[Submitted by Mr. M. L. Sodhi, (Consulting Actuary),
Fellow - Institute of Actuaries of India,
New Delhi]

February 11, 2017

  1. Gratuity Benefit is payable by Schools to its employees. Furthermore, with amendment of ‘Payment of Gratuity Act’ in 2009, Gratuity is payable to teachers also. The amended act can be accessed from the gazette vide Notification SO1080 by Ministry of Labour and Employment .
  2. How Schools should do their accounting is explained by The Institute of Chartered Accountants of India in a guidance note GN(A) 21 (Issued 2005) Guidance Note on Accounting by Schools, here in after referred to as GN (A) 21.
  3. In para 4 of the GN (A) 21 it is stated that “This Guidance Note is applicable to all non-governmental schools whether Government aided or not, whether established by a trust or a society or by any other form of organization.
  4. In para 60 & a footnote thereto under section headed “Recognition Criteria for Items of Expenses” of the GN(A)21 it is recommended that as far as Accounting for Retirement Benefits in the Financial Statements of Employers is concerned , principles laid down in “Accounting Standard (AS) 15 (Revised 2005) – Employee Benefits” should be followed.
  5. Gratuity being an important retirement benefit to employees in the Indian context, is relevant for Schools (with reference to para 1 above). Since an employee sacrifices prime time of his life for the development, prosperity and betterment of his employer, employer pays his employee gratuity as a graciousness or gift to him, when he no longer serves him.
  6. Without going into details of the AS – 15 (Revised 2005), we have to say that accounting for Gratuity Benefit is to be made in accordance with this Standard. Brief details about Gratuity benefit and how accounting for the same in compliance of AS 15 (Revised 2005) is to be done are given in para 7 & in subsequent paras herein below.
  7. Gratuity Benefit falls in the category of “Defined Benefits” & amount of Gratuity payable to an employee on his exit from service, according to “ Payment of Gratuity Act 1972”, in force at present, is :-
    (Salary of the employee at the time of exit) x (15/26) x (Number of Years of Service at the time of exit)
           This is subject to a ceiling limit of `10,00,000/-
    Gratuity is payable to an employee on exit from service after he has rendered continuous service for not less than five years:
    1. On his superannuation
    2. On his resignation
    3. On his death or disablement due to employment injury or disease.
               In case of (c) vesting condition of 5 years does not apply.
    Since this benefit depends upon last drawn monthly salary and is linked to length of service, normally it goes on increasing from the time when the employee joins service and the time of his exit from service due to annual increase in salary and increasing service period.
  8. Figures required to be shown in the Financial Statements i.e, Balance Sheet and Income & Expenditure Account for compliance of AS 15 (Revised 2005) are:-
    1. Value of Obligation both at the beginning & close of the financial period.
    2. Interest Cost
    3. Current Service Cost
    4. Actuarial Gain/Loss
    5. Actuarial Gain/Loss due to experience Adjustment
    6. Employer’s Expense
  9. Determination of the above figures involves a complex exercise. Most Scientific way to determine these figures falls in the discipline of Actuarial Science & it is advisable to seek the services of an Actuary for this purpose.
  10. Information/ Data to determine the figures for items mentioned in para 8 above are broadly as follows:-
    1. Data of employees, both at the beginning & close of the accounting period, in excel version, with particulars:-
      1. Serial number
      2. Name
      3. Date of birth (mm/dd/yyyy)
      4. Date of joining Service (mm/dd/yyyy)
      5. Qualifying Salary for the purpose of Gratuity
      6. Retirement Age
    2. Assumptions with respect to the following rates:-
      1. Salary Escalation rate which includes inflation, merit and promotional increase.
      2. Attrition rate
      3. Discount rate (As per para 78 of AS 15 (Revised 2005))
      4. Mortality and disablement rate. (Normally it is Indian Assured Lives Mortality–2006-08) ult.