{"id":29703,"date":"2020-03-20T16:42:20","date_gmt":"2020-03-20T11:12:20","guid":{"rendered":"https:\/\/enterslice.com\/learning\/?p=29703"},"modified":"2020-03-20T11:42:42","modified_gmt":"2020-03-20T06:12:42","slug":"actuarial-valuation-of-employee-benefits-an-overview","status":"publish","type":"post","link":"https:\/\/enterslice.com\/learning\/actuarial-valuation-of-employee-benefits-an-overview\/","title":{"rendered":"Actuarial Valuation of Employee Benefits: An Overview"},"content":{"rendered":"<p class=\"has-drop-cap\">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 <strong>employee benefits scheme<\/strong>. The first step in actuarial valuation is to calculate the benefit available to the employee. The AS 15 and Ind AS 19 provide the <a class=\"glossaryLink\"  aria-describedby=\"tt\"  data-cmtooltip=\"&lt;div class=glossaryItemTitle&gt;Accounting&lt;\/div&gt;&lt;div class=glossaryItemBody&gt;Accounting is the language of business, serving as the backbone of financial management and decision-making. It involves the systematic recording, analysis, and reporting of financial(...)&lt;\/div&gt;\"  href=\"https:\/\/enterslice.com\/learning\/terms\/accounting\/\"  data-gt-translate-attributes='[{\"attribute\":\"data-cmtooltip\", \"format\":\"html\"}]'>accounting<\/a> treatment and disclosure to be made with respect to employee benefits.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">What is Actuarial Valuation of Employee Benefits?<\/h2>\n\n\n\n<p>Actuarial valuation of employee\nbenefits may be with respect to leave, gratuity, provident fund, pension,\ndeferred benefit schemes, long service awards, etc. To calculate actuarial valuation,\nactuaries will make assumptions and determine how likely an employee is to\nresign or die before the retirement age, increase in employees salary etc. In\norder to arrive at these assumptions, actuaries use probabilities for various\nevents which are termed as actuaries assumptions. Actuarial assumptions cover both\nfinancial and demographic assumptions.<\/p>\n\n\n\n<p><em><strong>Financial assumptions include<\/strong><\/em><strong>:<\/strong><\/p>\n\n\n\n<ul><li>Discount\nRate.<\/li><li>Employee\nsalary increase rate.<\/li><li>Medical\ncost escalation.<\/li><\/ul>\n\n\n\n<p><strong><em>Demographic assumptions include:<\/em><\/strong><\/p>\n\n\n\n<ul><li>Probable\nMortality Rate.<\/li><li>Employee\nTurnover Rate.<\/li><li>Probable\ndisability.<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\">What is the Need of Actuarial Valuation of Employee Benefits?<\/h2>\n\n\n\n<p>&nbsp;An organization may need services of actuarial valuation of <strong><a href=\"https:\/\/en.wikipedia.org\/wiki\/Employment\">employee<\/a><\/strong> benefits for the following probable reasons: <\/p>\n\n\n\n<ul><li>To\nprepare year-end financial statements which depict accurate results and\nfinancial position<\/li><li>To\nensure that compliance with Indian GAAP is met<\/li><li>To\nensure proper accounting of employee benefits in the books of accounts<\/li><li>To\nensure that liabilities are recorded in the financial statements in respect of\nemployee benefit schemes in accordance with AS 15 or Ind AS 19, as may be\napplicable to an organization<\/li><li>To\nestimate the liability accurately and to make adequate disclosures as required\nby the accounting standards<\/li><li>For\nemployee benefits of an India based subsidiary of an international parent\ncompany, one would need to report under the GAAP applicable to the parent company\nwhether US GAAP, IAS 19, etc<\/li><li>To\nassess whether the company holds the required level of assets to match the\nemployee benefits&rsquo; liability<\/li><li>To\nassess the amount of contribution needed by the organization to make up for\ngratuity funds or trusts<\/li><li>To\nascertain the cost to be paid with reference to the liability of employee\nbenefits in a merger or acquisition<\/li><li>To\ndetermine the amount of settlement of liabilities in case of winding up,\nliquidation or discontinuance of operations<\/li><li>To\nprecisely determine the level of provisions to be recorded in the year-end\nfinancial statements<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\">Which Employee Benefits Require Actual Valuation?<\/h2>\n\n\n\n<p>AS 15 and Ind AS 19 both\ndeal with the valuation of all employee benefits except on share-based\npayments. Sometimes, it is not clear as to which benefits require an actuarial\nvaluation.<\/p>\n\n\n\n<p>The general principle is that the actuarial valuation of employee benefits needs to be valued actuarially only in the following conditions:<\/p>\n\n\n\n<ul><li>The\nbenefit is collected in the past.<\/li><li>The\nbenefit is earned for services rendered in the past.<\/li><li>The\nbenefit will be paid in future maybe after retirement or post-death whatever is\ndecided before.<\/li><li>There\nshould be a certain reasonable amount of benefit.<\/li><\/ul>\n\n\n\n<p>The following are the few types of employee benefits\nwhere actuarial valuation can be required:<\/p>\n\n\n\n<div class=\"wp-block-image\"><figure class=\"aligncenter\"><img decoding=\"async\" loading=\"lazy\" width=\"599\" height=\"361\" src=\"https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2020\/03\/Image-1-1.png\" alt=\"types of employee benefits\" class=\"wp-image-29705\" srcset=\"https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2020\/03\/Image-1-1.png 599w, https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2020\/03\/Image-1-1-300x181.png 300w\" sizes=\"(max-width: 599px) 100vw, 599px\"\/><\/figure><\/div>\n\n\n\n<h2 class=\"wp-block-heading\">How Is An Actuarial Valuation of Employee Benefits Done?<\/h2>\n\n\n\n<ul><li>The\nbasic purpose of an actuarial valuation of employee benefits is to calculate\nthe &lsquo;present value&rsquo; of payments that would be made to the employees in future\nas part of the employee benefit plan.<\/li><li>Actuaries\nstart their work by making assumptions about future salary increment rates,\nemployment attrition and also the mortality rates. <\/li><li>The\nassumptions are then used to calculate the benefit payments that will be made\nfrom the employer to its employees, as per the rules of the plan.<\/li><li>Actuaries\nalso choose another assumption method called the discount rate, to convert the\nfuture payments into a present value. This liability is to be disclosed in the\nfinancial statements.<\/li><li>Actuarial\nvaluation generally includes not just an estimate of liability, but also\nextended disclosures in the form of an actuarial report. <\/li><li>The\ndisclosures are different for different accounting standards. In the context of\nIndian GAAP, there are differences between AS 15 and Ind AS 19 as far as the\ndisclosures are concerned.<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\">Regulatory Framework Governing Actuarial Valuation of Employee Benefits<\/h2>\n\n\n\n<p>AS 15, Ind AS 19, US GAAP and other International\nAccounting Standards provide a regulatory framework for actuarial valuation of\nemployee benefits.<\/p>\n\n\n\n<p><strong>The main aim of AS 15 and Ind AS 19 is to ensure that:<\/strong><\/p>\n\n\n\n<ul><li>A\nliability is mentioned in the balance sheet that represents the actuarial value\nof the benefits that have been accrued till the balance sheet and are expected\nto be paid in future.<\/li><li>An\nexpense is recognized in the statement of profit or loss, representing the cost\nof running these benefits schemes over the reporting period.<\/li><li><em>From the reporting company&rsquo;s benefit,\nthe liability is the excess of Defined Benefit Obligation (DBO).<\/em><\/li><li>In\nthe absence of these accounting standards, the true financial position of the\ncompanies will not be disclosed.<\/li><li>Ind\nAS 19 requires additional disclosures to set out the significant risks to\npost-employment plans. <\/li><\/ul>\n\n\n\n<p><strong>How are various employee benefits treated\nunder AS 15 and Ind AS 19?<\/strong><\/p>\n\n\n\n<p>AS 15 and Ind AS 19 applies to all types of employee benefits,\nexcept those that are linked to shares. The benefits are categorized as follows:<\/p>\n\n\n\n<div class=\"wp-block-image\"><figure class=\"aligncenter\"><img decoding=\"async\" loading=\"lazy\" width=\"405\" height=\"341\" src=\"https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2020\/03\/Image-2-1.png\" alt=\"various employee benefits\" class=\"wp-image-29706\" srcset=\"https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2020\/03\/Image-2-1.png 405w, https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2020\/03\/Image-2-1-300x253.png 300w\" sizes=\"(max-width: 405px) 100vw, 405px\"\/><\/figure><\/div>\n\n\n\n<h3 class=\"wp-block-heading\">Short Term Benefits<\/h3>\n\n\n\n<p>Short term benefits such as bonuses, salaries etc. do not require the actuarial valuation.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Long Term Benefits<\/h3>\n\n\n\n<p>Long &shy;term&nbsp;benefits&nbsp;are&nbsp;further&nbsp;categorized&nbsp;as:\n<\/p>\n\n\n\n<p><em>&nbsp;Post\n&shy;employment&nbsp;benefits:-&nbsp;such&nbsp;as&nbsp;gratuity&nbsp;and&nbsp;pension<\/em>,&nbsp;and\n<\/p>\n\n\n\n<p><em>Other&nbsp;Long&shy;\nTerm&nbsp;benefits:-&nbsp;such&nbsp;as&nbsp;jubilee&nbsp;awards,&nbsp;which&nbsp;are&nbsp;paid&nbsp;during\nthe service of the employee.<\/em><\/p>\n\n\n\n<ul><li><strong><em>Leave&nbsp;benefits&nbsp;can&nbsp;be&nbsp;categorized&nbsp;as&nbsp;either&nbsp;post\n&shy;employment&nbsp;or&nbsp;other&nbsp;long &shy;term benefits,&nbsp;depending&nbsp;on&nbsp;the&nbsp;scheme&nbsp;rules&nbsp;and&nbsp;assumptions&nbsp;whether&nbsp;a&nbsp;First&shy;In\nFirst Out&nbsp;(FIFO)&nbsp;or&nbsp;a&nbsp;Last &shy;In&shy; First &shy;Out&nbsp;(LIFO)&nbsp;method&nbsp;is&nbsp;used&nbsp;for&nbsp;actuarial&nbsp;valuation\nof employee benefits.<\/em><\/strong><\/li><\/ul>\n\n\n\n<div class=\"read\"><p><b>See Our Recommendation:<\/b> <mark><a href=\"https:\/\/enterslice.com\/learning\/epf-form-10c\/\" target=\"_blank\" rel=\"noopener noreferrer\">All you need to know about EPF Form 10C<\/a><\/mark>.<\/p><\/div>\n\n\n\n<h3 class=\"wp-block-heading\">How to Set Actuarial Assumptions for Actuarial Valuation of Employee\nBenefits?<\/h3>\n\n\n\n<p>In case the actuarial assumptions are wrong, it can\nlead to wrong liability estimates. Hence there must be a thorough understanding\nof the accounting standards applicable in the company. Most of the accounting\nstandards like AS 15, Ind AS 19, IAS 19, ASC 715 and FRS 17, places the\nresponsibility for all actuarial assumptions on the Board of Directors of the\nreporting organization.<\/p>\n\n\n\n<p><strong><em>The actuarial valuation of employee benefits requires the following process:<\/em><\/strong><\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Discount rate<\/h3>\n\n\n\n<p>It is the most important\nassumption. This set is based on yields on the central government bonds. Actuaries\ngenerally have access to the financial data on G-secs to set the assumption. It\nis the responsibility of the companies to request a full explanation regarding\nthe actuarial valuation report.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Salary Escalation and Attrition Rates<\/h3>\n\n\n\n<p>These are the best\nestimates for the reporting enterprise regarding the future increments and\nattrition of the employee.<\/p>\n\n\n\n<div class=\"shadow4\"><i>Other assumptions include the mortality rate, leave availment, disability, etc., which are relevant and important for the specific schemes.&#65279;<\/i><\/div>\n\n\n\n<h2 class=\"wp-block-heading\">How to interpret the results regarding Actuarial Valuation of Employee\nBenefits?<\/h2>\n\n\n\n<p>The company&rsquo;s official after getting the report should\nassess the information contained in these reports. In order to understand the\nresults of actuarial valuation of employee benefits the companies need to focus\non the settlement of closing and opening DBO or Defined Benefit Obligation,\nwhich is a required disclosure under both AS 15 and Ind AS 19. This is a critical\npiece of information to understand why the obligation has increased or\ndecreased during the reporting period. The various elements for interpreting\nare as follows:<\/p>\n\n\n\n<div class=\"wp-block-image\"><figure class=\"aligncenter\"><img decoding=\"async\" loading=\"lazy\" width=\"437\" height=\"345\" src=\"https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2020\/03\/Image-3-1.png\" alt=\"elements for interpreting\" class=\"wp-image-29707\" srcset=\"https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2020\/03\/Image-3-1.png 437w, https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2020\/03\/Image-3-1-300x237.png 300w\" sizes=\"(max-width: 437px) 100vw, 437px\"\/><\/figure><\/div>\n\n\n\n<ul><li>DBO at the opening and closing dates come from the results of actuarial valuation of employee benefits.<\/li><li>Service cost is an increase in obligation due to an additional year of service by employees, an employee who had rendered at least four years of service.<\/li><li>Interest Cost is an increase in obligation because the benefit payment date is now a year closure.<\/li><li>Benefit payments are the number of benefits that have been paid during the reporting period to employees who have left the company.<\/li><li>Actuarial loss is assessed when a full actuarial valuation of employees has been carried out to assess the closing DBO.<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\">Conclusion<\/h2>\n\n\n\n<p>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 <a class=\"glossaryLink\"  aria-describedby=\"tt\"  data-cmtooltip=\"&lt;div class=glossaryItemTitle&gt;Market&lt;\/div&gt;&lt;div class=glossaryItemBody&gt;A market is a structured environment, either physical or virtual, where buyers and sellers convene to trade goods and services. This trading hub operates based on the principles of supply and(...)&lt;\/div&gt;\"  href=\"https:\/\/enterslice.com\/learning\/terms\/market\/\"  data-gt-translate-attributes='[{\"attribute\":\"data-cmtooltip\", \"format\":\"html\"}]'>market<\/a> 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.<\/p>\n\n\n\n<div class=\"read\"><p><b>Also, Read:<\/b> <mark><a href=\"https:\/\/enterslice.com\/learning\/employee-provident-fund\/\" target=\"_blank\" rel=\"noopener noreferrer\">Various Reasons Why Provident Fund is Important to the Salaried Class<\/a><\/mark>.<\/p><\/div>\n","protected":false},"excerpt":{"rendered":"<p>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 [&hellip;]<\/p>\n","protected":false},"author":27,"featured_media":29708,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[1529,1501],"tags":[],"acf":{"service_id":"216"},"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v14.6.1 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Actuarial Valuation of Employee Benefits: Complete Overview<\/title>\n<meta name=\"description\" content=\"Actuarial valuation of employee benefits may include sick days, medical insurance, overtime, profit sharing, retirement benefits etc.\" \/>\n<meta name=\"robots\" content=\"index, follow\" \/>\n<meta name=\"googlebot\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<meta name=\"bingbot\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/enterslice.com\/learning\/actuarial-valuation-of-employee-benefits-an-overview\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Actuarial Valuation of Employee Benefits: Complete Overview\" \/>\n<meta property=\"og:description\" content=\"Actuarial valuation of employee benefits may include sick days, medical insurance, overtime, profit sharing, retirement benefits etc.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/enterslice.com\/learning\/actuarial-valuation-of-employee-benefits-an-overview\/\" \/>\n<meta property=\"og:site_name\" content=\"Enterslice\" \/>\n<meta property=\"article:publisher\" content=\"https:\/\/www.facebook.com\/enterslice\" \/>\n<meta property=\"article:published_time\" content=\"2020-03-20T11:12:20+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2020-03-20T06:12:42+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2020\/03\/Actuarial-Valuation-of-Employee-Benefits.jpg\" \/>\n\t<meta property=\"og:image:width\" content=\"670\" \/>\n\t<meta property=\"og:image:height\" content=\"352\" \/>\n<meta name=\"twitter:card\" content=\"summary\" \/>\n<meta name=\"twitter:creator\" content=\"@enterslice\" \/>\n<meta name=\"twitter:site\" content=\"@enterslice\" \/>\n<!-- \/ Yoast SEO plugin. -->","authorName":"Deepti Shikha","authorImageUrl":"https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2020\/01\/Deepti-Shikha.jpg","authorDescription":"Deepti is a Law graduate with an avid interest in reading and very proficient in summarizing legal cases. 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