While going through few discussions here and also from the general understanding of our new clients, I believe that there is a gap in general understanding regarding what actuarial valuations are all about. Being from a professional actuarial firm and qualified actuary myself, I think I should take steps to increase awareness about the same - hope this post proves helpful to fellow HR and Finance professionals.
Need for actuarial valuations
Actuarial valuations in India are mostly done for accounting purposes - under AS 15 (revised, 2005), IAS 19 or US GAAP (FAS 87/88/158), as they are mandatory requirements issued by the relevant accounting body. However, actuarial valuations are also done for calculating contribution rate for funded schemes and during mergers & acquisitions.
Types of schemes covered under AS 15 (revised, 2005)
Within Indian accounting framework, AS 15 (revised, 2005) deals with the accounting of employee benefits. AS 15 requires that actuarial valuation should be done in respect of following employee benefits:
2. Leave benefits (for both encashable and non-encashable leaves)
3. Pension schemes (including both defined benefit and defined contribution schemes which guarantee a minimum investment return)
4. Exempt Provident Fund (those PFs managed in-house and not by EPFO)
5. Long-term service awards (e.g. awards given on completion of certain number of years of service or at retirement)
6. Bonus and profit-sharing arrangements
7. Leaves for leisure and travel purposes
Please note that actuarial valuation is not required for:
1. Defined Contribution pension schemes where no investment return guarantee is provided
2. Leaves which cannot be carried forward beyond one year
Actuarial valuation results
The actuary calculates the following as per provisions of AS 15 for each applicable employee benefit scheme, which then need to be disclosed in company's annual accounts:
1. A liability in respect of the benefits in company's balance sheet
2. An expense in respect of the benefits in company's P&L account
Companies covered under AS 15 (revised, 2005)
AS 15 (revised, 2005) is applicable on the following firms:
1. Listed companies on any stock exchange in India
2. Banks/FIs/Insurance companies
3. Companies having turnover of more than 50 crores
4. Companies having borrowings or deposits of more than 10 crores
5. Companies employing more than 50 employees
6. Holding or subsidiary company of any of the above
Above-mentioned companies must get actuarial valuation done externally as per AS 15 by a certified actuary atleast once a year (usually 31 March). Company officials or auditors cannot do this valuation by themselves.
Companies which do not fall within any of the above six categories also need to consult a qualified actuary whether they need actuarial valuation or not. The need for actuarial valuation is determined by the actuary in consultation with the auditors after assessing materiality issues. Therefore, requirement of actuarial valuation falls more or less on every registered company.
Certificates by insurance companies (applicable only for funded schemes)
Companies who have funded the liabilities with an insurance company can get AS 15 valuation certificates from their respective insurance companies if they agree to provide the same. Companies need to ensure that such certificates are signed by a qualified actuary and are prepared as per the provisions of AS 15.
Contributions made to insurance companies in respect of employee benefits cannot be booked as expense in P&L as per AS 15 - the expense has to be calculated by an actuary using actuarial methods.
Numerica Quantitative Services is a professional services firm providing actuarial valuations for corporates and insurance companies. For more information on specific issues (e.g. simplified calculations of liability, sample AS 15 disclosures, funding vs accounting), please refer to www.numerica.in or write an e-mail to info @ numerica.in
I hope the information turns out to be useful to the audience here. Looking forward for your thoughts and comments on the issues highlighted here.