Gain/Loss on Actuarial Valuation

This query is : Resolved

Aadish Jain (Querist)
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26 January 2024 Dear Sir/Madam
Please guide me on below issues :-

1. What is the Accounting Treatment of Gain/Loss on Defined Benefit Plans (Actuarial Valuation). Please provide accounting entries with nature of Account i.e. Balance Sheet item or P&L item

2. What is the treatment of OCI in calculation of MAT or Deferred Tax Assets / Deferred Tax Liability

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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07 July 2024 Certainly! Here are the explanations for both queries:

### 1. Accounting Treatment of Gain/Loss on Defined Benefit Plans (Actuarial Valuation)

Defined Benefit Plans involve accounting for pension obligations and other post-employment benefits. Actuarial valuations assess the present value of these future obligations, often resulting in gains or losses due to changes in actuarial assumptions (like discount rates, salary escalation, mortality rates, etc.).

**Accounting Entries:**

- **Gain/Loss Recognized in OCI (Other Comprehensive Income):**
- **Debit OCI Reserve (Equity)**: To recognize the gain or loss arising from actuarial valuation adjustments.
- **Credit/(Debit) Defined Benefit Liability/Asset (Balance Sheet)**: Depending on whether it's a gain or loss, adjust the liability or asset recognized in the balance sheet.

Example:
- For a **gain** in actuarial valuation:
- Debit OCI Reserve (Equity)
- Credit Defined Benefit Liability (Balance Sheet)
- For a **loss** in actuarial valuation:
- Debit Defined Benefit Liability (Balance Sheet)
- Credit OCI Reserve (Equity)

These entries ensure that gains or losses are initially recognized in OCI and subsequently reclassified to profit or loss over time (amortized) or remain in OCI, depending on the accounting policy of the entity.

### 2. Treatment of OCI in Calculation of MAT or Deferred Tax Assets / Deferred Tax Liability

**MAT (Minimum Alternate Tax):**
- OCI items generally do not affect the calculation of MAT directly because MAT is computed based on the profit before tax as per the regular income tax laws. OCI items are typically excluded from the computation of taxable income for MAT purposes.

**Deferred Tax Assets (DTA) and Deferred Tax Liabilities (DTL):**
- **Deferred Tax Assets (DTA)**: OCI items that will reverse in future periods and result in tax deductions (e.g., revaluation surplus) may create deferred tax assets. These are recognized if it is probable that future taxable profits will be available.

- **Deferred Tax Liabilities (DTL)**: OCI items that will reverse in future periods and result in taxable income (e.g., actuarial losses on pension plans) create deferred tax liabilities. These are recognized if it is probable that future taxable profits will be available.

**Accounting Treatment:**
- **Deferred Tax Assets**: Recognize DTA to the extent that it is probable that future taxable profit will be available against which the asset can be utilized.
- **Deferred Tax Liabilities**: Recognize DTL based on the future tax consequences of the OCI items that will reverse in future periods.

**Example of OCI impact on DTA/DTL:**
- If there's an actuarial loss in OCI that is expected to reverse in future periods, it creates a deferred tax liability because it will lead to a higher taxable income in the future when benefits are paid out.

In summary, OCI impacts the calculation of deferred tax assets and liabilities based on the future tax consequences of items recognized in OCI. It does not directly impact MAT, which is based on profit before tax under MAT rules.