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Employee Benefits

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Employee benefits refer to all forms of compensation (cash/non-cash) paid by an employer to employee apart from salary/wages for the service provided to the employer. Offering employee benefits are essential to attract and retain the talent for the company.

Ind AS-19 deals with accounting of employee benefits
The standard requires an entity to recognize:

  • Payroll liability when an employee provides service in exchange for benefits to be paid in the future; and
  • Expense when the entity makes use of the benefit derived from service provided by an employee in exchange for benefits to be provided to an employee.

Short term Employee Benefits
Short-term employee benefits are expected to be settled wholly before 12 months. When an employee has rendered service to an entity during the financial period, the entity shall recognize the undiscounted amount of benefits to be paid in return of that service-

  • As a liability after adjustment of any amount paid;
  • As an expense;
  • Profit-sharing; and
  • Bonus plans.

An entity shall consider the expected cost of profit-sharing and bonus payments when and only when:

  • Entity has a present legal or constructive obligation to make payments as a result of past events
  • A reliable estimate of the obligation shall be made.

Defined Contribution Plans
Fixed contributions are being paid into a fund but have no legal or constructive obligation to make further payments if the fund does not have sufficient assets to pay all of the employees’ entitlements to post-employment benefits. The entity’s duty is only limited to make the contribution to the fund and effectively place actuarial and investment risk.

The amount recognized in the period is the contribution to be made in return for service rendered by employees. Contributions to a plan which are not expected to be fully settled within 12 months after the end of the financial reporting period in which the employee provides the related service shall being discounted.

Defined Benefit Plans
These plans lay down an obligation on the organization to provide employee benefits to current and past employees and effectively places actuarial and investment risk on the entity. An entity shall recognize the net defined benefit liability (asset) in the Balance sheet. When an entity has a surplus in a defined benefit plan, it shall measure the net defined benefit at the lower of:

  • The surplus in the defined benefit plan; and
  • The asset ceiling

To calculate the present value of the post-employment benefit obligations and the current service cost, it is necessary to:

  • Apply actuarial valuation method;
  • Attribute benefit to service; and
  • Make actuarial assumptions
  • Deficit/Surplus = Present Value of the defined benefit obligation-Future Value of plan assets.
  • Use projected unit credit method (or accrued benefit method pro-rated on service or as benefit / years of service method) to determine PV of its Defined benefit obligations and related current / past service cost.
  • While calculating the present value of its obligations and the related current service cost and, an organization shall also attribute benefit to periods of service served under the plan’s benefit formula.
  • Where an employee provide services in later years this will be lead to a materially higher level of benefit obligation than in past years, an organization shall attribute benefit on a straight-line basis from the date when service by the employee first leads to benefits under the plan (whether or not the benefits are conditional on further service) until the date when further service provided by the employee will lead to absolutely no material amount of further benefits under the plan, other than from further salary increases.

Actuarial assumptions

  • It should be unbiased and mutually compatible.
  • It is an entity’s best estimates of the variables that will determine the ultimate cost of providing post-employment benefits.
  • Financial assumptions shall be recorded on market expectations.

Mortality assumptions
Assumptions shall be determined by reference to its best estimate of mortality of plan members both during the service and after the employment.

Discount Rate
The rate which is used to discount post-employment obligations (both funded and unfunded) shall be determined by taking into consideration the market yields at the end of the reporting period on government bonds.

Salaries, benefits and medical costs
All the consideration for future salaries and benefits reflect the terms of the plan, future salary increase, any limits on the employer’s share of cost, contributions from employees or third parties, and estimate of the future changes in state benefits that impact benefits payable. Medical cost assumptions shall incorporate future changes resulting from inflation and specific changes in medical costs recording.

Past service costs
Before the calculation of the past service cost, or a gain or loss on settlement, an entity shall re-determine the net defined benefit liability (asset) using the current fair value of the plan assets and the current actuarial assumptions (including current market interest rates and other current market prices) which shall reflect the benefits that are offered under the plan before the plan amendment or settlement. The past service cost shall be recognized as an expense at the earlier of the following date:

  • when a plan amendment or curtailment occurs and the date when an entity recognizes any termination benefits, or
  • related restructuring costs under Ind AS 37.

 Recognition of defined benefit costs
Gains or losses on the settlement of a defined benefit plan shall be recognized when the settlement occurs.

The components of defined benefit cost are recognized as follows:

Component Recognition
The Service cost are attributable to the current and past periods Profit or loss
The Net interest on the net defined benefit liability or asset, is determined using the discount rate considered at the beginning of the period Profit or loss
The net defined benefit liability or asset is Re-measured, comprising:a.       actuarial gains and losses

b.      return on plan assets

some changes in the effect of the asset ceiling

(It is not reclassified to profit or loss in a subsequent period)

Other Long Term Benefits
Service cost, net interest and re measurements are all recognized in profit or loss (unless recognized in the cost of an asset under another Ind AS).

At AJSH, we assist our clients in ensuring correct accounting of employee benefits. If you would like to know more about accounting of employee benefits, please click here.


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