What Are Compensated Absences?
In India, organizations provide various forms of compensated absences, commonly referred to as:
- Earned Leave / Annual Leave / Paid Leave
- Casual Leave
- Sick Leave
The entitlement (i.e. number of leave days per year) and rules on leave accumulation vary by state and are governed by the Shops and Establishments Acts or Factory Acts applicable in the location of the office or factory.
For a comprehensive summary of these rules, refer to this resource by Paycheck.in:
👉 Leave and Holidays in India
Accumulation and Encashment of Leave
Certain categories of leave—particularly Earned/Annual Leave and Sick Leave—can often be carried forward and used in future years. Although there is no statutory requirement to offer leave encashment, many employers:
- Provide leave encashment at the time of employee separation
- Allow annual encashment as a short-term benefit
For more insights into tax implications and treatment of leave encashment, this Mint article provides helpful information:
👉 Don’t forget to encash your unutilized leaves – Mint
Why Is Actuarial Valuation Required for Compensated Absences?
An actuarial valuation estimates the financial liability of an organization toward its employee benefit obligations. It ensures accurate representation of this liability in the financial statements, in line with accounting standards like IND AS 19 or AS 15 (revised).
While Gratuity is the most recognized post-employment benefit in India, compensated absences also qualify as a long-term employee benefit when:
- Leave balances can be carried forward to future years
- There is a monetary value associated with their utilization or encashment
Other similar long-term employee benefits include:
- Long Service Awards
- Retention Bonuses
- Employee Stock Options (under certain conditions)
Actuarial valuation is performed by an independent actuary and helps organizations comply with Indian and global accounting standards.
Why Is Valuation Required for Sick Leave?
Although Sick Leave is generally not encashable in most Indian organizations, it is often accumulative, allowing employees to carry forward unused days. Even without a direct payout, the utilization of such leave imposes a notional cost on the employer due to absenteeism.
Hence, as per accounting standards, an actuarial valuation is required to reflect the financial impact of accumulated sick leave.
What Is the Availment Assumption?
The availment assumption represents the proportion of the accumulated leave balance that employees are expected to utilize beyond their current year entitlement.
This assumption is:
- Commonly used in non-encashable leave schemes like Sick Leave
- Occasionally applied to Paid/Earned Leave schemes—especially in older organizations where historical data shows consistent usage of carried-forward leave
How Is It Derived?
The assumption is typically based on the organization’s 3–5 years of historical data, calculated as:
Availment Proportion =
(Leave availed over and above current year entitlement) Ă· (Opening accumulated leave balance)
The corresponding availment liability is generally calculated on a Cost-to-Company (CTC) basis.
Disclosure Requirements in Actuarial Valuation of Leave Benefits
Disclosure requirements for compensated absences follow the same format as other retiral benefits under:
- IND AS 19
- AS 15 (Revised)
However, as stated in Para 158 of IND AS 19, disclosures are not mandatory for other long-term employee benefits like compensated absences. Organizations may still choose to disclose them for transparency and internal reporting.