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Actuarial calculation of Gratuity liability

Dhaval (Job) (794 Points)

28 July 2020

Hi
Can anyone help me out how gratuity liability as per actuarial valuation is carried out.
I don't want theory, any video or something practical solution would be great help.
Thanks

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2 Replies

yasaswi gomes (My grammar is 💯 good I) (7290 Points)
Replied 30 July 2020

There are no special calculations for actuarial valuations available online. The gratuity formula is known to you probably and Discounting the future obligation into present value by considering financial and demographic risk factors is actuarial valuation. Check IndAS 19.5 concepts here where gratuity https://mca.gov.in/Ministry/pdf/INDAS19.pdf

this valuation method is applicable in assessing defined plan obligations I believe. But as far as gratuity is concerned, I suspect there is no need for actuarial valuation as the formula is straightforward which does not include any benefit plans but require financial assessment.

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yasaswi gomes (My grammar is 💯 good I) (7290 Points)
Replied 30 July 2020

However, at an individual level, to calculate gratuity that valuation might not be required. But for reporting purposes while assessing gratuity for the whole employees, it is required.

For example, formula= last drawn basic pay*no of year’s of service * 15/26 (for twenty years service). Not all the employees have the same service nor they receive the gratuity in the same year. So, out of ten employees, five will receive the gratuity, then actuarial method of assessing the demographic risk factors should be like what is the mortality, disability and attrition rates will be taken into consideration. If only two out of the five will pass this criteria, then, measure and recognise gratuity for only two employees. Once you have established that its for 2 employees only that you have an obligation to pay 20,000₹, then discount it every year to present it in the financial statements. You will also use medical costs and their pay escalations into consideration while calculating the exact amounts. https://cleartax.in/s/ind-as-19#PEB5