Actuarial valuation as required under lkas 19
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Actuarial Valuation as required under LKAS 19. Date : 10 th December, 2012 Rudresh Pandit Shraddha Vora. Accounting Standards. Accounting Standards are Definitive benchmarks prescribed by a country’s Accounting Standard Board. ACCOUNTING STANDARDS: SLAS 16 V/S LKAS 19. Comparison

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Actuarial Valuation as required under LKAS 19

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Actuarial valuation as required under lkas 19

Actuarial Valuation as required under LKAS 19

Date : 10th December, 2012RudreshPanditShraddhaVora


Accounting standards

Accounting Standards

  • Accounting Standards are Definitive benchmarks prescribed by a country’s Accounting Standard Board.


Accounting standards slas 16 v s lkas 19

ACCOUNTING STANDARDS:SLAS 16 V/S LKAS 19

  • Comparison

  • Measurement

  • Disclosures & Recognition under expense in the Income Statement and Balance Sheet


Employee benefits types

Employee benefits-types

  • Short-Term Employee Benefits

  • Other Long-Term Employee Benefits

  • Post Employment Benefits

  • Termination Benefits


Accounting standard requirements

Accounting Standard-requirements

  • Requires a best estimate of likely Future Benefit Payment.

  • Future Payments are to be Discounted back.

  • Gains/ Losses: Deviations between Actual and Expected


Method of valuation

Method Of Valuation

  • Projected Unit Credit Method : Present Value of All Accrued Benefit on valuation Date on Projected Salaries at Exit (PBO)

    • Required Under LKAS 19.

    • Required Under ASC 715 (US-GAAP)

    • Required Under IAS-19 (IFRS)


Assumptions for valuation

Assumptions for Valuation

Demographic Assumptions

Mortality

Turnover/Attrition

Retirement Age…………...


How to set these assumptions

How to set these Assumptions?

Setting the Assumptions is a Group Work.

  • Salary Escalation, Attrition Rate best Known by the Employer

  • Disount Rate is market driven

  • Other related assumptions are taken on a best estimate from past trend.


Gratuity

Gratuity

As per Payment of Gratuity Act (1983)- ‘Gratuity is the payment made by the employer to an employee in appreciation of continuous service rendered by the employee.’

Gratuity is payable immediately on the “EXIT” of employment of the employee after he/she has rendered a continuous service of not less than 5 years

  • On retirement/early exit, or

  • On death, or

  • Exit due to disablement , accident or disease.


Gratuity valuation

Gratuity Valuation

  • Required Information

    • Identification of the Employee

    • Date of Birth

    • Date of Joining

    • Date of Valuation

    • Monthly Salary

    • Retirement Age

    • Benefit Description

  • To determine

    • Age

    • Past service

    • Discontinuance liability

    • Actuarial Liability


Example gratuity

Example Gratuity

  • Benefit : 15 days salary per year of service

  • Past Service = 10 Years

  • Age = 40 Years

  • Current Salary = 10,000

  • Rate of Discounting = 7%

  • Vesting Period = 5 Years

  • Retirement Age = 60 Years

  • Method of Valuation = Projected Unit Credit Method


Calculation of benefit payable and actuarial liability 1

Calculation of Benefit Payableand Actuarial Liability - 1

  • Future Salary Growth = 5%

    Benefits = 15/30*10,000*10 = 50,000

    Actuarial Value = 50,000*(1.05/1.07)^(60-40)

    = 34,283

Actuarial Value differs due to uncertainty of early withdrawal and mortality


Calculation of benefit payable and actuarial liability 2

Calculation of Benefit Payableand Actuarial Liability - 2

  • Future Salary growth = 4%

    Benefits = 15/30*10,000*10 = 50,000

    Actuarial Value = 50,000*(1.04/1.07)^(60-40)

    = 28,311

Actuarial Value differs due to uncertainty of early withdrawal and mortality


Calculation of benefit payable and actuarial liability 3

Calculation of Benefit Payableand Actuarial Liability – 3

  • Future Salary growth = 9%

    Benefits = 15/30*10,000*10 = 50,000

    Actuarial Value = 50,000*(1.09/1.07)^(60-40)

    = 72,414

Actuarial Value differs due to uncertainty of early withdrawal and mortality


Lkas 19 disclosures

LKAS 19 DISCLOSURES

  • General description of the type of plan

  • Principal actuarial assumptions

  • Accounting policy for recognizing actuarial gains & losses.

  • Reconciliation with movements during the period of the liability in the balance sheet.

  • Details of total expense (income statement)


Actuarial loss gain actual liability expected liability

Actuarial Loss/(gain)Actual liability- Expected liability

28.25

150

4

Extra year’s interest and benefit accrual

100

Benefit Payments (leavers)

124.25

Liability

Liability Loss

Year Start

Year End

Year End Expected

Year End Actual


Actuarial gains losses

Actuarial Gains/Losses

SLAS 16

Hit to Income statement


Assumptions

Assumptions


Movement in liability

Movement in Liability


Movement in asset

Movement in Asset


Other comprehensive income

Other comprehensive income


Amount recognised in balance sheet

Amount recognised in balance sheet


Expense recognised in income statement

Expense recognised in income statement


Balance sheet reconciliation

Balance sheet reconciliation


Next year income statement

Next year income statement


Cash flow projection

Cash flow projection


Experience adjustment

Experience adjustment


Income statement comparison

Income Statement comparison


Effects of changes in actuarial assumptions

Effects of Changes in Actuarial Assumptions


Volatility oci

Volatility & OCI

LKAS19

  • Full and immediate recognition outside Income statement via Other Comprehensive Income (OCI).

  • This results in Reduction Of Volatility in profits and losses of company.


How corridor approach works

How Corridor Approach works?

  • LKAS19

  • “Corridor approach” can be used to delay recognition of losses / (gains)

  • “Corridor Approach” amortizes over employees’ future service periods any unrecognized gains or losses in excess of 10% of greater of projected benefit obligation or fair value of plan assets


How corridor approach works1

Net gain/loss subject to recognition

Unrecognized net gain/loss

“Corridor”

= 10% Max(PBO, Fund Assets)

“Corridor”

= 10% Max(PBO, Fund Assets)

How Corridor Approach works?


Thank you

THANK YOU


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