1.60     Query

Apportionment of Life Insurance Premium paid for gratuity liability

between “prepaid expenses” and “current expenses”.

  The Life Insurance Corporation fixes up a particular date of valuation of a life policy issued by it.  In the case of a company, this date is different from the date on which its accounts are finalised.  Since the premium is based on the actuarial valuation of gratuity liability on the valuation date, the premium covers two financial years.  The yearly premium is charged to the Profit and Loss Account, as and when it is paid, and is not apportioned between prepaid expenses and current expenses.

  Kindly advice: (i)  whether debiting the premium to Profit and Loss account on payment basis is correct, and (ii) whether it is necessary to apportion the premium between prepaid expenses and current expenditure ; if so, then on what basis?

                                                                  Opinion                                                                March 27, 1980

   The premium on LIC policy taken for covering the gratuity liability is worked out by the actuarial valuation of increase in gratuity liability during the year; it is not based on time factor.  As the premium is not based on time factor, the premium paid, in the opinion of the Committee, need not be allocated to the expenditure for the current year and prepaid expenditure.

   Premium paid may be debited as an expense in the Profit and Loss Account for the year.

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