Actuarial Valuation
as required under LKAS 19
D a t e : 1 0 t h D e c e m b e r, 2 0 1 2
R u d re s h P a n d i t
S h r a d d h a Vo r a

Accounting Standards are Definitive
benchmarks prescribed by a country’s
Accounting Standard Board.



Comparison
Measurement
Disclosures & Recognition under expense in the
Income Statement and Balance Sheet




Short-Term Employee Benefits
Other Long-Term Employee Benefits
Post Employment Benefits
Termination Benefits



Requires a best estimate of likely Future Benefit
Payment.
Future Payments are to be Discounted back.
Gains/ Losses: Deviations between Actual and
Expected

Projected Unit Credit Method : Present Value of
All Accrued Benefit on valuation Date on
Projected Salaries at Exit (PBO)
• Required Under LKAS 19.
• Required Under ASC 715 (US-GAAP)
• Required Under IAS-19 (IFRS)
Demographic
Assumptions
Mortality
Turnover/Attrition
Retirement
Age…………...
Setting the Assumptions is a Group Work.
– Salary Escalation, Attrition Rate best Known
by the Employer
– Disount Rate is market driven
– Other related assumptions are taken on a best
estimate from past trend.
As per Payment of Gratuity Act (1983)- ‘Gratuity is
the payment made by the employer to an employee
in appreciation of continuous service rendered by
the employee.’
Gratuity is payable immediately on the “EXIT” of
employment of the employee after he/she has
rendered a continuous service of not less than 5
years
On retirement/early exit, or
On death, or
Exit due to disablement , accident or disease.

Required Information
•
•
•
•
•
•
•
Identification of the Employee
Date of Birth
Date of Joining
Date of Valuation
Monthly Salary
Retirement Age
Benefit Description
• To determine
• Age
• Past service
• Discontinuance liability
• Actuarial Liability








Benefit : 15 days salary per year of service
Past Service = 10 Years
Age = 40 Years
Current Salary = 10,000
Rate of Discounting = 7%
Vesting Period = 5 Years
Retirement Age = 60 Years
Method of Valuation = Projected Unit Credit
Method

Future Salary Growth = 5%
Benefits = 15/30*10,000*10 = 50,000
Actuarial Value = 50,000*(1.05/1.07)^(60-40)
= 34,283
Actuarial Value differs due to uncertainty of early withdrawal and mortality

Future Salary growth = 4%
Benefits = 15/30*10,000*10 = 50,000
Actuarial Value = 50,000*(1.04/1.07)^(60-40)
= 28,311
Actuarial Value differs due to uncertainty of early withdrawal and mortality

Future Salary growth = 9%
Benefits = 15/30*10,000*10 = 50,000
Actuarial Value = 50,000*(1.09/1.07)^(60-40)
= 72,414
Actuarial Value differs due to uncertainty of early withdrawal and mortality

General description of the type of plan

Principal actuarial assumptions

Accounting policy for recognizing actuarial gains &
losses.

Reconciliation with movements during the period of
the liability in the balance sheet.

Details of total expense (income statement)
28.25
4
100
Liability
Benefit
Payments
(leavers)
Year
Start
Year
End
150
Extra year’s
interest and
benefit accrual
124.25
Liability Loss
Year End
Expected
Year End
Actual
SLAS 16
Hit to Income
statement
I. ASSUMPTIONS:
01/04/2011
to 31/03/2012
DISCOUNT RATE [PREVIOUS]
8.25%
RATE OF RETURN ON PLAN ASSETS [PREVIOUS]
0.00%
SALARY ESCALATION [PREVIOUS]
8.00%
ATTRITION RATE [PREVIOUS]
2.00%
DISCOUNT RATE [CURRENT]
8.50%
RATE OF RETURN ON PLAN ASSETS [CURRENT]
0.00%
SALARY ESCALATION [CURRENT]
8.00%
ATTRITION RATE [CURRENT]
2.00%
II. TABLE SHOWING CHANGE IN THE PRESENT VALUE OF
DEFINED BENEFIT OBLIGATION:
PRESENT VALUE OF BENEFIT OBLIGATION AS AT THE BEGINNING
OF THE CURRENT PERIOD
01/04/2011
to 31/03/2012
100,00,000
INTEREST COST
8,25,000
CURRENT SERVICE COST
20,00,000
LIABILITY TRANSFERRED IN
-
(LIABILITY TRANSFERRED OUT)
-
(BENEFIT PAID)
(4,00,000)
ACTUARIAL (GAINS)/LOSSES ON OBLIGATIONS
25,75,000
PRESENT VALUE OF BENEFIT OBLIGATION AS AT THE END OF
THE CURRENT PERIOD
150,00,000
III. TABLE OF FAIR VALUE OF PLAN ASSETS:
01/04/2011
to 31/03/2012
FAIR VALUE OF PLAN ASSETS AT THE BEGINNING OF THE PERIOD
EXPECTED RETURN ON PLAN ASSETS
CONTRIBUTIONS
4,00,000
TRANSFER FROM OTHER COMPANY
-
(TRANSFER TO OTHER COMPANY)
-
(BENEFIT PAID)
ACTUARIAL GAINS/(LOSSES) ON PLAN ASSETS
FAIR VALUE OF PLAN ASSETS AT THE END OF THE PERIOD
(4,00,000)
-
IV. EXPENSES RECOGNIZED IN THE STATEMENT OF
OTHER COMPREHENSIVE INCOME (OCI)
ACTUARIAL (GAINS)/LOSSES ON OBLIGATION FOR THE PERIOD
ACTUARIAL (GAINS)/LOSSES ON ASSET FOR THE PERIOD
NET (INCOME)/EXPENSE FOR THE PERIOD RECOGNIZED IN
THE STATEMENT OF OCI
01/04/2011
- 31/03/2012
25,75,000
-
25,75,000
(ACCUMULATED OTHER COMPREHENSIVE INCOME AT THE
BEGINNING OF THE PERIOD)
-
(ACCUMULATED OTHER COMPREHENSIVE INCOME AT THE
END OF THE PERIOD)
25,75,000
V. AMOUNT RECOGNIZED IN THE BALANCE SHEET:
FAIR VALUE OF PLAN ASSETS AT THE END OF THE PERIOD
(PRESENT VALUE OF BENEFIT OBLIGATION AS AT THE END
OF THE PERIOD)
FUNDED STATUS
NET (LIABILITY)/ASSET RECOGNIZED IN THE BALANCE
SHEET
01/04/2011
to 31/03/2012
-
(150,00,000)
(150,00,000)
(150,00,000)
VI. EXPENSES RECOGNIZED IN THE INCOME STATEMENT:
CURRENT SERVICE COST
INTEREST COST
(EXPECTED RETURN ON PLAN ASSETS)
EXPENSE RECOGNIZED IN INCOME STATEMENT
01/04/2011
to 31/03/2012
20,00,000
8,25,000
-
28,25,000
VII. BALANCE SHEET RECONCILIATION:
01/04/2011
to 31/03/2012
OPENING NET LIABILITY
100,00,000
EXPENSE RECOGNIZED IN P&L
28,25,000
EXPENSE RECOGNIZED IN THE STATEMENT OF OCI
25,75,000
NET TRANSFER IN
-
(NET TRANSFER OUT)
-
(EMPLOYER'S CONTRIBUTION)
(4,00,000)
NET LIABILITY/(ASSET) RECOGNIZED IN THE BALANCE SHEET
150,00,000
VIII. EXPENSES RECOGNIZED IN THE INCOME STATEMENT
OF NEXT YEAR:
CURRENT SERVICE COST
INTEREST COST
(EXPECTED RETURN ON PLAN ASSETS)
EXPENSE RECOGNIZED IN INCOME STATEMENT
01/04/2012
to 31/03/2013
25,00,000
12,75,000
-
37,75,000
IX. CASH FLOW PROJECTION:
PROJECTED BENEFITS PAYABLE IN
2013
14,41,923
2014
12,23,722
2015
14,45,048
2016
16,92,611
2017
20,26,592
2018-2022
123,12,274
X. EXPERIENCE ADJUSTMENT:
ON PLAN LIABILITY (GAINS)/LOSSES
ON PLAN ASSETS (LOSSES)/GAINS
01/04/2011
to 31/03/2012
35,42,543
-
SLAS 16
LKAS 19
Current Service Cost
2,000,000
2,000,000
Interest Cost
825,000
825,000
Actuarial (Gain)/Loss
2,575,000
0
Assumption
Increase
Decrease
Liab. would increase
Discount Liab. would decrease and
and leads to actuarial
rate
leads to actuarial gain
loss
Salary
Liab. would decrease
Liab. would increase and
Increase
and will lead to
leads to actuarial loss
Rate
actuarial gain
LKAS19
 Full and immediate recognition outside Income
statement via Other Comprehensive Income
(OCI).
 This results in Reduction Of Volatility in profits
and losses of company.



LKAS19
“Corridor approach” can be used to delay recognition
of losses / (gains)
“Corridor Approach” amortizes over employees’
future service periods any unrecognized gains or
losses in excess of 10% of greater of projected benefit
obligation or fair value of plan assets
Unrecognized net
gain/loss
Net gain/loss subject to
recognition
“Corridor”
= 10% Max(PBO, Fund Assets)