Actuarial Valuation

as required under LKAS 19

Accounting Standards are Definitive benchmarks prescribed by a country’s Accounting Standard Board.

Comparison

Measurement

Disclosures & Recognition under expense in the Income Statement and Balance Sheet

Short-Term Employee Benefits

Other Long-Term Employee Benefits

Post Employment Benefits

Termination Benefits

Requires a best estimate of likely Future Benefit

Payment.

Future Payments are to be Discounted back.

Gains/ Losses: Deviations between Actual and

Expected

Projected Unit Credit Method : Present Value of All Accrued Benefit on valuation Date on Projected Salaries at Exit (PBO)

• Required Under LKAS 19.

• Required Under ASC 715 (US-GAAP)

• Required Under IAS-19 (IFRS)

Demographic Assumptions

Mortality

Turnover/Attrition

Retirement Age…………...

Setting the Assumptions is a Group Work.

– Salary Escalation, Attrition Rate best Known

by the Employer

– Disount Rate is market driven

– Other related assumptions are taken on a best

estimate from past trend.

As per Payment of Gratuity Act (1983)- ‘Gratuity is the payment made by the employer to an employee in appreciation of continuous service rendered by the employee.’

Gratuity is payable immediately on the “EXIT” of employment of the employee after he/she has rendered a continuous service of not less than 5 years

On retirement/early exit, orOn death, or Exit due to disablement , accident or disease.

Required Information

• Identification of the Employee

• Date of Birth

• Date of Joining

• Date of Valuation

• Monthly Salary

• Retirement Age

• Benefit Description

• To determine

• Age

• Past service

• Discontinuance liability

• Actuarial Liability

Benefit : 15 days salary per year of service

Past Service = 10 Years

Age = 40 Years

Current Salary = 10,000

Rate of Discounting = 7%

Vesting Period = 5 Years

Retirement Age = 60 Years

Method of Valuation = Projected Unit Credit

Method

Future Salary Growth = 5%

Benefits = 15/30*10,000*10 = 50,000

Actuarial Value = 50,000*(1.05/1.07)^(60-40)

= 34,283

Actuarial Value differs due to uncertainty of early withdrawal and mortality

Future Salary growth = 4%

Benefits = 15/30*10,000*10 = 50,000

Actuarial Value = 50,000*(1.04/1.07)^(60-40)

= 28,311

Actuarial Value differs due to uncertainty of early withdrawal and mortality

Future Salary growth = 9%

Benefits = 15/30*10,000*10 = 50,000

Actuarial Value = 50,000*(1.09/1.07)^(60-40)

= 72,414

Actuarial Value differs due to uncertainty of early withdrawal and mortality

General description of the type of plan

Principal actuarial assumptions

Accounting policy for recognizing actuarial gains & losses.

Reconciliation with movements during the period of the liability in the balance sheet.

Details of total expense (income statement)

Liability

Year

Start

Benefit

Payments

(leavers)

Year

End

Extra year’s

interest and

benefit accrual

Year End

Expected

Liability Loss

Year End

Actual

4

124.25

15028.25

100

SLAS 16Hit to Income

statement

I. ASSUMPTIONS: 01/04/2011

to 31/03/2012

DISCOUNT RATE [PREVIOUS] 8.25%

RATE OF RETURN ON PLAN ASSETS [PREVIOUS] 0.00%

SALARY ESCALATION [PREVIOUS] 8.00%

ATTRITION RATE [PREVIOUS] 2.00%

DISCOUNT RATE [CURRENT] 8.50%

RATE OF RETURN ON PLAN ASSETS [CURRENT] 0.00%

SALARY ESCALATION [CURRENT] 8.00%

ATTRITION RATE [CURRENT] 2.00%

II. TABLE SHOWING CHANGE IN THE PRESENT VALUE OF DEFINED BENEFIT OBLIGATION:

01/04/2011 to 31/03/2012

PRESENT VALUE OF BENEFIT OBLIGATION AS AT THE BEGINNING OF THE CURRENT PERIOD

100,00,000

INTEREST COST 8,25,000

CURRENT SERVICE COST 20,00,000

LIABILITY TRANSFERRED IN -

(LIABILITY TRANSFERRED OUT) -

(BENEFIT PAID) (4,00,000)

ACTUARIAL (GAINS)/LOSSES ON OBLIGATIONS 25,75,000

PRESENT VALUE OF BENEFIT OBLIGATION AS AT THE END OF THE CURRENT PERIOD

150,00,000

III. TABLE OF FAIR VALUE OF PLAN ASSETS:01/04/2011

to 31/03/2012

FAIR VALUE OF PLAN ASSETS AT THE BEGINNING OF THE PERIOD

EXPECTED RETURN ON PLAN ASSETS -

CONTRIBUTIONS 4,00,000

TRANSFER FROM OTHER COMPANY -

(TRANSFER TO OTHER COMPANY) -

(BENEFIT PAID) (4,00,000)

ACTUARIAL GAINS/(LOSSES) ON PLAN ASSETS -

FAIR VALUE OF PLAN ASSETS AT THE END OF THE PERIOD -

IV. EXPENSES RECOGNIZED IN THE STATEMENT OF OTHER COMPREHENSIVE INCOME (OCI)

01/04/2011 - 31/03/2012

ACTUARIAL (GAINS)/LOSSES ON OBLIGATION FOR THE PERIOD25,75,000

ACTUARIAL (GAINS)/LOSSES ON ASSET FOR THE PERIOD-

NET (INCOME)/EXPENSE FOR THE PERIOD RECOGNIZED IN THE STATEMENT OF OCI 25,75,000

(ACCUMULATED OTHER COMPREHENSIVE INCOME AT THE BEGINNING OF THE PERIOD) -

(ACCUMULATED OTHER COMPREHENSIVE INCOME AT THE END OF THE PERIOD) 25,75,000

V. AMOUNT RECOGNIZED IN THE BALANCE SHEET:01/04/2011

to 31/03/2012

FAIR VALUE OF PLAN ASSETS AT THE END OF THE PERIOD-

(PRESENT VALUE OF BENEFIT OBLIGATION AS AT THE END OF THE PERIOD) (150,00,000)

FUNDED STATUS(150,00,000)

NET (LIABILITY)/ASSET RECOGNIZED IN THE BALANCE SHEET (150,00,000)

VI. EXPENSES RECOGNIZED IN THE INCOME STATEMENT:01/04/2011

to 31/03/2012

CURRENT SERVICE COST20,00,000

INTEREST COST8,25,000

(EXPECTED RETURN ON PLAN ASSETS)-

EXPENSE RECOGNIZED IN INCOME STATEMENT28,25,000

VII. BALANCE SHEET RECONCILIATION:01/04/2011

to 31/03/2012

OPENING NET LIABILITY 100,00,000

EXPENSE RECOGNIZED IN P&L 28,25,000

EXPENSE RECOGNIZED IN THE STATEMENT OF OCI 25,75,000

NET TRANSFER IN -

(NET TRANSFER OUT) -

(EMPLOYER'S CONTRIBUTION) (4,00,000)

NET LIABILITY/(ASSET) RECOGNIZED IN THE BALANCE SHEET 150,00,000

VIII. EXPENSES RECOGNIZED IN THE INCOME STATEMENT OF NEXT YEAR:

01/04/2012 to 31/03/2013

CURRENT SERVICE COST25,00,000

INTEREST COST12,75,000

(EXPECTED RETURN ON PLAN ASSETS)-

EXPENSE RECOGNIZED IN INCOME STATEMENT37,75,000

IX. CASH FLOW PROJECTION:

PROJECTED BENEFITS PAYABLE IN

2013 14,41,923

2014 12,23,722

2015 14,45,048

2016 16,92,611

2017 20,26,592

2018-2022 123,12,274

X. EXPERIENCE ADJUSTMENT:01/04/2011

to 31/03/2012

ON PLAN LIABILITY (GAINS)/LOSSES35,42,543

ON PLAN ASSETS (LOSSES)/GAINS-

Actuarial (Gain)/Loss

2,575,000 0

Interest Cost

825,000 825,000

Current Service Cost

2,000,000 2,000,000

SLAS 16 LKAS 19

Assumption Increase Decrease

Discount

rate

Liab. would decrease and

leads to actuarial gain

Liab. would increase

and leads to actuarial

loss

Salary

Increase

Rate

Liab. would increase and

leads to actuarial loss

Liab. would decrease

and will lead to

actuarial gain

LKAS19

Full and immediate recognition outside Income

statement via Other Comprehensive Income

(OCI).

This results in Reduction Of Volatility in profits

and losses of company.

LKAS19

“Corridor approach” can be used to delay recognition

of losses / (gains)

“Corridor Approach” amortizes over employees’

future service periods any unrecognized gains or

losses in excess of 10% of greater of projected benefit

obligation or fair value of plan assets

“Corridor” = 10% Max(PBO, Fund Assets)

Unrecognized net gain/loss

Net gain/loss subject to recognition

“Corridor” = 10% Max(PBO, Fund Assets)