To ensure that an employer's financial statements recognize an expenditure when an employee has provided services in exchange for employee benefits

Transcription

1 AS 15 (Revised) Employee Benefits 1

2 OBJECTIVE To ensure that an employer's financial statements recognize an expenditure when an employee has provided services in exchange for employee benefits to be paid in the future 2

3 Importance and key features Complexity in employee compensation structures. Specificity on actuarial assumptions/ method. Definition of employee under revised AS 15, includes part time, casual & temporary employees, whole-time directors and other management personnel. Coverage of all forms of employee compensation Treatment of provident fund as defined benefit in certain cases Treatment of gratuity scheme funded with LIC Transitional provisions and tax effect thereon 3

4 Key Definitions Employee benefits - all forms of consideration given by an enterprise in exchange for service rendered by employees. Short term employee benefits - are employee benefits (other than termination benefits) which fall due wholly within twelve months after the end of the period in which an employee render the related service. Defined contribution plan (DCP) - are post-employment benefit plans under which an enterprise pays fixed contributions into a separate entity (a fund) and will have no obligation to pay further contributions if the fund does not hold sufficient assets to pay all employee benefits relating to employee service in the current and prior periods. Defined benefit plan (DBP) - are post-employment benefit 4 plans other than DCPs.

5 Key Definitions Vested employee benefits are employee benefits that are not conditional on future employment. Present value of defined benefit obligation (DBO) is the present value (without deducting plan assets) of expected future payments required to settle obligations resulting from employee services in current/ prior periods. Current service cost is the increase in the present value of the DBO resulting from employee service in the current period. Interest cost is the increase during a period in the present value of a DBO which arises because the benefits 5 are one period closer tofebruary settlement. 13, 2009

6 Key definitions (contd.) Return on plan assets is interest, dividends and other revenue derived from plan assets, together with realized and unrealized gains or losses on plan assets, less costs of administering the plan and any tax payable by the plan itself itself.. Actuarial gains and losses - comprise (a) experience adjustments (the effects of differences between the previous actuarial assumptions and what has actually occurred) occurred);; and (b) the effects of changes in actuarial assumptions assumptions.. Past service cost - is the change in the present value of the DBO for employee service in prior periods, resulting in the current period from the introduction of or changes to post post--employment/ other long long-term employee benefits benefits.. Past service cost may be either positive (where benefits are introduced or improved) or negative (where existing benefits are reduced) reduced).. 6 Seminar on AS

7 Applicability Employees includes full time, part time, permanent, casual or temporary basis. Liability recognised not only for legal obligation or formal plans but also for constructive obligation. No requirement for a formal employer-employee relationship Includes benefits provided to employees, their spouses, children or other dependants Excludes ESOPs (covered under separate guidance note) 7

8 Categorization of benefits (a) Short-term employee benefits (b) Post-employment benefits (a) Other long-term employee benefits (d) Termination benefits 8

9 Short term employee benefits Falls due within 12 months from the period when service rendered - Wages & salaries, social security contributions, - Short term compensated absence - Paid leave (Absences expected within 12 months). Cost of compensated absences to be measured as additional amount enterprise expects to pay as a result of unused entitlement. An enterprise may have a practice of paying only basic wage when leave is encashed whereas an employee would be entitled to full wages and benefits when leave is availed. - Profit sharing & bonuses (payable within 12 months), - Non-monetary benefits Medical care, housing, cars and free or subsidized goods or services 9

10 Short term benefits Component Recognition & Measurement Short-term employee benefits Undiscounted amount to be recognized Accumulated compensated absence Additional amount that an enterprise expects to pay as a result of a unused entitlement Nonaccumulated compensated absence No liability or expense is required to be recognized Profit sharing and bonus plan Recognize expected cost when an enterprise has a present obligation to make such payments as a result of past events and a reliable estimate of such obligation can be made. A present obligation exists when an enterprise has no realistic alternative but to make payments. In case entitlements are subject to employees remaining in service for a specified period, obligation to be measured taking into account that some employees may leave 10

11 Post--employment benefits Post Retirement benefits like Gratuity Pension PF Other benefits like Post-employment life insurance Post-employment medical care 11

12 Accounting for Post-employment Benefit Defined Contribution Plans Defined Benefit Plans Enterprise pays fixed contribution into separate entity - No further obligation to pay. Actuarial & investment risk on the employee Basis of benefit defined but not the amount of liability-actuarial Multi-employer Plans (Trust /AMC) State Plans (PF) (benefits will cost more than expected) & investment risks on the employer Insured Benefits (Insurance companies) Recognise contribution as an expense on accrual basis (no discounting). To be evaluated actuarially 12

13 Defined contribution plan (DCP) Accounting is based on the amount to be contributed for that period Obligation is measured on undiscounted basis unless the obligation does not fall due within 12 months after the end of the period in which the employee rendered the service Disclosure An enterprise should disclose the amount recognized as an expense for DCPs 13

14 Defined benefit plans (DBP) Amount recognized to be computed as the present value of DBO at the balance sheet date minus the fair value of plan assets (if any) on the same date. A single actuarial valuation method (Projected unit credit method) recognized Use unbiased and mutually compatible actuarial assumptions about Demographic variables (employee turnover, mortality, etc) Financial variables (future increase in salaries, changes in medical costs, etc ). Assumptions should be based on market expectations at balance sheet date for the period over which the obligations are to be settled and Actuarial assumptions should neither be imprudent nor excessively conservative. 14

15 Defined benefit plans (contd.) Discount rate to be determined by reference to market yields at the balance sheet date on government bonds Salary growth rates factored in actuarial computation are long term and not necessarily based on past few years. Gratuity provision would be required even in respect of employees who have not completed 5 years. Where a plan has been introduced or changed, recognize past service cost on SLM basis over the average period until the amended benefits become vested 15

16 Defined benefit plans (contd.) To the extent that benefits have already vested, enterprise should recognize past service cost immediately Recognize gains or losses on curtailment or settlement of DBP when that occurs. Determine actuarial gains & losses and recognize in Profit and Loss account Company and its auditors required to review whether the valuation report in line with the standard Disclosures are extensive Disclosures as per Accounting Standard 15.doc 16

17 Other long term employee benefits Are employee benefits (other than post-employment 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. Long service or sabbatical leave, jubilee or other long service benefits, long term disability benefits, profit-sharing/ bonuses/ deferred compensation [payable twelve months or more] Approach is similar to that for defined benefit plans except for the immediate recognition of past service costs The result of this is that the liability is measured as: PV of the obligation less fair value of assets (if any) out of which the liability will be settled No specific disclosure requirements under AS 15 17

18 Termination Benefits Termination benefits are those payable as a result of an enterprise's decision to terminate an employee's employment before normal retirement date or an employee's decision to accept voluntary retirement in exchange for benefits An enterprise should recognize an expense if the enterprise has a present obligation as a result of a past event it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. 18

19 Termination Benefits (contd.) Termination benefit are recognized as expenses immediately Where there is uncertainty about the number of employees who will accept an offer of termination benefits, a contingent liability exists Where termination benefits fall due more than 12 months after the balance sheet date, they should be discounted using the discount rate specified 19

20 Transitional provisions Employee Benefits (other than Defined Benefit Plan and termination benefits) On first time adoption of standard, difference (adjusted by tax expense) between liability existing on the date of adopting the standard and liability that would have been recognized under pre-revised AS 15, should be adjusted against opening balance of revenue reserves and surplus Termination Benefit Immediate expensing of expenditure on termination benefits. However, where an enterprise incurs expenditure on termination benefits on or before March 31, 2009, the enterprise may choose to follow an accounting policy of deferring such expenditure over its pay-back period. However, deferred expenditure cannot be carried forward to accounting period commencing on or after April 1,

21 Accounting policy disclosure (illustrative) Provident and pension funds are defined contribution schemes and contributions are charged to profit & loss account of the year in which they are due Gratuity liability is a defined benefit plan and is provided for on the basis of actuarial valuation made at the end of each year. Short term compensated absences are provided for on the basis of estimates. Long term compensated absences are provided for based on actuarial valuation. Actuarial gain / losses are immediately recognized in the profit and loss account. Payments under VRS scheme are charged to the Profit & Loss account over a five year period. 21

22 ASB Guidance on implementation Rules of provident funds (private trusts) set up by exempted establishments generally provide that the deficiency in yields as compared to rate of interest paid by PF commissioner will be met by the employer. Accordingly, trusts set up by such employers which require interest shortfall to be met by it would be a defined benefit plan. A key distinction between DCPs and DBPs is that in the case of DBPs the actuarial and investments risk fall, in substance, on the enterprise. Where a gratuity scheme is covered under an insurance policy, payments to the insurer would not be considered as DCP if the actuarial/ investment risks are borne by the enterprise. The gratuity plan covered under such a scheme would be a DBP. 22

23 Significant differences between IGAAP and IFRS 23

24 Significant GAAP differences (contd.) 24

25 Significant GAAP differences 25

26 Significant GAAP differences (contd.) 26

27 Significant GAAP differences (contd.) 27

28 Significant GAAP differences (contd.) 28

29 Significant GAAP differences (contd.) 29

30 Significant GAAP differences (contd.) 30

31 Thank you 31