Indian Accounting Standard (AS - 15)

Transcription

1 21 st April, Indian Accounting Standard (AS - 15) EMPLOYEE BENEFITS Employee benefits are all forms of consideration given by an entity in exchange for service rendered by employees or for the termination of employment - Akshay Pandit.

2 SYNOPSIS OBJECTIVE The objective of this Standard is to prescribe the accounting and disclosure for employee benefits The Standard requires an entity to recognize: a liability in respect of benefits to be paid in the future; and an expense arising in respect of above for the service rendered during the year APPLICABILITY Applicable to Employee Benefits provided under DB plans or agreements and those arising by informal practices resulting in constructive obligation This Standard shall be applied by an employer in accounting for all employee benefits except those to which Ind AS 102 Share-based Payment applies

3 ACCOUNTING STANDARD 15 Issued by Institute of Chartered Accountants of India Talks about the Recognition and Measurement principles. It is Applicable in Entirety to all entities mentioned Para (a) of the standard except Some relief is given to the enterprises As per Para ( b ) & ( c ) of the standard. All the employee Benefits are grouped into four major types; SHORT TERM EMPLOYEE BENEFITS employee benefits (other than termination benefits) which fall due wholly within twelve months after the end of the period in which the employees render the related service. POST EMPLOYMENT BENEFITS are employee benefits (other than termination benefits) which are payable after the completion of employment. DB Scheme DC Scheme ( Where interest Guarantee is given or implied)

4 ACCOUNTING STANDARD 15 OTHER LONG TERM EMPLOYEE BENEFITS (other than post-employment benefits and termination benefits) which do not fall due wholly within twelve months after the end of the period in which the employees render the related service. eg. Exempt PF, (Though classified as DB) because withdrawal of the fund is allowed while in service. TERMINATION BENEFITS (eg. VRS or Retrenchment Compensation )

5 WHY DO YOU NEED AN ACTUARY? MANDATORY ACTUARIAL METHOD: PUCM As per Para 51(a) and 65 Determining the deficit or surplus involves using the actuarial technique, the projected unit credit method, to make a reliable estimate of the cost of benefits and the assumptions for the same PROJECTED UNIT CREDIT METHOD (PUCM) is the value of liability of Past Service on projected earnings

6 ACTUARIAL ASSUMPTIONS Actuarial assumptions are an entity s best estimates of the variables that will determine the ultimate cost of providing post-employment benefits I. DEMOGRAPHIC ASSUMPTIONS: Mortality Rate Retirement Attrition (Withdrawal) Rate

7 II. FINANCIAL ASSUMPTIONS : Financial assumptions shall be based on market expectations, at the end of the reporting period Discount Rate The rate shall be determined by reference to market yields as at reporting date on government bonds. The currency and term of the government bonds shall be consistent with the currency and estimated term of the post employment benefit obligations. Expected Return on Plan Assets Salary Escalation Rate

8 ACTUARIAL GAINS AND LOSSES Actuarial gains and losses are changes in the present value of the defined benefit obligation resulting from: experience adjustments (the effects of differences between the previous actuarial assumptions and what has actually occurred); and the effects of changes in actuarial assumptions To be recognized immediately (in OTHER COMPREHENSIVE INCOME when IND IAS 19 becomes effective) in the year of incurrence.

9 WHAT IS GRATUITY? Gratuity is a lump sum payment made to the employees based on the duration of their services rendered to an organization. Minimum 5 years of continuous service Payable on cessation of employment Basis for the calculation is the last drawn salary and tenure Employees are the ones hired on company payrolls

10 PAYMENT OF GRATUITY ACT The Payment of Gratuity Act 1972, Amendment (2010), says that benefits should be 15 days salary per year of service with a maximum of Rs.1,000,000 Daily salary = (Monthly salary / 26) Gratuity Amount=Daily Salary*15*No. of years The employers can always pay better benefits than those provided under the Act Mandatory for all employers employing more than 9 employees Act specifies minimum benefits.

11 GRATUITY VALUATION Required Information To determine Identification of the Employee Date of Birth Date of Joining Date of Valuation Monthly Salary Retirement Age Benefit Description Age Past service Discontinuance liability Projected Benefit Obligation(PBO) (Actuarial Liability)

12 VALUATION EXAMPLE Benefit : As per Gratuity Act(15 days salary per year of service) Past Service = 10 Years Age = 40 Years Current Salary = 10,000 Rate of Discounting = 7% Salary Growth Rate = 5% Vesting Period = 5 Years Retirement Age = 60 Years Method of Valuation = Projected Unit Credit Method CALCULATION: Discontinuance liability = 15/26*10,000*10 = 57,692 Actuarial liability** = 57,692*(1.05/1.07)^(60-40) = 39,557 **Actuarial Value differs due to uncertainty of early withdrawal and mortality, factors of which are not shown above

13 CHANGES IN ACTUARIAL ASSUMPTIONS ASSUMPTION INCREASE DECREASE PBO would decrease and PBO would increase and DISCOUNT RATE leads to actuarial gain leads to actuarial loss SALARY INCREMENT PBO would increase and leads to actuarial loss PBO would decrease and will lead to actuarial gain ATTRITION RATE Vesting Period = 5 years of Service MORTALITY RATE For PS<5,Liab would decrease and leads to actuarial gain For PS>=5,Liab would increase and leads to actuarial loss PBO would increase and leads to actuarial loss For PS<5,Liab would increase and leads to actuarial loss For PS>=5,Liab would decrease and will lead to actuarial gain PBO would decrease and will lead to actuarial gain The effect of each decrement rate shown above is independent of the other

14 Effect of Discounting ROI-SE/ PS , , , , ,147 90,573 86,261 82, ,529 82,035 74,409 67, ,135 74,301 64,186 55, ,954 67,297 55,368 45, ,977 60,953 47,761 37, ,192 55,207 41,199 30,832

15 REQUIREMENTS SHORT TERM EMPLYEE BENEFITS: No actuarial valuation is required and hence there would no possibility of any actuarial loss or (gain) Obligation is measured on undiscounted basis POST EMPLOYMENT BENEFIT PLAN: Actuarial valuation will be required for Defined Benefit plans based on actuarial assumptions Actuarial Gains/Losses would be recognized in the year of Incurrence. OTHER LONG-TERM EMPLOYEE BENEFIT PLAN: Recognition and Measurement would be same as DB Plan as above OTHER LONG-TERM EMPLOYEE BENEFITS: Requires a simplified method of accounting, (PUCM not mandatory) Measurements to be recognised in the PROFIT AND LOSS ACCOUNT TERMINATION BENEFITS: Recognition and Measurement depends on which of the above types the benefit falls into

16 DISCLOSURE REQUIREMENT An entity shall disclose information that: Explains the characteristics of its DB Plans and risks associated Identifies and explains the amounts in its financial statements arising from DB Plans Describes how its DB Plans may affect the amount, timing and uncertainty of the entity s future cash flows (Para ) i.e. SENSITIVTY ANALYSIS when IND IAS 19 comes in to effect TYPES OF BENEFITS DISCLOSURE NEEDED REFERENCE Short Term Employee Benefits Not Mandatory Para. 23 of Rev. AS15 Post Employment Benefits MANDATORY Para. 119 of Rev. AS15 Other Long Term Employee Benefits Not Mandatory Para. 132 of Rev. AS15 Termination Benefits Not Mandatory Other standard may require.

17 DISCLOSURE CONTENTS An enterprise should disclose the following information about defined benefit plans Profit & Loss Account* Current Service Cost Interest Cost Expected Return on Plan asset Past Service Cost Recognition of Transition Liability Curtailment or Settlement Actuarial (gains) or Losses Balance Sheet Reconciliation Opening Net Liability Expense from P&L Net Liability Transfer in Net Liability Transfer out Employer Contribution Closing Net Liability *P&L Check : (Closing PBO Opening PBO)+ Benefit Payments Earnings on Investments

18 DISCLOSURE AS 15_GR_ABC_ xls

19 Note on Revised Schedule VI Status Current Liability Non-Current Liability Funded Scheme Un-Funded Scheme Net Liability or Cap as per Income tax act on Contribution* Expected Payouts for Next year on Account of Death Resignation Normal Retirement PBO less Current Liability or Zero whichever is more PBO less Current Liability *One month salary in case of Gratuity or 27% of Annual salary in case of Pensions

20 Note on Revised Schedule VI Bifurcation of PBO (Actuarial Liability) into Current & Non-Current Liability For a Fully Funded scheme, the liability recognized in the balance sheet is the difference between the PBO (Actuarial Liability) and Asset. It is supposed to be paid to the trust in the next year. As the amount recognized in the balance sheet is the Net Liability, the Current Liability will be the Net Liability or one month salary in case of Gratuity or 27% of annual salary in case of Pensions (as per the approved trust norms contribution to the trust shall not exceed the ceilings) whichever less. The payment to the employees is made by the trust, the company does not carry any liability for the same in its books. Hence, the payment in the next year by the trust cannot be classified as Current Liability.

21 Note on Revised Schedule VI Cont.. As regards Leave liability in particular, is concerned there is a view taken that if employee can encash all the balance in the next year then the gross leave liability is to be considered as current. We feel that we need also to consider the guidance note for AS 15 which state that one needs to consider will and not can for arriving at the encashment. So we feel that payment on account of utilization for the next year should be considered as current. This view is the view of our firm and may not be accepted by others. From the year ended we will be giving the bifurcation of liabilities into current and non-current, since we have modified our model as per the requirements in Revised Schedule VI.

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23 Akshay Pandit M/s. K.A.Pandit Tel : akshay@ka-pandit.com Website: