Monday, December 12, 2011

Grautity Accounting in the Books of Gratuity Trust & Company

This blog is intended to highlight the accounting treatment in the books of Employer Company and Gratuity Trust. I have divided this series in two parts. The first part is intended to help the reader to understand the accounting treatment in the books of Employer Company.
Case Study
The Employer Company has decided to create a Gratuity Trust in order to manage the Gratuity liability for their employees. The main motto of the Gratuity Trust is to manage the Funds contributed by Employer Company & to pay the Gratuity Amount to the employee at the time of retirement or separation. The payment will be made out of the funds managed by Gratuity Trust. The Employer Company will periodically contribute to the Funds of Gratuity Trust, which in turn will invest in the securities as approved at the time of creation of trust.
Above arrangement is treated as “Defined Benefit Plan” under AS-15_Accouting for Retirement Benefits issued by Institute of Chartered Accountants of India.
As per AS-15, the Employer Company is required to value the Gratuity Liability from the qualified actuary.
Looking to the above discussion & for the better understanding of the reader, we can take the following example:
In a Financial Year, Employer Company has contributed Rs 100 millions to Gratuity Trust. At the end of Financial Year, the further liability calculated by qualified Actuary is Rs 25 million. The extract from Actuary Report is as follows:
Balance Sheet Recognition           (Rs in millions)

Present Value Of Obligation
125
Fair Value Of Plan Assets
-100
Liability (assets)
0
Unrecognised Past Service Cost
0
Liability (asset) recognized in the Balance Sheet
25



Accounting Entries
The accounting entries in the books of Employer-Company will be as follows:
Date
Particular
Dr/Cr
Nature of Ledger
Amount





Payment Date
Provision for Gratuity A/c
Dr
Liability
100

Bank A/c
Cr
Asset
100





(Toward Contribution to Gratuity Trust)






31/MAR/2XXX
Gratuity Expenses
Dr
Expense
125

Provision for Gratuity A/c
Cr
Liability
125





(Liability & Expense Booking As per Actuarial Valuation)









So the Gratuity Expense recognized in the books of accounts is Rs 125 million vis-a-vis Gratuity Liability as Rs 25 million. It means that the Employer Company has to still contribute Rs 25 millions to Gratuity Trust to meet the Gratuity Liability.
In case of any query, the readers can post their comment and I will try to resolve the same at the earliest.
Please follow this blog to learn the accounting treatment in the books of Gratuity Trust



Nalin Bhandari Chartered Accountant Cell:+919930018666

2 comments:

  1. Dear sir,

    we are having a defined contribution plan for gratuity. we have contributed some xxx amount this year to fund a/c. we have obtained the acturial valuation reports as on 31st march 2013. now my doubt is how to account the above two entries...

    ReplyDelete
  2. Can you provide chart of accounts for the accounting of transactions by a Group Gratuity Fund Trust set up by a company for its employees and having fund entrusted to LIC?

    ReplyDelete