Auditing the Actuarial Valuation Reports

Chitra Jayasimha
Consulting Actuary, FIAI, FIA (UK)
Universal Actuaries & Benefit Consultants
t + 91 22 25185725| m +91 9987769877
Chitra.jayasimha@uabc.co.in
www.uabc.co.in

Auditing the Actuarial Valuation Reports Proprietary & Confidential

 Table of Contents

About the report ...................................................................................................................................... 2

Data Accuracy and Consistency ................................................................. Error! Bookmark not defined.

Plan/Scheme Details ............................................................................................................................... 5

Appropriateness of Assumptions .......................................................................................................... 6

Liability Movement ................................................................................................................................. 7

Analysis on Actuarial Gain & Loss ........................................................................................................ 7

Disclosures ............................................................................................................................................. 8

Accounting Treatment………………………………………………………………………………………….9
Our Services ............................................................................................................................................ 9

Disclaimer.............................................................................................................................................. 10

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 About the Report

Reviewing an actuarial valuation report is not a straightforward task. Actuarial Valuation is highly
technical in nature where the actuaries apply actuarial assumptions such as Discount Rate, Salary,
Attrition, Leave Availment %, Medical increases, Pension increases etc. to the data to arrive at the
present value of the liability.
The CFO/Financial Controller / Finance team of the company must take into account various
aspects while checking the actuarial reports broadly to ensure that the reports represent the data
movements and other relevant aspects accurately.

We believe that a company should look at these 7 points while checking the accuracy of the
actuarial reports:

1) Data Accuracy and Consistency

2) Plan/Scheme Details
3) Appropriateness of Assumptions
4) Liability Movement
5) Analysis of Actuarial Gain/loss
6) Disclosures
7) Accounting Treatment – Social Security Code

Data Plan/Scheme Appropriate- Liability Analysis of Disclosures Accounting

Accuracy & Details ness of Movement Actuarial Treatment
Consistency Assumptions Gain/Loss

Auditing the Actuarial Valuation Reports Proprietary & Confidential

Data Accuracy and Consistency

Basic Details

➢ The Data should be complete in all aspects. Any incomplete data will lead to an
incorrect liability.
➢ The Employee Data used for Actuarial Valuations should not contain any errors with
respect to key fields such as “Date of Birth”, “Date of Joining” “Salary Details” “Leave
balances” etc.
➢ The Employee Data should also be consistent with the previous year data.
➢ The “Date of Birth” and “Date of Joining” for the continuing employees should be the
same.

Salary Data

➢ The Basic salary and Gross Salary when compared to previous year should broadly
increase in line with the salary assumption provided.
➢ The Basic plus DA - Salary in most cases is provided for the Gratuity and this should
be a % of the total gross salary.
➢ Any large changes in Salary should be examined thoroughly as any sudden increase or
drop in salary from the previous year has a retrospective impact on the gratuity since
gratuity is calculated as
15 /26 * No of years of Past Service *Last drawn Salary (Basic plus DA)

Leave Data

➢ Closing Leave balances as on the date of leave valuation has to be provided.

➢ The company should reconcile the closing balances as below

Opening Leave balance + Added during the Year - Availed during the year
= Closing Leave Balances
➢ The Salary to be provided for the privilege leave valuations can be Basic plus DA or
gross depending on which basis is the encashment of leave balance paid to the
employees.
➢ In case of Sick leave valuations, the Salary to be provided is the CTC as sick leaves are
usually valued on an availment basis.
➢ The Leave Availment % is usually calculated on the Leaves availed from the opening
balance after exhausting the leaves added (entitled) during the year – the LIFO method
(Last in first out)

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Plan /Scheme Details

Gratuity

➢ Gratuity is usually calculated as per the Payment of Gratuity act 1972 which is
15 /26 * No of years of Past Service *Last drawn Salary (Basic plus DA) with an
Upper limit of INR 20 lakhs
➢ The Gratuity Salary is usually paid on Basic plus DA
➢ The Vesting Period for Gratuity is 5 Years (i.e. an employee has to put in a minimum
of 5 years to be eligible for the gratuity payment)
➢ The Gratuity is Paid at the time of Separation – both resignation and retirement
➢ On death. the Gratuity is paid immediately

Many Companies have different variants of Gratuity and the company must ensure
that the Actuary has captured the Gratuity plan details correctly.

Privilege Leaves and Sick Leaves

➢ If the Privilege leave and Sick leave are accumulating, then as per the Accounting
Standard, the company has to perform actuarial valuations for these leaves.
➢ Both Privilege leave and Sick Leave is provided to the employees based on the Shops
and Establishment act which is different for different states
➢ The Leave encashment can be on either on Basic pay or CTC /Gross depending on
the company policy.
➢ The “Leave Factor “ which can be 22/ 26/30 depending on the number of working
days in a month ,This factor is used in calculating the salary per day when arriving at
the leave cost .
➢ In most companies the outstanding Privilege leaves in the employees account is paid
at the time of Separation – both resignation and retirement
➢ The Sick leave usually is not en- cashable , it is valued only on an availment basis

The company should ensure that the Actuary has captured the leave plan details
correctly as the leave liability would vary greatly if captured incorrectly.
The company should also ensure that all leave details including assumptions used
specifically for leave valuations such as leave availment and Leave encashment %
should be clearly mentioned in the actuarial report
.

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 Approach to Setting Actuarial Assumptions

Broad Guidance on Setting Actuarial Assumptions

➢ Actuarial assumptions need to be unbiased so that they are not imprudent nor excessively
conservative.

➢ Actuarial assumptions need to be mutually compatible so that they can reflect the economic
relationships between factors such as inflation, rates of salary increase and discount rates.

➢ Financial assumptions shall be based on market expectations, at the end of the reporting
period, for the period over which the obligations are to be settled.

Long Term View

Consistent Year on Year

Best Estimate

Unbiased Approach

Company Experience

Industry & Peer Company Standard

Current Economic Scenario

Compliant with Regulations

Final Actuarial Assumptions

For detailed report on “Approach to Setting Employee Benefits Actuarial Assumptions” click here

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Discount Rate
➢ As per Para 83 of the IND AS 19 and Para 78 of the AS 15 R, the rate used to discount post-
employment and other long term benefit obligations (both funded and unfunded) shall be
determined by reference to market yields at the end of the reporting period on Government
bonds.
➢ The currency and term of the government bonds or corporate bonds shall be consistent with
the currency and estimated term of the post-employment benefit obligations

➢ There are many reliable sources for the Government Bond rates - Clearing Corporation of India
Ltd (CCIL), Bloomberg, FIMMDA etc.

Salary Escalation Rate

➢ The Salary assumption is very crucial while determining the cost of any salary dependent
benefit plan.

➢ Estimates of the future salary increases needs to be futuristic rather than based on past trends

➢ It would be advisable to use a staggered salary assumption for actuarial valuations, the first 2
years reflecting the proposed salary increments and beyond that a lower salary assumption as
long term view is not possible
Attrition Assumption

➢ While the past experience or trends can be used to set the Attrition assumption , the
assumption is always made for the future experience

➢ We would suggest the attrition assumption should be layered or staggered rather than using a
single assumption across all categories of the employees to capture the liability correctly. In
correct assumptions would result in either understating or overstating the liability

➢ For example we could use the following layers while setting the Attrition assumptions
- Age Based (up to 30 years, 30 to 45 years and 45 and above) – Typically used in IT/ITES
industries where the attrition is highest in the younger ages when compared to the attrition
in the older ages.
- Service Based (Up to 5 years, above 5 Years) - Typically used in Financial Services
industry to reflect the attrition pattern.
- Sales / non Sales – The sales function has high attrition rate when compared to non-sales
functions – Any company/entity with high proportion of sales force, should be using this
layer for setting attrition assumption.
- White Collar / Blue Collar - Blue collar workforce tends to have a lower attrition tendency
when compared to the white collar workforce. This approach can be adopted by the
Manufacturing sector

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Liability Movement & Actuarial Gain/loss

➢ The Liability movement can be ascertained as below -

Opening Liability

+ Current Service Cost – (increase in liability due to one year of service)

+ Interest Cost - (increase in liability due to one year roll forward)
- Benefits Paid – (Any benefits paid by the company for separating employees)
+/- Transfer in/Transfer out
+/- Acquisition /Divestiture
+/- Actuarial Gain /Loss – This is the balancing item

Closing Liability (the closing liability is calculated based on the final data provided to the
actuary)

➢ Any large jumps in the corresponding parameters when compared to the previous year have to
be examined in detail.
➢ Unless there have been any significant changes to the company’s employee strength or actual
salary or assumptions, the various parameters usually has an consistent change which is
similar to the liability increase /decrease.

Analysis on Measurement/ Actuarial Gain & Loss

Actuarial gain/loss occur due to the following reasons -

- Due to change in assumptions – Due to change in assumptions used in the current yaer
when compared to that used in the previous year such as Discount Rate , Salary ,attrition
etc
- Actual vs Expected – Experience - The actual experience vs that assumed flows into
actuarial gain or loss due to experience changes.

➢ Ensure that the Assumptions are not having large jumps or falls when compared to the previous
year. Any large changes in assumptions will lead to large actuarial gain/loss due to assumption
changes

➢ Larger the Experience Gain/loss, the farther away is your actual company experience in terms
of salary increments or attrition with that of actuarial assumptions.

➢ The company should ensure that they should set assumption as close as possible to the actual
company experience

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Disclosures

➢ The company must ensure that all details pertaining to the Plan should be included in the
actuarial report

➢ The actuarial report disclosure should typically include the following

- Membership Data

- All Assumption used for calculating the Liability and Asset

a) Discount Rate
b) Salary
c) Attrition
d) Leave availment and encashment % if any
e) Leave Factor
f) Expected Return on assets
g) Pension and Medical increases

- Plan/Scheme Details

- Actuarial Methodology and approach

- Certification and any additional points when valuing the liability

- Accounting and Reconciliation tables

a) Expense Table (P&L)
b) Other Comprehensive Income (OCI )Table
c) Liability Reconciliation Table
d) Asset Reconciliation Table
e) Funded Status
f) Balance sheet reconciliation
g) Other Comprehensive Income (OCI ) Reconciliation Table
h) Current/non-Current
i) Asset Break up

➢ In case of IND AS 19 , the actuarial report should also include the following
a) Liability Sensitivity for major assumptions
b) Maturity Cash flows
c) Risk profile of the Pan/ scheme

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Accounting Treatment

Past Service Cost

According to Para 102, 103 (a) and 104 of IND AS 19, if the company decides to maintain the
same Basic Pay % to CTC as earlier, and a redefined Gratuity salary as per the new wage code
the impact may be considered as Past Service Cost.

Financial Under AS 15 R Under IND AS Under US

Impacts 2005 19/IFRS GAAP

Past Service cost
Only the Vested past
service cost is recognized
in P&L.
Non-vested past service
cost is carried over in the
balance sheet to be
recognized over the
balance vesting period.
The past service The Past Service
cost is recognized Cost is Amortised
immediately as a over the Expected
P&L item Future Working
Life

The Vested Past Service All the Past One year of

is Recognised in the P&L Service Cost is amortised cost is
Profit and Loss immediately recognised recognised in the
Account immediately in the P&L over the
P&L Expected Future
Working Life

No Impact The Balance of the

Accumulated Amortised Cost is
Other carried forward in
Comprehensive the AOCI
Income (AOCI)

Non-Vested Past Service No Impact No Impact

Balance Sheet Cost is carried over in the
Balance Sheet

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 Other Comprehensive Income
According to Para 128 (a) of the IND AS 19, if the company increases the Basic Pay to 50% or
more of the CTC, the impact will be treated as actuarial loss and will be recognised in other
comprehensive income.

Under AS 15 R Under IND AS

Financial Impacts Under US GAAP
2005 19/IFRS

OCI is not applicable The Impact will be

in AS 15 R, however taken to Actuarial
OCI (Other this amount will be loss under
Comprehensive treated as Actuarial experience and will
Income) Loss be a part of the OCI
which will be carried
in the Books of
accounts.

The Actuarial loss is No Impact to P&L One Year of amortised

Recognised in the cost is recognised in
Profit and Loss P&L immediately the P&L over the
Account Expected Future
Working Life from the
next Year

Accumulated The AOCI will be

Other Amortised over the
Comprehensive Expected Future
Working Life. The
Income (AOCI)-
Balance of the
US GAAP Amortised Cost is
carried forward in the
AOCI

Balance Sheet No Impact No Impact No Impact

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 Our Services

Our Services

Retirement
Employee Benefit
Consulting & Benefit Insurance
Actuarial Valuation
Pension Consulting Consulting
Services
Calculator

Accounting
Trust Audit ESOPS, LTIPS,
(Indian & International Life Insurance
& Governance Study Warranties Valuations
GAAPs)

Funding Valuations Due diligence and Benefit Cost/ General Insurance

Compliance Utilization Analysis

DB to DC plan Retirement Income Generic Benefit Health Insurance

Conversions Adequacy Calculator Consulting

Contact Information

Chitra Jayasimha
Founder and Consulting Actuary, FIAI (India), FIA (UK), FIII
Universal Actuaries & Benefit Consultants
t + 91 22 25185725| m +91 9987769877
Chitra.jayasimha@uabc.co.in
www.uabc.co.in

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Disclaimer

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