Actuarial Valuation of Gratuity:Gratuity Calculator, Definition, Different Types, Eligibility, Document Required, Process, Time Taken, Benefits

Gratuity is payable to the employees of the organisation which has 10 or more employees according to the Gratuity Payment Act 1972. The organisations on whom gratuity act is applicable need to estimate the liability of gratuity payment to the employees. The gratuity valuation is performed by an actuarial consultant according to accounting standards AS 15 or Indian Accounting Standard (IND AS 19) - Employee Benefits. The actuarial valuation of gratuity is recognised in the financial statement in order to provide a true and fair view to the reader of the financial statements. Some organizations, like listed companies, get the actuarial valuation done on a quarterly basis, whereas unlisted companies get the valuation done on a semi-annual or annual basis. Bizfoc has a team of expert actuarial consultants who will assist you in the gratuity valuation.

Free Gratuity Calculator

What is Actuarial Valuation of Gratuity ?

Gratuity represents an amount that is payable to employees as per the Gratuity Payment Act, 1972, in return for service rendered by the employee. Gratuity is paid to employees at the time of termination, resignation, or retirement who have completed 5 years of continuous employment. The gratuity amount is also payable prior to 5 years in case of death or permanent disability. The gratuity amount is payable in the future, and there is a probability that the employee may not complete 5 years of continuous employment. Therefore, the estimation of gratuity liability requires actuarial consultants who can perform these complex calculations.

Eligibility for Gratuity Valuation

The organisation which has employed 10 or more employees has an obligation to pay gratuity to the employees. Therefore, it is important to get the valuation of gratuity by creating the necessary provision in the financial statements. Listed companies or entities planning to get listed need to adhere to the requirements of the accounting standard and get the actuarial valuation.

Documents Required for Actuarial Valuation of Gratuity

The organisation needs to supply the following details of each employee:

• Employee salary details
• Date of joining
• Date of birth

Additionally, the average increase in salary and attrition rates need to be estimated based on past data points and future expectations.

Process of Actuarial Valuation of Gratuity

The valuation of gratuity aims to estimate the liability which the organisation needs to provide in their book of accounts. The steps involved to complete the gratuity valuations are as follows:

• Understanding Scope: It involves understanding the number of employees, the objective of conducting the gratuity valuation, and the timelines for issuing the report.
• Sharing the Data Format: It involves sharing the format in which details of employees like salary structure, date of birth, date of joining, overall attrition rate, and salary hike in the past. The entity can share the data in the agreed format.
• Conducting the Analysis: This step covers estimating the gratuity liability based on the information shared. The outcome is discussed with the concerned person of the organisation.
• Gratuity Valuation Report: The final gratuity valuation report is issued, which has the actuarial gain or loss to be recognised for the period, along with the signature of the actuary.

How to Perform the Actuarial Valuation of Gratuity?

The gratuity valuation is done using a statistical model which involves the following steps:

• Step 1: Estimate the probability of each employee discontinuing, allowing for resignation, termination, or retirement.
• Step 2: Estimate the amount of gratuity to be paid to employees at future dates based on their joining date. The gratuity at each time point is calculated using the following formula: Gratuity Amount = Last drawn (basic salary + DA) * Number of completed years of service * 15/26
• Step 3: The amount of gratuity at different points is adjusted for the employee’s probability of discontinuing.
• Step 4: The amount calculated in Step 3 is discounted with the discount rate to allow for the time value of money.
• Step 5: Steps 1 to 4 are repeated for all employees to arrive at the total liability of gratuity.

Time Taken to Issue Gratuity Valuation Report

Bizfoc team needs 3 working days to issue the gratuity valuation report after the required information is supplied.

Benefits of Actuarial Valuation of Gratuity

The gratuity valuation is required to establish the provision in the financial statement which has the following benefits:

• Estimate the gratuity liability to know the financial position
• Helps to provide a true and fair view of the financial statement
• Meet the requirements laid out in the Indian Accounting Standards
• Actuarial provision of gratuity ensures money is not distributed as a dividend and there is no shortage of money at the time of payment to employees
• Management can assess the value of Gratuity which costs to their organisation

Accounting Treatment for Actuarial Valuation of Gratuity

The accounting treatment for actuarial valuation of gratuity varies for Accounting Standards AS-15 and Indian Accounting Standard (IND AS-19).

BizFoc: Best Actuarial Consultant in India

BizFoc has a team of qualified actuaries and Chartered Accountants with more than 10 years of experience. We have issued a gratuity valuation report for multiple industries like manufacturing, financial institutions, and the service industry. Our actuarial consultants will guide you at every step for getting the gratuity valuation within set timelines.

Conclusion

The gratuity valuation is required to estimate the liability in the book of accounts which is required for a true and fair view to the reader of the financial statement. The gratuity valuation requires complex statistical computation which is carried out by the actuarial consultant.