Accounting treatment of gratuity

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Querist : Anonymous

Querist : Anonymous (Querist)

21 August 2015 What should be the accounting treatment of Gratuity. and leave encashment Both Current and Non - Current Liability will be booked as per actuarial certification??

CA AnKiT BoHrA (AB)

CA AnKiT BoHrA (AB) (Expert)
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21 August 2015 gratuity is to be booked as per actuary valuation

Querist : Anonymous

Querist : Anonymous (Querist)

21 August 2015 but how we will disclose non current leave encashment as per acturial verification??

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Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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14 July 2024 Disclosure of non-current leave encashment, especially when it involves actuarial valuation, is typically done in the financial statements of a company under the provisions of Accounting Standard (AS) 15 (Revised), which deals with Employee Benefits. Here’s how you would disclose non-current leave encashment:

### 1. Actuarial Valuation:

- **Engagement of Actuary:** The first step is to engage an actuary who will calculate the present value of the expected future payments for non-current leave encashment. This involves estimating the liability based on factors like employee service period, salary levels, and the likelihood of employees availing leave encashment.

- **Valuation Methodology:** Actuarial valuation methods, such as the projected unit credit method, are commonly used to calculate the present value of the obligation.

### 2. Presentation in Financial Statements:

- **Balance Sheet:** Non-current leave encashment liability is presented as a separate line item under Provisions in the Liabilities section of the Balance Sheet. It is classified as a long-term liability because the obligation is not expected to be settled within the normal operating cycle of the business, typically one year.

- **Income Statement:** The net expense or income arising from changes in the present value of the leave encashment liability (actuarial gains or losses) is recognized in the Statement of Profit and Loss under the head of Employee Benefits Expenses.

### 3. Disclosure Requirements (AS 15 Revised):

- **Nature and Extent of Employee Benefits:** Disclose the nature of the benefit provided (non-current leave encashment), the basis used to determine the liability (actuarial valuation), and the key assumptions made in the actuarial valuation process.

- **Amount Recognized in Financial Statements:** Disclose the total amount recognized in the Balance Sheet as a liability for non-current leave encashment, broken down into current and non-current portions if material.

- **Sensitivity Analysis:** Provide sensitivity analysis disclosing the effect on the liability due to changes in key assumptions such as discount rate, expected salary increases, and employee turnover rates.

- **Reconciliation:** Reconcile the opening and closing balances of the non-current leave encashment liability, showing additions (e.g., current year service cost, interest cost) and deductions (e.g., payments made during the year).

### Example Disclosure:

In the notes to the financial statements, the disclosure might appear as follows:

- **Non-current Leave Encashment Liability:**
```
Non-current Leave Encashment Liability XXX,XXX
```

- This represents the present value of the estimated future payments for non-current leave encashment obligations as at the reporting date.

- **Actuarial Assumptions:**
- Discount rate: X%
- Expected salary increase: Y%
- Employee turnover rate: Z%

- **Reconciliation of Non-current Leave Encashment Liability:**
- Opening balance: XXX,XXX
- Service cost: +/- XXX
- Interest cost: +/- XXX
- Payments made: -XXX
- Actuarial gains/losses: +/- XXX
- Closing balance: XXX,XXX

### Conclusion:

Proper disclosure of non-current leave encashment in financial statements is crucial for transparency and compliance with accounting standards. Following AS 15 (Revised) ensures that the actuarial valuation and subsequent disclosures are in line with accepted accounting principles, providing stakeholders with clear information about the company's obligations related to employee benefits. For precise implementation and disclosure, it's recommended to consult with a qualified accountant or financial advisor familiar with AS 15 (Revised) and actuarial valuation practices.