Circular to clients

by R. Krishnaswamy on July 10, 2010

Date: 01  01  2010

1. The new Accounting Standard (Revised 2005) hereinafter called as AS15R has now been in force for three years.  Our experience suggests that while most enterprises have started complying with this Standard, there are several instances where more needs to be done to achieve full compliance with the Standard.  In the current scenario We also foresee that there will be more regulatory pressures and insistence to achieve full compliance with this Standard so that the financial statements reflect the true and correct position as per AS15R.

The purpose of this circular is severalfold:

a)   To assist companies to achieve 100%  compliance with AS15R.

b)    To highlight the additional services made available by us particularly in the area of Actuarial Asset Liability Modeling where the focus is on increasing the yield on invested funds.

c)    Optional additional services as explained in the caption.

2.         STEPS TO BE TAKEN FOR ACHIEVING 100% COMPLIANCE WITH AS15R.

[i]      Ensure that employee list is fully updated as on the valuation date.

[ii]     Identify all employee benefits because AS15R covers all employee   benefits unlike the earlier standard which covered only retirement benefits.

[iii]    Classify the benefits into four distinctive categories. The appropriate paras of AS15R applicable to them is indicated within brackets

    1. Short Term Employee Benefits (8 – 23)
    1. Post Employment Benefits such as gratuity, pension, other retirement        benefits and post-employment medical benefits (24 – 126)
    1. Other long-term employee benefits including long-service leave, sick leave even if it is not encashable, other long service benefits, long-term disability benefits and deferred compensation. (127 – 132)
    1. Termination Benefits (133 – 142)

While (a) above will not require Actuarial Valuation, the other three categories of benefits will require Actuarial Valuation

3.         THE FOLLOWING IS  AN ILLUSTRATIVE LIST OF EMPLOYEE BENEFITS WHICH WILL REQUIRE ACTUARIAL VALUATION:

Gratuity

Privilege Leave

Sick Leave

Pension

Employee Incentive Scheme

Post Retirement Medical Benefit Scheme

Relocation Expenses on Separation

Leave Travel Concession

Casual Leave which can be carried forward beyond 12 months

Three year contract employment scheme prevalent in Textile Industry.

Interest Guarantee in the context of Exempt Provident Fund [EPF]

It is very import to identify which of the above benefits are offered by an enterprise and also examine whether there are other employee benefits [not included above] which may require an actuarial valuation.

You can revert back to us for further clarifications in this regard.

4.         DATA FOR ACTUARIAL VALUATION

Kindly furnish employee particulars in excel format as on the valuation date strictly as per data format in the attached- Data and Input Format File.  The DOB and DOJ should strictly be in the mm/dd/yyyy format only.  The entire company data should be given in one Excel sheet only without any break between rows.  Different units should not be given in separate Excel sheets. If it is necessary to indicate unit name, the same can be done in a separate column.

The attached Data and Input Format File provides the data formats for Gratuity, Earned leave and Sick leave.  For other types of benefits, kindly contact us for obtaining appropriate data formats.

5.         OTHER INPUTS FOR ACTUARIAL VALUATION

The attached Data and Input Format File has two input sheets – one for Gratuity and the other for Leave.  Kindly provide all the particulars asked for in these input sheets.  Kindly refer to the guidelines provided at the top of the input sheet before filling up the input sheets.   Kindly provide a separate note describing the salient features of the Leave and Gratuity plans.  In the description of the Gratuity plan kindly indicate whether the ceiling of Rs. 3.5 lakhs is applicable. In the case of leave encashment plan indicate whether the carried forward leave can be encashed during service.

For the current valuation please fill in green shaded cells of Column ‘C’of the input sheet.  Column ‘B’ needs to be filled only if previous valuation is needed.

For benefits other than Gratuity and Leave kindly contact us for obtaining relevant input sheets.

6.         INPUTS FOR PREPARING THE DISCLOSURE REPORT

To achieve full compliance with AS15R, it is necessary to prepare detailed disclosure report as per format provided in Appendices A and B of AS15R.  As per Companies [Accounting Standard] Rules [copy enclosed] small and medium Companies [SMC]  will not require disclosure report, while Non-SMC will require it under para 120 for Gratuity and paras 129 and 130 for leave.  In the light of the same kindly check  up whether disclosure is needed in your case, keeping in view the criteria mentioned in the said Rules for classification under SMC and Non-SMC.

In case it is needed valuation has to be done as at the year beginning date also for which data is needed, unless it has already been done.  In order to prepare these disclosure reports for funded (self administered or insurer managed) schemes kindly provide the fund movement particulars for the period in the input sheet.  For unfunded plans kindly provide the amount of benefits paid during the period in the input sheet.

7.         SPECIFYING THE PARAMETERS FOR ACTUARIAL VALUATION

AS15[R] places the responsibility of determining the following parameters on the enterprise.

    1. Salary escalation rate: This is to be determined taking into account inflation, seniority, promotion, past practice of increasing benefits etc. as per paras 83 – 91 as also 120(l) of AS15R. This should be on a long term basis
    1. Attrition rate: This refers to withdrawals other than death and normal retirement.  While fixing this parameter the Company has to take into account the recent past experience and expected future experience. Again what is called for is the long term estimate of the attrition rate.
    1. In the case of Self Administered plans, the enterprise has to value assets on a fair value basis as per paras 101 – 102 of AS15R.  This is normally taken to be the market value.
  1. d. In the case of self administered plans, the enterprise must also estimate the expected rate of return on the investments in the manner specified in paras 107 – 109 of AS15R.
  1. e. Discount rate: This will be determined by the Actuary by reference to market yields (as on the balance sheet date) of Government Bonds of term which is equivalent to estimated term of the benefit obligations.  In case the actuarial valuation process is undertaken prior to the balance sheet date, the Actuary will use the market yield on Government Bonds as on the date of performing the valuation.  The valuation results will be reviewed based on the bond yields on the balance sheet date.

8.         VALUATION OF LONG TERM COMPENSATED ABSENCES : SOME ASPECTS

There have been certain doubts as to how this benefit should be treated in the Actuarial Valuation.  Both Accounting Standard Board (ASB) Guidelines and Experts Advisory Committee (EAC)’s opinion on leave valuation have clarified this issue.  Compensated Absence is of three types:  1. Casual leave, 2. Earned or Privilege leave and 3. Sick leave.  The valuation aspects related to these three types of leave are covered in the following paras:

  1. a. Casual leave: This is either not carried forward beyond valuation date or generally not beyond twelve months from the date of valuation.  Such type of leave does not require Actuarial Valuation and has to be valued on undiscounted basis.

If “casual leave year” is same as financial year typically there will be no liability on balance sheet date.

If “casual leave year” is calendar year and financial year ends on 31st March there will be a leave liability to be valued on the balance sheet date.

It needs to be noted that the unavailed casual leave will be valued on a Cost to Company (CTC) basis.  While valuing the unavailed casual leave an allowance needs to be made for the fact that a portion of this leave may not be availed at all.

  1. b. Earned or Privilege Leave: These are generally carried forward till separation which can either be availed or encashed during service and on separation.   Some enterprises also permit encashment during service.  While doing this valuation the Actuary will value the entire leave to credit as a long term benefit, even though some portion of the leave will be availed within twelve months.  This is because a liability occurring  within twelve months and forming part of a long term benefit has to be valued on a long term basis in terms of para 67 of the AS15R.
  1. c. Sick Leave: This is to be actuarially valued even if no encashment facility may be available. The company has to give an estimate of sick leave that may lapse on separation without giving rise to any liability.

A frequently asked question is how availment of leave can give rise to a liability particularly when no payment or cash flow is involved.  This is because when availment takes place the Company pays salary when no work is done which in turn is due to the fact that the company has already derived the corresponding economic benefit as on the valuation date itself.

9.         Actuarial Valuation Aspects of Exempt Provident Funds (EPF)

Doubts have been expressed about the need for actuarial valuation of Exempt Provident Fund Schemes which provide an interest rate guarantee. Para 26(b) of AS15R read in conjunction with the guidance provided by the ASB (Accounting Standards Board) of the Institute of Chartered Accountants of India clearly states an EPF plan with an interest rate guarantee is a defined benefit plan.  Therefore for achieving full compliance with AS15R it will be necessary to do an actuarial valuation of the EPF plan – as on both the opening and closing valuation dates – and prepare the disclosure report for the relevant period.   The data and input requirements for the actuarial valuation of the EPF plans will be provided on request.

10.      Insurer Managed Schemes: Is there a need for independent   actuarial valuation?

This is a frequently asked question.  The guidance provided by the ASB clearly states that such enterprises which rely on the actuarial valuation certificates provided by an insurance company must ensure that the actuarial valuation has been carried out by a qualified actuary in accordance with AS15R requirements.  In light of this it is necessary  to get independent actuarial certification under AS15R even in Insurer Managed Schemes.

11       RESTATEMENT OF ACCOUNTS AS PER INTERNATIONAL FINANCIAL REPORTING  STANDARDS [IFRS]

It may become necessary in the case of some Companies to restate their accounts as per  IFRS.  The requirements for the same will be quoted on request.  Such convergence will naturally have impact on the employee benefit cost.  Another significant feature of convergence is the extra facility which companies have to recognize the actuarial gains and losses outside profit and loss statement – a practice mostly adopted in United Kingdoms and Europe.

12.      INVESTMENT ANALYSIS

An optional additional service made available from this year onwards is the performing of Investment analysis in the case of Self Administered Fund such as Gratuity, Pension and EPF.  This involves appropriate asset liability modeling on an Actuarial basis.  The results of this analysis will help the company to rebalance its asset portfolio in order to either mitigate interest rate risk or enhance investment return or both.  Our experience suggest that the companies which have applied such investment diagnostic tools have been able to make better investment decisions related to their post  employment benefit plans leading to increased yield on invested assets.

13.       QUANTIFICATION OF RISK EXPOSURE

Another optional service is the quantification of risk exposure.  Due to uncertain and volatile nature of employee benefits companies are exposed to considerable risk – both financial risk and operational risk.   It is naturally in the interest of the company to understand the impact of such risk on its financial position, dividend distribution and current operation. We develop several ratios based on actuarial valuation and other financial reports and explain their significance in relation to the risks faced in the above regard.  These ratios will place a very important management tool in the hands of the company. Particularly for Banks understanding such impact is all the more essential in view of the ever increasing liabilities under Pension Scheme.

14.       SUMMARY

This circular has captured all salient requirements which need to be met for achieving full compliance with AS15R.   Adhering to these requirements – particularly the data and input requirements can significantly reduce the lead time involved in the valuation process.  Please feel free to revert back to us if you have questions about any of these requirements.

To sum up I am giving below in a nutshell the particulars to be sent to me for Actuarial Valuation purposes

1.         EMPLOYEE DATA STRICTLY AS PER THE FORMAT ENCLOSED.

2.         INPUT SHEETS AS PER ENCLOSURE

3.         FUND MOVEMENT STATEMENT AS PER ENCLOSURE

4.         PLEASE NOTE THAT ALL THE THREE ABOVE ARE UPDATED ONES AND TO  BE  USED FROM THIS YEAR ONWARDS.  PLEASE DO NOT USE INPUT SHEETS SENT DURING EARLIER YEARS.

With best wishes.

R. KRISHNASWAMY

Consulting Actuary

{ 1 comment… read it below or add one }

V.Rajagopalan April 19, 2012 at 6:02 am

Dear Sir,
I hava a small query on AS15 applicable to PF Exempted Trust. As per the the revised
AS 15 Trust should get the acturial valuation in respect of Interest availble to the Trust is sufficient to make Statutory Interest payment to its members. As EPF allow the accounts of the Trust should be closed on or before 30th Sept for the previous financial year, in the absence of closing PF books and interest declared and credited to members account how this can be valued in line with Company closing of accounts to determine the short fall in interest as that of statutory rate. Assuming that it is possible if EPFO declared interest rate for the year by March, in case if EPFO declares interest after March (After Company account closure is over for March) how the Trust can get the Acturial valuation as of Mar. Is there any provision in that case Trust has to go in for Acturail valuation after sept (EPF dead line) and the same should be taken into Dec end closing of company Accounts in case of any adverse interest receipts.

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