Is Gratuity Provision required if employees /companies have not completed 5 years?
Question in hand
While identifying/analyzing the employee benefits for which measurement, recognition, and disclosures are required, we are often encircled by queries from our clients on whether gratuity provision is required even if employee/ company has not completed 5 years (vesting conditions as per Payment of Gratuity Act,1987- POGA)
Yes, the gratuity provision is required even if the employees/ company have not completed vesting conditions (example: 5 years in case of Gratuity). Let’s understand why
Provisions of Payment of Gratuity Act, 1972
As per Payment of Gratuity Act, 1972, gratuity is payable on retirement, resignation & death. There is a vesting period of 5 years in case of retirement & resignation which means benefit becomes payable when an employee completes 5 years. However, for death in service, the gratuity benefits are payable even if employee duration is less than 5 years.
Relevant abstract from accounting Standards
Para 70 of Accounting Standard 15 (revised 2005) & Para 72 of Ind AS 19 states that “Employee service gives rise to an obligation under a defined benefit plan even if the benefits are conditional on future employment (in other words they are not vested). Employee service before the vesting date gives rise to a constructive obligation because, at the end of each successive reporting period, the amount of future service that an employee will have to render before becoming entitled to the benefit is reduced.”
Thus, Gratuity Expense is recognized from the day employee joins the company because the gratuity benefits start accruing as soon as the employee starts his/her service. Gratuity provision needs to be made for each employee as on the balance sheet date, irrespective of whether the employee has completed 5 years or not. Also, there is no vesting condition on death, hence employer is liable to pay gratuity in case of death even if the employee has not completed 5 years of service.
Actuarial valuation considers the likelihood that gratuity benefit payment may not arise if the employee resigns or retires before the vesting date. Thus, the provision for gratuity is reduced to that extent. The cost of retirement benefits is accounted for in the period during which qualifying services are rendered as gratuity liability starts accruing.
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