APPLICABILITY OF ACTUARIAL VALUATION
Applicability of Actuarial Valuation to Corporates
An Actuarial Valuation of Defined Benefit Obligation (DBO) schemes is required under accounting standards for the audit of a company having employee benefit schemes. This is as per the provisions of accounting standards Ind AS 19 and AS 15(R) for corporate entities based in India.
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As per Chapter IX Section 129 of The Companies Act, 2013, the financial statements of an entity shall give a true and fair view of the state of affairs of the company and be in accordance with the accounting standards notified under Section 133 of The Companies Act, 2013. As per Section 143 3(e) of The Companies Act, 2013, The auditor‘s report shall also state whether, in his opinion, the financial statements comply with the accounting standards.
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Thus, the Auditors must ensure that the financial statements prepared by them comply with the accounting standards. And as per the provisions of the accounting standards viz. Ind AS 19 and AS 15(R), the Actuarial Valuation must be performed by a Qualified Actuary for certain types of employee benefit schemes such as Gratuity Schemes, Leave Encashment Schemes, Provident Fund etc.
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Para 59 of Ind AS 19
This Standard encourages, but does not require, an entity to involve a qualified actuary in the measurement of all material post-employment benefit obligations. For practical reasons, an entity may request a qualified actuary to carry out a detailed valuation of the obligation before the end of reporting period
Para 49 of AS 15(R)
While the Standard requires that it is the responsibility of the reporting enterprise to measure the obligations under the defined benefit plans, it is recognised that for doing so the enterprise would normally use the services of a qualified actuary.
In practice, the valuation of Employee Benefit Schemes must be performed by an Actuary.
The Accounting Standards recognize that accounting for defined benefit plans is complex because actuarial assumptions are required in order 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.
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The Role of an Actuary is to measure the DBO plan obligations using actuarial methods and techniques, and provide the actuarial valuation report that presents the OCI components like actuarial gains and losses which will be carried forward to the financial statements.
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Specifically, using actuarial valuation techniques, we:
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Recognize a liability when an employee has provided service in exchange for employee benefits to be paid in future.
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Recognize an expense when the enterprise consumes the economic benefit arising from service provided by an employee in an exchange for employee benefits.
IndAS 19 Applicability
Since 2016, Ind AS 19 has become applicable
For companies having a net-worth greater than Rs. 250 Cr, listed companies, banks, NBFC etc, IndAS 19 is applicable for valuation of employee benefit schemes. This replaces AS 15(R) standards and has differences in accounting treatment of obligations.
Actuarial Valuations in Practice
In practice, companies with employee benefit plans like a gratuity fund may require to obtain actuarial valuation annually at the end of year reporting period, or in an interim basis if AS 25 is applicable.
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For small and medium scale enterprises, there are also few relaxations in disclosures available when complying with the accounting standards. We can evaluate this further after understanding the particulars of the company.
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You can get in touch with us by filling the form below to obtain a professional evaluation for the scope of actuarial valuation for your organization.