Gratuity valuation

This query is : Resolved

GIRISH JAYANTILAL JAIN (Querist)
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08 July 2013 Company follow calender year as accounting year. Previously it was obtaining gratuity valuation report in December as well as March. Now company want to gratuity valuation report only in the month of December.

Query - How to make provision for gratuity in March?? Also what amount will be considered for dis allowances as December provision was made for Jan to Dec 2012.

CMA Ramesh Krishnan

CMA Ramesh Krishnan (Expert)
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30 July 2013 Why the change.may be company financial changed as any other mode?

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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26 July 2024 ### **Gratuity Valuation and Provisioning:**

When a company follows the calendar year for its accounting and decides to obtain a gratuity valuation report only in December (as opposed to December and March), there are several considerations for making provisions and handling disallowances.

#### **1. Gratuity Provisioning in March:**

**a. **December Valuation Report:**
- If the company now obtains a gratuity valuation report only in December, this report will reflect the liability up to December 31. The valuation is based on factors such as the number of employees, their tenure, and the actuarial assumptions used.

**b. **Provision for March:**
- To account for gratuity in March (end of the financial year), you need to estimate the gratuity liability for the period from January 1 to March 31, which is not covered by the December valuation report.
- **Calculation:** You can estimate the liability for this period by applying the same valuation rate or percentage increase derived from the December report, adjusted for any significant changes or trends observed in the first quarter.
- **Journal Entry:**
- **December:** Record the provision based on the valuation report.
```plaintext
Dr. Gratuity Expense
Cr. Gratuity Provision
```
- **March:** Record the additional provision for the period from January to March.
```plaintext
Dr. Gratuity Expense
Cr. Gratuity Provision
```

#### **2. Disallowance Considerations:**

**a. **Provision for December:**
- The gratuity provision made in December should be based on the valuation report for the period up to December 31. This amount reflects the liability for the whole year (January to December).

**b. **Adjustment for Disallowances:**
- **Disallowance Impact:** The adjustment or disallowance relates to the difference between the valuation amounts or provisions made and what was actually required or reported. For tax purposes, if the company’s provision in December was made based on an estimated amount, it may need to adjust the actual provision made in March.

**c. **Tax Treatment:**
- Ensure the provision made in December aligns with the company’s accounting and tax policies. Any adjustment or difference must be accounted for in the tax computation.
- For tax disallowances or adjustments, consult with a tax advisor to ensure compliance with relevant tax laws and regulations.

#### **Summary:**

1. **Provision for Gratuity:**
- Obtain the December valuation report and record the provision for the period up to December.
- Estimate and record additional provision for the period from January to March based on the December valuation or trend.

2. **Disallowance Handling:**
- Make adjustments in the accounts to ensure that the provision reflects the actual liability for the financial year.
- Consult with a tax advisor to handle any tax implications or disallowances effectively.

By following these steps, you ensure that the gratuity provision is accurately reported and accounted for, reflecting both the December valuation and the additional period up to March.

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