Actuarial Valuation as required under LKAS 19

Date : 10th December, 2012Rudresh Pandit Shraddha Vora

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)

= 34,283Actuarial 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)

= 28,311Actuarial 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

150

28.25

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 PERIOD                 25,75,000 

   

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 COST                 20,00,000 

   

INTEREST COST                   8,25,000 

   

(EXPECTED RETURN ON PLAN ASSETS)                                 -   

   

EXPENSE RECOGNIZED IN INCOME STATEMENT 28,25,000

   

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 COST                 25,00,000 

   

INTEREST COST                 12,75,000 

   

(EXPECTED RETURN ON PLAN ASSETS)                                 -   

   

EXPENSE RECOGNIZED IN INCOME STATEMENT 37,75,000

   

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)/LOSSES 35,42,543

ON PLAN ASSETS (LOSSES)/GAINS -

   

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

LKAS19Full 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)