Implication of retrospective implementation of Ind AS on Actuarial Valuations

Implication of retrospective implementation of Ind AS on Actuarial Valuations

Ind AS 19 doesn’t allow actuarial gains / losses to be recognized in the statement of profit or loss but requires the same to be taken to Other Comprehensive Income (OCI), unlike the current standard (AS15).

Given that whilst transitioning to Ind ASs, all standards have to be applied retrospectively, the common questions we are receiving from clients / practitioners are:

1. Does the entity preparing opening Ind AS balance sheet segregate actuarial gains or losses recognized in all past periods and recognize the same in OCI?
2. Calculation of actuarial gains or losses on assets is different under Ind AS 19 from AS15. Does this mean that the entity shall have to open all past period valuations and calculate actuarial gains or losses in accordance with Ind AS 19?

The quick answer to both the above questions is - No! However, let us go through the relevant provisions of the standards to find out why and how!

The Background

Indian Accounting Standard (Ind AS) 101 on First-time Adoption of Indian Accounting Standards requires in Para 7 that:

"An entity shall use the same accounting policies in its opening Ind AS Balance Sheet and throughout all periods presented in its first Ind AS financial statements. Those accounting policies shall comply with each Ind AS effective at the end of its first Ind AS reporting period."

Further, para 10 of Indian Accounting Standard (Ind AS) 101 on requires:

“An entity shall, in its opening Ind AS Balance Sheet:

1. recognise all assets and liabilities whose recognition is required by Ind ASs;
2. not recognise items as assets or liabilities if Ind ASs do not permit such recognition;
3. reclassify items that it recognised in accordance with previous GAAP as one type of asset, liability or component of equity, but are a different type of asset, liability or component of equity in accordance with Ind ASs; and
4. apply Ind ASs in measuring all recognised assets and liabilities.”

Whilst Ind AS 101 provides certain relaxations to follow retrospective application, there is no relaxation in relation to actuarial gain / loss mentioned in Ind AS 101.

Coming to actuarial valuations, Indian Accounting Standard (Ind AS) 19 on Employee Benefits, in para 120, which reads as under, requires re-measurement costs (actuarial gains and losses) to be recognised in the OCI:

"An entity shall recognise the components of defined benefit cost, except to the extent that another Ind AS requires or permits their inclusion in the cost of an asset, as follows:

1. service cost in profit or loss;
2. net interest on the net defined benefit liability (asset) in profit or loss; and
3. remeasurements of the net defined benefit liability (asset) in other comprehensive income. "

Para 122 of Ind AS19, which reads as under, does not allow re measurements to ever be reclassified to profit or loss:

"Remeasurements of the net defined benefit liability (asset) recognized in other comprehensive income shall not be reclassified to profit or loss in a subsequent period. "