Important Details About the PSARA L...
Private Security Agencies Regulations Act also known as PSARA is the regulatory act for private...
Employee benefits refer to all forms of perks or compensation paid by an employer to an employee apart from the salary or wages for the services provided by the employee. Actuarial valuation of employee benefits may include sick days, medical insurance, overtime, profit sharing, retirement benefits etc. In simple words, actuarial valuation deals with the computation of the present value of payments that would be made to employees in future as part of an employee benefits scheme. The first step in actuarial valuation is to calculate the benefit available to the employee. The AS 15 and Ind AS 19 provide the accounting treatment and disclosure to be made with respect to employee benefits.
Actuarial valuation of employee benefits may be with respect to leave, gratuity, provident fund, pension, deferred benefit schemes, long service awards, etc. To calculate actuarial valuation, actuaries will make assumptions and determine how likely an employee is to resign or die before the retirement age, increase in employees salary etc. In order to arrive at these assumptions, actuaries use probabilities for various events which are termed as actuaries assumptions. Actuarial assumptions cover both financial and demographic assumptions.
Financial assumptions include:
Demographic assumptions include:
An organization may need services of actuarial valuation of employee benefits for the following probable reasons:
AS 15 and Ind AS 19 both deal with the valuation of all employee benefits except on share-based payments. Sometimes, it is not clear as to which benefits require an actuarial valuation.
The general principle is that the actuarial valuation of employee benefits needs to be valued actuarially only in the following conditions:
The following are the few types of employee benefits where actuarial valuation can be required:
AS 15, Ind AS 19, US GAAP and other International Accounting Standards provide a regulatory framework for actuarial valuation of employee benefits.
The main aim of AS 15 and Ind AS 19 is to ensure that:
How are various employee benefits treated under AS 15 and Ind AS 19?
AS 15 and Ind AS 19 applies to all types of employee benefits, except those that are linked to shares. The benefits are categorized as follows:
Short term benefits such as bonuses, salaries etc. do not require the actuarial valuation.
Long term benefits are further categorized as:
Post employment benefits:- such as gratuity and pension, and
Other Long Term benefits:- such as jubilee awards, which are paid during the service of the employee.
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In case the actuarial assumptions are wrong, it can lead to wrong liability estimates. Hence there must be a thorough understanding of the accounting standards applicable in the company. Most of the accounting standards like AS 15, Ind AS 19, IAS 19, ASC 715 and FRS 17, places the responsibility for all actuarial assumptions on the Board of Directors of the reporting organization.
The actuarial valuation of employee benefits requires the following process:
It is the most important assumption. This set is based on yields on the central government bonds. Actuaries generally have access to the financial data on G-secs to set the assumption. It is the responsibility of the companies to request a full explanation regarding the actuarial valuation report.
These are the best estimates for the reporting enterprise regarding the future increments and attrition of the employee.
The company’s official after getting the report should assess the information contained in these reports. In order to understand the results of actuarial valuation of employee benefits the companies need to focus on the settlement of closing and opening DBO or Defined Benefit Obligation, which is a required disclosure under both AS 15 and Ind AS 19. This is a critical piece of information to understand why the obligation has increased or decreased during the reporting period. The various elements for interpreting are as follows:
Reducing investment risk exposure and pro-actively managing scheme funding are the key priorities of the sponsors of defined benefit plans. This requires having an in-depth knowledge of how assets and liabilities perform under a range of market conditions and also identifying different risk drivers to establish the basic checkpoints to ensure the continued relevance of the asset-liability management strategy. Actuarial Gains and Losses comprise the difference between the previous and actual actuarial assumptions or the changes in the assumptions. Actuarial Gains or Losses should be determined by profit or loss immediately as an income or an expense.