finance Professionals (i.e. CA, CS, CMA, Finance Professionals & Directors) involved in finalization of Financial Statements to check the proper compliance and provisions of these Accounting Standards.

In case of any query or clarification on the above subject you may call me at 9211637063 or email your requirements at tikaramchaudhary@gmail.com. 

Regards

 

Tika Ram Chaudhary

Gratuity, Pension, Superannuation Trust Fund Consultant

(Corporate Consultant with more than 11 Years of experience in providing Support Services to Indian and Multinational Companies for Formation of Gratuity Trust, Formed to gain Tax Benefit available for Companies under Section 36 (1) (v) of Income Tax Act 1961 & Specialized Support Services for preparation of Inputs for Actuarial Valuations in compliance of AS 15 (Revised 2005), IndAS 19, IAS 19 (Revised 2011) - IFRS & USGAAP required by Gratuity Trust of Indian Companies)

Trade Name - Gratuity Trust Fund Consultant 

Registered Office Address: R 11, F/F, R Block, Vikas Nagar, Uttam Nagar, New Delhi -110059

Mobile Number: 9211637063

Email Id: tikaramchaudhary@gmail.com

Website:  www.gratuitytrustfund.com

LinkedIn Profile: https://www.linkedin.com/in/tika-ram-chaudhary-a5727848/

Caclubindia Profile: https://www.caclubindia.com/profile.asp?member_id=1446582

Tax Guru Profile: https://taxguru.in/author/tikaramchaudhary@gmail.com/

Blog: http://gratuitytrustfundconsultant.blogspot.com

Google Business Listing: https://gratuity-trust-fund-consultant-in-delhi-ncr.business.site/

 

(All services/consultancy is subject to terms and conditions)

 

This message and any attachment are confidential. If you are not the intended recipient please delete this message and all attachments from your system. You must not copy this message or any attachment or disclose the contents to any other person. The sender does not accept liability for any errors, omissions or consequences which arise as a result of e-mail transmission

Why Actuarial Valuation for Accounting of Gratuity Benefit is Compulsory for Company?

 Background

Indian Public Sector, Private Sector and Multinational Companies need to prepare the Financial Statement such as Balance Sheet & Profit/Loss Accounts at the closure of each financial year as per provisions of Section 129 of the Companies Act 2013. As per provisions of Section 133 of the Companies Act 2013, Financial Statements should be prepared in compliance of Accounting Standards as stipulated by the Ministry of Corporate Affairs so that they can give a true and fair view of the state of affairs of the company. 

Why Actuarial Valuation for Accounting of Gratuity Benefit?

Gratuity Benefit as an Employee Benefit Falls in the category of Defined Benefit and further categorized as Post Employment Benefit Obligation. Accounting and Disclosure requirements  for Defined Benefit Plan is laid down in the following 2 Accounting Standards as issued by The Institute of Chartered Accountants of India (ICAI):- 

1. Accounting Standard 15 (Revised 2005) – AS 15 (Revised 2005)

2. Indian Accounting Standard 19 – IndAS 19

 

The main objectives of the above Standards are to prescribe the guidelines and disclosures for Accounting for Defined Benefit Plans (i.e. Gratuity, Leave Encashment, Pension etc.). In order to comply with above standards a company is required to recognize: -

(a) a liability when an employee has provided service to company in exchange for defined benefits to be paid in the future; and

(b) an expense when the company consumes the economic benefit arising from service provided by an employee in exchange for defined benefits. 

I produce here in below few para’s of AS 15 (Revised 2005) & Guidance Note on the Revised Schedule IV to the Companies Act, 1956  which may help CA/CS/Auditors to understand “Why  Actuarial Valuation is required by the Public, Private and Multinational Indian Companies with more than 10 employees for compliance of AS 15 (Revised 2005)  on Actuarial Valuation Basis instead of any other rational Method” for Compliance of the above Accounting Standard 15 (Revised 2005) – AS 15 (Revised 2005)” The Para 49, Para 50 and Para 51 of AS 15 (Revised 2005) prescribes requirements of Actuarial Valuation Method for Accounting of Defined Benefits and Steps for Computation of Defined Benefit Plans. These paras are produced herein below –

Para 49. - Post-employment Benefits: Defined Benefit Plans

Accounting for Employee Benefit Plans falls in the category of Defined Benefit is complex because actuarial assumptions are required to measure the obligation and the expense and there is a possibility of actuarial gains and losses.  Moreover, the obligations are measured on a discounted basis because they may be settled many years after the employees render the related service. While the Standard requires that it is the responsibility of the reporting enterprise to measure the obligations under the defined benefit plans, it is recognized that for doing so the enterprise would normally use the services of a qualified actuary.

Para 50. - Recognition and Measurement

Defined benefit plans may be unfunded, or they may be wholly or partly funded by contributions by an enterprise, and sometimes its employees, into an entity, or fund, that is legally separate from the reporting enterprise and from which the employee benefits are paid. The payment of funded benefits when they fall due depends not only on the financial position and the investment performance of the fund but also on an enterprise’s ability to make good any shortfall in the fund’s assets. Therefore, the enterprise is, in substance, underwriting the actuarial and investment risks associated with the plan. Consequently, the expense recognized for a defined benefit plan is not necessarily the amount of the contribution due for the period.

Para 51. - Accounting by an enterprise for defined benefit plans involves the following steps:

(a) using actuarial techniques to make a reliable estimate of the amount of benefit that employees have earned in return for their service in the current and prior periods. This requires an enterprise to determine how much benefit is attributable to the current and prior periods (see paragraphs 68-72) and to make estimates (actuarial assumptions) about demographic variables (such as employee turnover and mortality) and financial variables (such as future increases in salaries and medical costs) that will influence the cost of the benefit (see paragraphs 73-91);

(b) discounting that benefit using the Projected Unit Credit Method in order to determine the present value of the defined benefit obligation and the current service cost (see paragraphs 65-67);

(c) determining the fair value of any plan assets (see paragraphs 100102);

(d) determining the total amount of actuarial gains and losses (see paragraphs 92-93);

(e) where a plan has been introduced or changed, determining the resulting past service cost (see paragraphs 94-99); and

(f) where a plan has been curtailed or settled, determining the resulting gain or loss (see paragraphs 110-116).

Where an enterprise has more than one defined benefit plan, the enterprise applies these procedures for each material plan separately.

 

Para 7.3 of Guidance Note on the revised schedule vi to the companies act, 1956

 

For the purpose of Revised Schedule VI, a company also needs to classify its employee benefit obligations as current and non-current categories. While AS-15 Employee Benefits governs the measurement of various employee benefit obligations, their classification as current and noncurrent liabilities will be governed by the criteria laid down in the Revised Schedule VI. In accordance with these criteria, a liability is classified as “current” if a company does not have an unconditional right as on the Balance Sheet date to defer its settlement for twelve months after the reporting date. Each company will need to apply these criteria to its specific facts and circumstances and decide an appropriate classification of its employee benefit obligations. Given below is an illustrative example on application of these criteria in a simple situation:

(a) Liability toward bonus, etc., payable within one year from the Balance Sheet date is classified as “current”.

(b) In case of accumulated leave outstanding as on the reporting date, the employees have already earned the right to avail the leave and they are normally entitled to avail the leave at any time during the year. To the extent, the employee has unconditional right to avail the leave, the same needs to be classified as “current” even though the same is measured as ‘other long-term employee benefit’ as per AS-15. However, whether the right to defer the employee’s leave is available unconditionally with the company needs to be evaluated on a case to case basis – based on the terms of Employee Contract and Leave Policy, Employer’s right to postpone/deny the leave, restriction to avail leave in the next year for a maximum number of days, etc. In case of such complexities the amount of Non-current and Current portions of leave obligation should normally be determined by a qualified Actuary. 

(c) Regarding funded post-employment benefit obligations, amount due for payment to the fund created for this purpose within twelve months is treated as “current” liability. Regarding the unfunded postemployment benefit obligations, a company will have settlement obligation at the Balance Sheet date or within twelve months for employees such as those who have already resigned or are expected to resign (which is factored for actuarial valuation) or are due for retirement within the next twelve months from the Balance Sheet date. Thus, the amount of obligation attributable to these employees is a “current” liability. The remaining amount attributable to other employees, who are likely to continue in the services for more than a year, is classified as “non-current” liability. Normally the actuary should determine the amount of current & non-current liability for unfunded post-employment benefit obligation based on the definition of Current and Non-current assets and liabilities in the Revised Schedule VI.

How to Identify the Compliance requirement for Indian and Multinational Companies ? 

As per payment of Gratuity Act 1972 (amended), All Indian Private and Multinational Companies with more than 10 employees covered under the preview of this Act.  CA, CS & Auditors should follow the following criteria to know the Accounting and Disclosure requirement for Provision of Gratuity Benefit Liabilities in the Financial Statements of the Companies: -

(i) SME Companies - SME requires to give disclosures as per Clause L of Para 120 of AS 15 (Revised 2005) - (For more details refer MCA notification dated 07.12.2006 ) 

(ii) Non SME Companies – Non SME requires to give disclosures as per Para 120 of AS 15 (Revised 2005)

(iii) Listed Companies & their subsidiaries with Net-worth more 250 cr. – In this case, companies and their subsidiaries has to give disclosure of in compliance of IndAS 19.

(iv) NBFC (Non-Banking Financial Company) with Net-worth more 250 cr. – In this case, NBFC has to give disclosure of in compliance of IndAS 19 with comparative numbers of previous 2 years. 

Why Non-Compliance of AS 15 (Revised 2005) & IndAS19 needs to be observed by the CA, CS & Auditors of the Indian and Multinational Companies ?

 MCA vide its notification dated 13th November 2018 notified National Financial Reporting Authority (NFRA) Rules 2018.  The main functions NFRA Authority are:-

1. Monitoring and enforcing the compliance with accounting standards and auditing standards, 

2. Overseeing the quality of Audit service and suggesting measures for improvement,

3. Power to investigate,

4. Disciplinary proceedings, Manner of enforcement of orders passed in disciplinary proceedings, Punishment in case of non-compliance etc.

In view of above provisions, it becomes mandatory for Finance Professionals (i.e. CA, CS, CMA, Finance Professionals & Directors) involved in finalization of Financial Statements to check the proper compliance and provisions of these Accounting Standards.

In case of any query or clarification on the above subject you may call me at 9211637063 or email your requirements at tikaramchaudhary@gmail.com. 

 

Tika Ram Chaudhary

Gratuity, Pension, Superannuation Trust Fund Consultant

(Corporate Consultant with more than 11 Years of experience in providing Support Services to Indian and Multinational Companies for Formation of Gratuity Trust, Formed to gain Tax Benefit available for Companies under Section 36 (1) (v) of Income Tax Act 1961 & Specialized Support Services for preparation of Inputs for Actuarial Valuations in compliance of AS 15 (Revised 2005), IndAS 19, IAS 19 (Revised 2011) - IFRS & USGAAP required by Gratuity Trust of Indian Companies)

Trade Name - Gratuity Trust Fund Consultant 

Registered Office Address: R 11, F/F, R Block, Vikas Nagar, Uttam Nagar, New Delhi -110059

Mobile Number: 9211637063

Email Id: tikaramchaudhary@gmail.com

Website:  www.gratuitytrustfund.com

LinkedIn Profile: https://www.linkedin.com/in/tika-ram-chaudhary-a5727848/

Caclubindia Profile: https://www.caclubindia.com/profile.asp?member_id=1446582

Tax Guru Profile: https://taxguru.in/author/tikaramchaudhary@gmail.com/

Blog: http://gratuitytrustfundconsultant.blogspot.com

Google Business Listing: https://gratuity-trust-fund-consultant-in-delhi-ncr.business.site/

 

(All services/consultancy is subject to terms and conditions)

 

This message and any attachment are confidential. If you are not the intended recipient please delete this message and all attachments from your system. You must not copy this message or any attachment or disclose the contents to any other person. The sender does not accept liability for any errors, omissions or consequences which arise as a result of e-mail transmission

Gratuity Insurance Consultant

 1. Brief about Gratuity Benefit

Gratuity being an important retirement benefit to employees in the Indian context, is relevant for all organizations (i.e. Companies, NBFC's, Financial Institutions, MNC's, Schools and other business entities) having more than 10 employees .Since an employee sacrifices prime time of his life for the development, prosperity and betterment of his employer, employer pays his employee gratuity as a graciousness or gift to him, when he no longer serves him. Gratuity is a statutory obligation on the shoulders of the employer to make the payment of Gratuity to his employees as soon as it becomes payable (Refer Sub Section (2) of Section 7 to the Act).

 

2. Applicability

 

Compliance of this act is applicable to all organizations such as a factory, mine, oilfield, port, railways, plantation, shops, establishments or Educational institution having 10 or more employees on any day in the preceding 12 months.

 

3. Determination of Gratuity Amount

 

The amount of Gratuity payable to an employee on his exit from service, according to “The Payment of Gratuity (Amendment) Act 2018 ”, in force at present, is:-

 

(Wages of the employee at the time of exit) x (15/26) x (Number of Years of Service at the time of exit)

 

This is subject to a ceiling limit of 20,00,000/- effective from 29.03.2018.

 

4. Conditions for payment of Gratuity

 

Gratuity is payable to an employee on exit from service after he has rendered continuous service for not less than five years:

 

(a) On his superannuation

(b) On his resignation

(c) On his death or disablement due to injury or disease.

 

In the case of (c) vesting condition of 5 years does not apply.

 

5. Factors affecting Gratuity Benefits

 

Gratuity Benefits changes with the change in the following:-

 

(a) Past Service of Employee in the Company,

(b) Increase in wages of Employee in the Company,

(c) Change in Benefit Formula of the Gratuity Benefit due to the amendment in the Act,

(d) Change in Ceiling Limit on Gratuity Benefits due to the amendment in the Act,

(e) Change in Vesting Condition for eligibility of Gratuity Benefits due to the amendment in the Act,

 

 

6. Provisions for Employer under Payment of Gratuity Act 1972 (Amended)

 

Section 7 of the Act has kept obligation for payment of gratuity act on the shoulders of employer, few provisions of this section act are listed below:-

 

1.   As soon as Gratuity becomes payable, it employers responsibility to determine the amount of gratuity and inform it to employee in writing (Refer sub section 2 of Section 7 of the Act).

 

2.  The employer shall arrange to pay the amount of gratuity within 30 days from the date  when it   becomes mandatory. (Refer Sub-section 3 of Section 7 of the Act).

 

3.  If the amount of gratuity is not paid within 30 days then amount of gratuity and simple  interest   will be paid by the employer to the employee for the duration when the payment is not made to the  employee. (Refer Sub-section 4 of Section 7 of the Act).

 

4. Applicability of compulsory insurance for Gratuity by State Governments due  amendment in  the act. (State of Andhra Pradesh notified about the compulsory insurance for Gratuity under  Andhra Pradesh Compulsory Gratuity Insurance Rules, 2011 vide Lr.No.M1/8842/2010,  dated: 04.12.2010 from the Commissioner of Labour, Andhra Pradesh and remains un-notified for rest of India). 

 

7. Options available to Companies for Discharging the Gratuity Liability

 

From point No. 5 & 6, we conclude that the Gratuity Liability of companies increase exponentially with the increase in wages of employee, service period of employee, regulatory changes as shown in point 6 and it is employers responsibility to pay the gratuity to employee to avoid the regulatory penalty for Non Payment of Gratuity within stipulated time as given in 6 (2) above. Employers generally have 2 options for discharging the Gratuity Liability: –

 

1.  Accounting Option also called “Pay as you go” Option

2. Funding Option

 

7(a). Accounting Options 

 

Accounting Option – Under this option provision of gratuity is made in Financial Statement of the Company by taking Actuarial Valuation Report from the Actuary and when employee leaves the company employee, employer pays the gratuity from their own resources. This option is called "Pay as you go Option". This is mandatory for all companies having 10 or more companies. Few more points to be considered by the Auditors whilst Auditing the Financial Statement in respect of Accounting of Gratuity Benefits are as under :-

1.       As per provisions of Section 129 of the Companies Act 2013, each company has 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.  MCA vide its notification dated 13th November 2018 notified National Financial Reporting Authority (NFRA) Rules 2018. The main functions NFRA Authority are:-               

 

A.   Monitoring and enforcing the compliance with accounting standards and auditing standards, 

B.   Overseeing the quality of Audit service and suggesting measures for improvement,

C.   Power to investigate,

D.   Disciplinary proceedings, Manner of enforcement of orders passed in disciplinary proceedings, Punishment in case of non-compliance etc.

In view of above provisions, it becomes mandatory for Professionals (i.e.CA, CS, CMA, Finance Professionals & Directors) involved in finalization of Financial Statements to check the proper compliance and provisions of these Accounting Standards.

In Indian context, Companies needs Actuarial Services for Compliance of following Accounting Standards for Accounting of Defined Benefit Plans (i.e. Gratuity Plan, Leave Encashment Plan, Pension Plan, PRMB etc.). Accounting and Disclosure requirements for Employee Benefits Plans as laid down in the following Accounting Standards as issued by The Institute of Chartered Accountants of India (ICAI):-

1.          Accounting Standard 15 (Revised 2005) – AS 15 (Revised 2005)

2.          Indian Accounting Standard 19 – IndAS 19

The main objectives of the above Standards to prescribe the guidelines and disclosures for Accounting for Defined Benefit Plans (i.e. Gratuity, Leave Encashment, Pension etc.). In order to comply with above standards a company is required to recognize:-

(a) a liability when an employee has provided service to company in exchange for defined benefits to be paid in the future; and

(b) an expense when the company consumes the economic benefit arising from service provided by an employee in exchange for defined benefits.

Accounting  for  defined benefit plans is complex because actuarial assumptions are required to measure the obligation and the expense and there  is  a  possibility  of  actuarial  gains  and  losses.  Moreover,  the obligations  are  measured  on  a  discounted  basis  because  they  may  be settled many years after the employees render the related service. While the Standard requires that it is the responsibility of the reporting enterprise to measure the obligations under the defined benefit plans, it is recognized that  for  doing  so  the  enterprise  would  normally  use  the  services  of  a qualified actuary.

Auditors follow the following criterion to know the applicability of Accounting Standards and disclosure requirement by the Companies :-

(i) SME Companies – In this case, company needs to disclose details as required for Clause (l) of Para 120 of AS 15 (Revised 2005)

(ii) Non SME Companies – In this case, company needs to disclose details as required for Para 120 of AS 15 (Revised 2005)

(iii) Listed Companies & their subsidiaries with Net-worth more 250 cr. – In this case, companies and their subsidiaries has to give disclosure of in compliance of IndAS 19.

(iv) NBFC (Non-Banking Financial Company) with Net-worth more 250 cr. – In this case, NBFC has to give disclosure of in compliance of IndAS 19 with comparative numbers of previous 2 years.

 

7(b). Funding Option 

Funding Option –In this option, Companies make provision of Gratuity liability in the balance on annually on accrual basis based on actuarial report but it is not allowed as deduction whilst computing net Income of Income Tax (Refer Section 47A (7) of Income Tax Act 1961), So companies prefer to create Gratuity Trust. There are 2 major benefits to the company by creating an Irrevocable Trust:-

 

(i) Contribution into Approved Trust is allowed as deductible Expense  - Provision of Gratuity Liability shown in the Balance Sheet is not allowed as deduction whilst computing net Income for Income Tax ((Refer Section 47A (7) of Income Tax Act 1961)) whereas Initial and Annual Ordinary Contribution made by company into an Approved Gratuity Trust (Subject to condition specified in Income Tax Rules 103 & 104) is allowed as deductible expense under Section 36 (1) (v).

(ii) Interest received from Investment of an Approved Gratuity Trust is also exempted as Income Tax :- Interest received from Investment of an Approved Trust is also exempted as Income under Section 10 (25) (iv) of the Income Tax Act, 1961. 

 

7(c). Examples for Taxation Benefits under Accounting and Funding Option 

 

Taxation of Gratuity Payment under Pay as go options :-

 

To understand this, let us take an Example,

 

Mr. A Joins the Organization with a Basic Pay of Rs. 26,000/- per month and monthly CTC of 50,000/-. Assuming that expected increase in basic salary is assumed to be 10% p.a.

 

Gratuity Payments for next 5 years will be :-

 

On Completion of 1 Yr – (15/26)* 28,600*1 = 16,500/-

On Completion of 2 Yrs – (15/26)*31,460*2 = 36,300/-

On Completion of 3 Yrs – (15/26)*34,606*3 = 59,895/-

On Completion of 4 Yrs – (15/26)*38,067*4 = 87,847/-

On Completion of 5 Yrs – (15/26)*41,873*5 = 1,20,788/-

 

Now, Expected Tax Benefit calculation in case of “Pay as you Go Option” is as under :-

 

For Provision of 1st Yr – NIL

For Provision of 2nd Yr – NIL

For Provision of 3rd Yr – NIL

For Provision of 4th Yr – NIL

For Payment on 5th Yr – 1,20,788/- In this case company,

 

Mr. A will leave the company then company will get the tax benefit of Rs. 1,20,788/-.

 

2.  Funding Option – In this option, Company decides to setup an Approved Gratuity Trust . The Investment of Company is either “Self-Managed” or “ Managed by Insurance Company”. Company contributes the annual contribution in this Gratuity Trust and gets the Tax Benefits. In this case, when Mr. A will leave the company, gratuity will be to Mr. A from the Gratuity Trust.

 

Expected Tax Benefit calculation in case of “Funding Option” under Section 36(1)(v) of the IT Act 1961 for Annual Contribution which is 8.33% of Annual Basic Salary of Employee.

 

For Contribution of 1st Yr – 28,600*12*0.833 = 28,589/-

For Contribution of 2nd Yr – 31,460*12*0.833 = 31,447/-

For Contribution of 3rd Yr – 34,606*12*0.833 = 34,592/-

For Contribution of 4th Yr – 38,067*12*0.833 = 38,051/-

For Contribution of 5th Yr – 38,067*12*0.833 = 41,857/-

 

In this case, Mr. A will get gratuity of Rs. 1,20,788/- from the Gratuity Trust and employer will get approximate Tax Benefits of Rs.1,74,536/- for annual contribution made by him in previous 5 years.

 

For more details in the matter you may visit my published article on www.taxguru.in at following weblink :- https://taxguru.in/income-tax/factors-affecting-gratuity-benefits-accounting-taxation-gratuity-benefits.html

 

The establishment of Gratuity Trust & compliance of AS 15 (Revised 2005) & IndAS 19 requires in-depth knowledge of various rules/regulations and expertise. We have a Team of Leading Professionals, Litigation Partners, Chartered Accountants, Company Secretaries & Heads of Insurance Companies having decades of experience in providing services to our clients spread in all sectors of the Indian Economy, in the Public & Private Sectors which covers areas of Manufacturing, Software, Technology, Electricity, Electronics, Call Centers, Banks, Educational Institutes, Schools, Universities, Hotels, Hospitals, Hospitality Companies, etc. etc. We have more than 11 years of experience in providing Consultancy and Support Services in following matters:-

 

Consultancy Services for Formation of Gratuity Trust for Gratuity Benefits

 

1.     Formation of a New Approved Irrevocable Gratuity Trust.

2.     Investment of Trust Money as per Income Tax Rules 1962.

3.     Gratuity Trust Deed, Trust Rules, Applications.

4.     Approvals of Trust in terms of Part C of Schedule IV from Income Tax Department in following cases :- 

 

o    Approvals for New Gratuity Trust or Group Gratuity Scheme

o    Approvals for Change in Trust Deed

o    Approvals for Change in Trust Rules

o    Approvals for Change in Object of Trust

o    Approvals for Change in Trustees

o    Approvals for winding up of Trust due to winding up of the Company 

o    Approvals for amalgamation with another fund due to merger/acquisition of the Companies

 

5.   Investment of Trust Money in Group Gratuity Schemes of Insurers.

 

·   Traditional Group Gratuity Schemes of LIC

·   Unit Linked Gratuity Schemes of Insurance Companies

 

Services Offered by our Professional Associates for Accounting of Gratuity Benefits

 

6.     Actuarial Valuations in compliance of following Accounting Standards:-

 

o    AS 15 (Revised 2005)

o    IndAS19

o    IAS 19 (Revised 2011)

o    USGAAP

 

 The services offered by us may be needed by you or by your clients:-

 

               I.   For compliance of AS 15 (Revised 2005) & IndAS19 whilst preparing the Balance Sheet and Profit/Loss Statement 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.

             II.  For getting the Tax Benefits under Section 36 (1) (v) & Section 10 (25) (iv) of the Income Tax Act, 1961 by creating an Approved Gratuity Trust or by starting an Group Gratuity Scheme of Insurer before closure of Financial Year  ending 31.03.2020.  

 

Since annual financial statements such as Balance Sheet and Profit/ Loss Statement of your clients are at hand for the close of the financial year as on 31.03.2020, the services we deal in will be needed by many of your clients and we will be happy to provide our services if needed. In case of any clarification, you may contact me at 9211637063 or email me your queries at tikaramchaudhary@gmail.com.

Tika Ram Chaudhary

Gratuity, Pension, Superannuation Trust Fund Consultant

(Corporate Consultant with more than 11 Years of experience in providing Support Services to Indian and Multinational Companies for Formation of Gratuity Trust, Formed to gain Tax Benefit available for Companies under Section 36 (1) (v) of Income Tax Act 1961 & Specialized Support Services for preparation of Inputs for Actuarial Valuations in compliance of AS 15 (Revised 2005), IndAS 19, IAS 19 (Revised 2011) - IFRS & USGAAP required by Gratuity Trust of Indian Companies)

Trade Name - Gratuity Trust Fund Consultant 

Registered Office Address: R 11, F/F, R Block, Vikas Nagar, Uttam Nagar, New Delhi -110059

Mobile Number: 9211637063

Email Id: tikaramchaudhary@gmail.com

Website:  www.gratuitytrustfund.com

LinkedIn Profile: https://www.linkedin.com/in/tika-ram-chaudhary-a5727848/

Caclubindia Profile: https://www.caclubindia.com/profile.asp?member_id=1446582

Tax Guru Profile: https://taxguru.in/author/tikaramchaudhary@gmail.com/

Blog: http://gratuitytrustfundconsultant.blogspot.com

Google Business Listing: https://gratuity-trust-fund-consultant-in-delhi-ncr.business.site/

 

(All services/consultancy is subject to terms and conditions)

 

This message and any attachment are confidential. If you are not the intended recipient please delete this message and all attachments from your system. You must not copy this message or any attachment or disclose the contents to any other person. The sender does not accept liability for any errors, omissions or consequences which arise as a result of e-mail transmission