Gratuity

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visu iyer (Querist)
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18 January 2015 the company has not paid gratuity or created gratuity fund.

Is it necessary to create a gratuity fund; is it necessary to create a provision for gratuity payable in the books

how to treat this with AS 15

experts pl. advise

CMA MALHAR BEHERA

CMA MALHAR BEHERA (Expert)
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18 January 2015 Gratuity can be paid by the employer as and when an employee leaves. Alternatively, a trust fund can be created, or an arrangement can be negotiated with an insurer so that the annual contributions, calculated actuarially, can be made each year. Benefits to employees on entitlement would in such a case be paid by the trust fund or by the insurer.
In respect of gratuity benefit and other defined benefit schemes, the accounting treatment depends on the type of arrangement which the employer has chosen to make.
(i) If the employer has chosen to make payment for retirement benefits out of his own funds, an appropriate charge to the statement of profit and loss for the year is made through a provision for the accruing liability. The accruing liability is calculated according to actuarial valuation. However, many enterprises which employ only a few persons do not calculate the accrued liability by using actuarial methods.
(ii)In case the liability for retirement benefits is funded through creation of a trust, the cost incurred for the year is determined actuarially. Many employers undertake such valuations every year while others undertake them less frequently, usually once in every three years. If actuarial valuations are conducted every year, the annual accrual of retirement benefit cost can be easily determined. If, however, the actuarial valuations are not conducted annually, the actuary's report specifies the contributions to be made by the employer on annual basis during the inter-valuation period. This annual contribution (which is in addition to the contribution that may be required to finance unfunded past service cost) reflects proper accrual of retirement benefit cost for each of the years during the inter-valuation period and is charged to the statement of profit and loss for each such year. Where the contribution paid during a year is lower than the amount required to be contributed during the year to meet the accrued liability as certified by the actuary, the shortfall is charged to the statement of profit and loss for the year. Where the contribution paid during a year is in excess of the amount required to be contributed during the year to meet the accrued liability as certified by the actuary, the excess is treated as a pre-payment.