Component of Expense recognised in Profit and loss account – AS 15 R versus IND AS 19

For businesses in India, accounting for employee benefits is a crucial aspect. These benefits, such as gratuity and pensions, come at a cost, impacting your company’s profitability. But how are these expenses recognized in your financial statements? Here, we explore the key differences between AS 15 R (Revised) and IND AS 19 (Indian Accounting Standard 19) in recognizing employee benefit expenses within the profit and loss (P&L) account.

AS 15 R: Straightforward Approach

AS 15 R, the previous accounting standard, followed a relatively straightforward approach for recognizing employee benefit expenses. Here’s a breakdown:

• Gratuity Valuation: The estimated liability for gratuity was calculated annually.
• Expense Recognition: The employer’s share of gratuity expense was recognized in the P&L account on a straight-line basis over the employee’s service period.
• Actuarial Valuation (Optional): Actuarial valuation for pensions was optional under AS 15 R. However, if used, actuarial gains and losses directly impacted the P&L account.

IND AS 19: Introducing Other Comprehensive Income (OCI)

IND AS 19, adopted in India to align with global accounting practices, introduced the concept of Other Comprehensive Income (OCI). This creates a separate category for certain income and expense items outside the P&L account. Here’s how it affects employee benefit expenses:

• Focus on Defined Benefit Plans: IND AS 19 primarily focuses on defined benefit plans, like pensions, where the employer pre-determines the benefits employees will receive upon retirement.
• Service Cost Recognition: The cost of providing employee benefits is recognized in the P&L account through service cost components like current service cost and past service cost.
• Actuarial Gains and Losses to OCI: Unlike AS 15 R, actuarial gains and losses arising from changes in assumptions or experience are no longer recognized in the P&L account. They now flow through the OCI statement.

Understanding the Impact

The shift from AS 15 R to IND AS 19 brings about some significant changes in how employee benefit expenses are presented:

• Smoother P&L: By excluding actuarial gains and losses from the P&L account, IND AS 19 reduces volatility in reported profits. This can be beneficial for companies with large employee bases and fluctuating actuarial results.
• Enhanced Transparency: The use of OCI provides a clearer picture of the overall cost of employee benefits. It allows stakeholders to understand the impact of actuarial changes without affecting reported profits.

Choosing the Right Approach

While IND AS 19 offers a more comprehensive and globally recognized approach, it can involve additional complexities in terms of actuarial valuations and disclosures. Businesses with smaller employee bases and simpler benefit structures may find AS 15 R’s approach sufficient.

Importance of Gratuity Valuation

Even under IND AS 19, gratuity, a common employee benefit in India, requires ongoing attention. While not explicitly addressed in the standard, a proper gratuity valuation is crucial for:

• Accurate Financial Reporting: An accurate estimate of the gratuity liability ensures your financial statements reflect your true financial position.
• Informed Decision Making: Knowing the potential gratuity cost helps businesses plan for future financial obligations.

Mithras Consultants: Your Partner in Employee Benefit Solutions

Mithras Consultants provides expert services in gratuity valuation, helping businesses:

• Comply with Accounting Standards: We ensure your gratuity calculations align with current accounting practices.
• Minimize Financial Risk: Our accurate valuations help you manage your gratuity liabilities effectively.
• Make Informed Decisions: We provide insights to support strategic planning for employee benefits.

Conclusion

Understanding the differences between AS 15 R and IND AS 19 is essential for businesses to accurately account for employee benefit expenses. By choosing the right approach and utilizing expert services for gratuity valuation, companies can ensure financial transparency and make informed decisions regarding their employee benefit programs.