Is sick leave valuation required?

Every company gives leaves to its employees, though the nature of these leaves differs. Some company classifies leaves as – Privilege Leave, Casual Leave, and Sick Leave. Some companies have no such classification. These leaves are driven by State Regulations. States would generally mention the minimum leave requirements and accumulation rules to protect the social welfare benefits of the employees. Typically, in some companies, if the current period’s leaves are not used in full, then they are carried forward & accumulated, up to a certain limit, specified in leave policy of the company. These accumulated leaves can be used by the employee in future periods. While some companies allow the encashment of these leave days during service & at the time of termination of the service, some don’t. To understand whether the valuation of leaves is needed or not, we first need to categorize the leave days as

prescribed by the accounting standards. As per AS15 & Ind AS 19, the entitlement to compensated absences falls into the following categories:

Is Actuarial Valuation required for Non-Accumulated leaves?

In case of non-accumulated leaves, an actuarial valuation of leave is not required as there is no cost implication in the future years due to the leave entitlement in the current year. But, in case a company follows calendar year for leave policy and not the financial year, there will be a need to hold a provision on the balance sheet in respect of unused leave balances as on March, though an actuarial valuation is not required.

Is Actuarial Valuation required for Accumulated leaves?

In case the leave days are allowed to be carried forward in the next year, the company needs to get an actuarial valuation done from a qualified actuary. This is because the current year’s entitlement affects the costs incurred by the company in the future years. This is true even if the leave balances are not encashed at the time of separation. The liability pertains to the cost of availing that might occur in the future and in cases where encashment is allowed, the encashment liability needs to be valued too.

Explanation:

If the sick leave balances are allowed to be carried forward and availed in the future, the employer would have to pay the salary to the employees to the extent they would avail these leaves in the futures, hence the provision for the same would be required in the books of accounts as at the reporting date.

To summarize the contents in one view:

Our Recommendation

In a nutshell, if the sick leave balances (or any type of leave) are of accumulating nature (means they are allowed to carry forward), then these are classified as Other Long Term Benefits as per the accounting standards and these require an actuarial valuation for appropriate provisioning.