Post-Employment Benefits are employee benefits (other than termination benefits) which are payable after the completion of employment.
Defined contribution plans are post-employment benefit plans under which an entity pays ---------fixed contributions into a separate entity (a fund) and
-------will have no legal or constructive 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. As a result, risk (Actuarial and Investment) fall on the employee.
In simple language, contribution should be recognized as a liability (accrued expense), after deducting any contribution already paid by employee, and correspondingly as an expense
------Examples- PF, DC Superannuation.
Defined benefit plans are post-employment benefit plans other than defined contribution plans. Obligation is to provide agreed benefits to the employees and as result, risk (Actuarial and Investment) falls on the enterprise.
-------Examples-Pension -Gratuity - Post retirement medical - Exempt PF.
------Recognize at Projected Unit Credit method –Applying present value concept and recognizing a future value as on the balance sheet date-Projected Unit Credit method. DBO is the Present Value of the obligation of the company towards its employees for their services rendered over a period of time.
Actuarial Assumptions cover both Financial/Demographic Assumptions. Financial assumptions inter alia include •Discount rate •Salary escalation • Medical cost Inflation. Demographic Assumptions on the other hand should take note of Mortality -Attrition/ withdrawal –Disability. (Refer item 1 of Table underneath)
Discount rate should be determined by reference to market yields on government bonds (paragraph 83, Ind. AS 19). Subsidiaries, associates, joint ventures and branches outside India could use yields on high quality corporate bonds, if the market is deep. (Refer item 2 of Table underneath)
Contribution as well benefit Plans can function as State Plans, Multi -Employer Plans or Insured Plans, as the case may be. State Plans are established by legislation and administered by central or state government or by autonomous body. Under Multi -Employer Plans, the contributions of various entities are pooled, invested and disburse from whom they were originally received –normally operated by third parties. Under Insured Benefit Scheme, Contributions are made in the form of insurance premium and the employees derive benefits in an assured manner.
Therefore, the crucial factor in recognising a post- employment scheme either as ‘contribution plan’ or ‘benefit plan’ depend on the absorption of the actuarial or investment risk related to the plan. If the risk remains with an operator, it is DCP; if the risk is shifted to the employer, it is DBP.
Accounting:
As per Ind. AS 19, accounting for changes in defined benefit related assets and liabilities are condensed and outlined as below:
Service cost: in P&L; Service cost could be Current Service Costs or Past service Costs (Refer item 3 of Table underneath) or gains or loss on non routine settlements.
Net Interest: in P&L (Refer item 5 of Table underneath).
Re-measurements: in OCI: (Refer item 1&4 of Table underneath). Administrative costs directly connected to the management of plan assets and certain taxes other than taxes payable by a plan on contributions to service costs are considered a reduction in the return of plan assets—recognised as a reduction In OCI.
Other long-term employee benefits are employee benefits (other than post-employment benefits and termination benefits) that are not due to be settled within twelve months after the end of the period in which the employees render the related service.
------Examples:- Privilege Leave - Sick Leave - These are not postemployment benefits since could be availed while in employment.Long term incentives - Loyalty bonus - Resettlement allowance.
Other long term benefits need to be actuarially valued using the Projected Unit Credit method( Para 67}
Under paragraph 158, no specific disclosure unless required by other Ind. ASs. To be recognised at Projected Unit Credit method.
Termination benefits are employee benefits payable as a result of either:
(a) an entity’s decision to terminate an employee’s employment before the normal retirement date; or
(b) an employee’s decision to accept voluntary redundancy in exchange for those benefits .
Characters:
------ Occurrence of Obligation is uncertain.
------If the obligation is not met, then it becomes liability.
------Provision as per Ind. AS 37.
-----if falls due for payment more than 12 months after Balance sheet date-benefits to be discounted using the logic of other Long-term Benefits--- PV concept—or else should be recognized using requirement of Short-term Benefits. Discount rate is to be recognised as spelt out in column 2 under Ind.AS
Disclosures:
No specific disclosers are required for Short term, other Long term and terminal benefits unless obligatory by other accounting standards. Amount recognised as expense for DCP in P&L.
But, disclosure requirements of Defined Benefit Plan (DBP) are profuse and copious. .
Accounting policy recognising Actuarial gain and loss should be in place covering inter alia description of each plan in operation explaining the characteristics of its defined benefit plans and risks associated with them (see 139); Among other things, identifying and explaining the amounts in its financial statements arising from its defined benefit plans (see paragraphs 140–144); and ) describing how its defined benefit plans may affect the amount, timing and uncertainty of the entity’s future cash flows (see paragraphs 145–147).
- Reconciliation of balance(s) of PV of obligation and FV of Plan Assets.
- Details of attributable costs---current service cost/ interest cost in P&L
- Details of funding of the plan
- Amount recognised in OCI
And further as required by the standard
Significant Differences between AS 15 and Ind.AS 19 on Employee Benefits:
| Sr. no. | Significant Differences | As.15 | Ind.As.19 |
| 1 | Actuarial Gains and Losses on Defined Benefit Plan on re measurement | Recognised immediately In P/L | Recognised In Other Comprehensive Income (OCI) and not reclassified to P/Lin a subsequent period |
| 2 | Asset returns in excess of discount rate | Recognised In P/L | Discount rate should be determined by reference to market yields on government bonds (paragraph 83, Ind. AS 19).Subsidiaries, associates, joint ventures and branches outside India could use yields on high quality corporate bonds, where there is no deep market in the bonds. Recognised in OCI |
| 3 | Past Service Cost | Vested past service costs to be recognized immediately in P&L and unvested over the period of vesting as a result of plan amendments | To be Recognized immediately in P&L |
| 4 | Effect of change of asset ceiling in OCI on re measurement | Recognised In P/L | Recognised in OCI |
| 5 | Computation of Interest cost (IC) affecting employers DBO= Rs. 1000 FVA= Rs.800 Disc. Rate= 6 % EROA*= 7.5 % Interest *Expected return on asset | Interest cost is obtained by multiplying the DBO by the discount rate both as determined by the start of the annual reporting year IC &EROA are calculated separately to obtain employers expense IC = 6% * 1000 = RS. 60 EROA= 7.5% * 800 = Rs.(60) Net expense/(income) = Nil | Net interest cost is calculated by multiplying the net defined benefit liability/asset by the discount rate both as determined by the start of the annual reporting year Net defined benefit liability/ asset =800-1000 Deficit=200 Net interest cost = 6% * 200 Net expense = Rs. 12 (here, employer expense increases ) |
Conclusion:
Ind. AS 19 is relevant for all employee benefits except for those to which Ind. AS 102, share-based payments, applies that will be dealt with in a separate article
A glance through of the above article makes it clear that recognition and measurement for short-term benefits are relatively easy, for the simple reason that it does not require actuarial assumptions and the obligations are not discounted. However, long-term benefits, particularly post-employment benefits, give rise to more complicated measurement issues as dealt with earlier.
Further, under Ind. AS, the liability for termination benefits has to be recognized based on constructive obligation as against under Indian GAAP ,that is recognized based on legal obligation.
A run through of the above article and the Table above makes it abundantly clear that there is a reduced volatility in income statement on account of actuarial differences -Actuarial gains and losses that arise due to changes in actuarial assumptions, such as with respect to the discount rate, increase in salary, employee turnover, mortality rate, etc., as there are accounted in other comprehensive income.
Under Ind. AS, termination benefits are required to be provided when the scheme is announced and the management is noticeably committed to it. Under Indian GAAP, termination benefits are required to be provided based on legal liability.
(Author can be reached at By- Sonu Mehla Mobile- 8285910007 E-Mail- sonuandfirm@gmail.com)