Is Annual Gratuity Valuation Necessary and How to Find an Affordable Actuary?

Dear All,

Is it mandatory to get the gratuity valuation done? If yes, can it be done annually? We currently have our gratuity valuation conducted by a certified Actuary who charges a high fee. Could someone kindly provide a contact number for a certified Gratuity Actuary?

Thanks,
Smita

Dear Smita,

I do not think so.

Regards,

R.N. Khola
Skylark Associates, Gurgaon (Haryana)
(Labour Law & Legal Consultants)
09810405361

Dear Smita,

You don't need to value your gratuity for your auditors. At least the Act doesn't say so.

Regards

Hi Smeta,

There is no need to calculate gratuity valuation by any other people; your company personnel can do this by themselves.

Why is your auditor asking for a higher price for this? You can negotiate with another firm.

This is only applicable if an employee is leaving your company after becoming eligible.

Have you included the gratuity amount in the employee's CTC?

Please provide us with a complete answer from your side.

Don't pay a hefty amount to any consultant for this. I can send you a formula for a pre-calculated Excel sheet where you can easily calculate it.

Best Regards,
Sajid Ansari - Delhi

Dear All,

Gratuity valuation is a mandatory requirement under AS 15 accounting standards. Any auditor should verify the Gratuity valuation process/documents as per this standard. If I am correct, auditors are supposed to ensure that the company has made yearly provisions for Gratuity payments that may arise in the future.

Regards,
P. Arunkumar

This comes under actuarial valuation and is required under AS-15 accounting standard. After disclosure of fraud in Satyam Computer, it has become mandatory, and all statutory auditors are asking for it. It is not new, but in the past, it had not gained so much importance.

Regards

Dear Smita,

Actuarial valuation of Gratuity liability is mandatory under the Income Tax Act, and it should be conducted annually. The actuarial valuation of Leave Encashment Liability is also mandatory. This practice started from F.Y. 2007-08, so more certified Actuaries will be available this year.

Thanks,
Mohd. Arif Khan

Try it out yourself, and if required, ask your auditor to check it.

Below mentioned are the formulas to calculate Gratuity:

A - (Basic + DA) * 15 / 26 * Number of Years

B - (Basic + DA) / 26 * 15 * Number of Services

Hi,

Gratuity valuation by a certified actuary is essentially required to ensure that the organization has made necessary provisions for payment of gratuity to its employees upon resignation or winding up. Internal and external auditors use the actuary's reports to check whether the provisions are made accordingly. This also serves as a checkpoint to ensure that the organization is not under-funding the gratuity account.

Attached are the details of one such actuary based out of Mumbai:
K A Pandit - 022 22042231

Hope this helps.

Regards,
Ronnie

Hi,

If the gratuity fund is maintained by a trust in the organization, you may have to get it certified by an actuary. Even if we have done the calculations which are 100% accurate, it has to be certified by the actuary. We may have to provide our assumptions on annual attrition rate, percentage increase in salary, etc.

If the fund is maintained by the insurance company, we may demand the report from them. The insurance companies will have actuaries appointed in their organization, and there is no additional cost attached to it.

It is rightly said that if there is any leave encashment policy, the actuarial valuation has to be done for the leave as well, and the certificate has to be obtained in the AS 15 prescribed format.

Both of these activities have to be done annually and preferably at the end of the financial year.

Please let me know your email ID, and I shall refer an actuary.

Regards,

Deepa Sudhakar

Hi Smitha,

The valuation certificate for statutory payments is not very important prior to the Satyam scam. The statutory payments are valued by the management themselves and provisions are made in their books of accounts accordingly. After the Satyam scam, all statutory payments are focused on obtaining a valuation certificate to ensure the accuracy of accruals and deposits. Not only gratuity but other statutory payments have to be accompanied by a valuation certificate as per accounting standards. Now, accounting standards are given foremost importance after such a scam.

I apologize, I do not have a specific individual to handle such certifications. Typically, they will charge a nominal amount for the certification, not as high as you mentioned.

With warm regards,
T. Kumar

Hi Smita,

Gratuity valuation from an actuary is compulsory if your company has employed more than 20 employees and in some specific cases. Please refer to AS15 (Accounting standards) for more information. If you are exempt from actuarial valuation, you can perform a basic arithmetic calculation (basic + da * 26/15 * number of years completed in service with the company).

Contact details:
Name: Thanawala
Tel: (91 22) 6694 3311

Dear All,

Thank you so much for your replies. I am confused now, as per a few replies, gratuity valuation by a certified actuary is mandatory, but a few are saying you can get it done within the company itself. Please advise.

Thanks,
Smita

Experts, please advise. After reading the posts, I have many queries, and I request CiteHR members with real and complete knowledge to guide all members on the following points:

1. I am assuming that gratuity payment provision is to be made in the annual books of accounts every year. Is it okay to make a provision of actual gratuity payable as of 31st March to all the eligible employees onboard?

2. In case the company has a gratuity trust and a tie-up with an insurance company, and is paying regular premiums to them, is there a need to make a separate provision again?

3. If the provision is to be made as per point no. 1 above, it will be a huge provision but it is a simple arithmetic calculation, and there is no need for an actuary and expert.

4. How is actuarial calculation different? Will the provision be higher or lower than point no. 1 above? Why? And how?

Experts, please educate.

Thanks & Regards

After reading the posts, I have many queries and I request citehr members with real and complete knowledge to guide all members on the following points:

1. I am assuming that gratuity payment provision is to be made in the annual books of accounts every year. Is it okay to make a provision of actual gratuity payable as of 31st March to all the eligible employees on board.

Provisioning has to be done for all employees, including those who have not completed 5 years of service, and should be accruing every month.

2. In case the company has a gratuity trust and a tie-up with an insurance company, and is paying a regular premium to them, is there a need to make a separate provision again.

Provisioning in the books of accounts may be done based on actuarial valuation and also considering other assumptions such as the number of new joiners, attrition, increment %, etc. If there is a tie-up with the insurance company, the actuarial valuation will be done by them, but the assumptions should be given to them.

3. In case the provision is to be made as per point no. 1 above, it will be a huge provision, but it is a simple arithmetic calculation and there is no need for an actuary or an expert.

Expert advice is required because the liability will be calculated after the assumptions, and it is very difficult for us to calculate. As a statutory requirement, actuarial valuation should be approved by the actuary.

4. How is actuarial calculation different? Will the provision be higher or lower than point no. 1 above? Why? And How?

The actuarial valuation and a simple gratuity calculation will definitely be different because the actuarial value is calculated after considering the assumptions.

Hope this clarifies

Dear friend,

Beside gratuity, any other HR expense must be considered for provision in the accounts books so that the accounts department may correctly record the accrued expenses for the coming year. Provisions should also be made for leave encashment, bonuses, unpaid salaries, etc. It is essential to adhere to systematic accounting standards.

Best regards,
Umesh Chaudhary
welcomeumesh@yahoo.com

Hi Deepa Sudhakar,

Your response is really elaborate and has depth. I still have a doubt and request your clarification.

1) Correct me if I am wrong. As I understand it, the amount of provision for gratuity payable as of March 31st will be the actual gratuity payable to all employees on board. In short, if all employees are checked out on March 31st, that will be the amount of gratuity payable. This calculation involves simple arithmetic. To make this calculation, you do not need an actuary. An actuary or Chartered Accountant is likely needed to certify that the correct amount is provisioned for.

2) If my statement in (1) is correct, then the amount of gratuity calculated by X, Y, an Actuary, or a Chartered Accountant should be the same.

Thanks & Regards

Hi,

The calculation that you are talking about is discontinuance liability, and it is only an input to calculate the actuarial value. This will be the actual amount of gratuity payable. The actuarial value will usually be less than the discontinuance liability. The net liability will be calculated at the end of the FY, and it becomes the responsibility of the organization to keep it completely funded.

Actuarial Valuation parameters/Assumptions usually include mortality rate, attrition rate, salary inflation, discount rate, recognition of actuarial gain or loss, and also the method of valuation. The most commonly used method, as prescribed by the Institute of Actuaries and AS 15, is the Unit Credit Method.

Calculation of the Fair value of the assets should also be done. This definitely requires an expert's intervention.

Regards,
Deepa

Surprised to see comments from various people - the concept of gratuity valuation seems to be widely misunderstood. Actuarial valuations of gratuity, leave encashment, pension, or other defined benefit schemes are mandatory as per AS 15 (revised, 2005) for the following companies:

1. Listed companies
2. Banks/FIs/Insurance companies
3. Companies having turnover more than 50 crores
4. Companies having borrowings more than 10 crores
5. Companies employing more than 50 employees

Even companies that do not fall under any of the categories listed above need to consult a certified actuary to assess the materiality and the need for any actuarial valuation. Such valuations cannot be done by company officials or their auditors as this would constitute a violation of the accounting standard.

Thank you, numerica.in;850235, for your update. 'AS 15' appears to be an Accounting Standard, and most HR professionals like me are not aware of Accounting Standards. I believe all Chartered Accountants and Auditors must be well aware of the provisions of 'AS 15' and the compliance needed under it. Hopefully, they are ensuring necessary compliance in companies they are associated with. Anyway, thanks for the update.

Thanks & Regards

Gratuity Valuation Issue

I have encountered an issue regarding gratuity valuation:

As of 31st March 2010, based on actuarial valuation, the provision we have created in our balance sheet is Rs. 198,416. Additionally, we have a Group Gratuity scheme with LIC, where the already deposited amount as of 31st March 2010 is Rs. 998,416.

Now, for the period up to 31st August 2010, LIC is requesting an additional deposit of Rs. 10 above what has already been deposited. They refer to this as the Current Service Cost + Additional contribution for the existing fund for the period from 1st August 2009 to 31st August 2010.

My question is, how much should we deposit with LIC to ensure compliance with all regulations and laws?

Furthermore, based on actuarial valuation, if the company were to wind up or discontinue operations, the gratuity amount payable to our employees would be Rs. 21 lakh.

Please advise on the correct amount to deposit with LIC to maintain the fund value, which can then be utilized to fulfill gratuity payments to employees who leave the service after completing 5 years of service.

Thanks in advance.

Regards