For reporting of employee benefits under various. accounting standards, employee benefit obligations need to be classified into either current or non-current liabilities by reporting companies. This classification is based on the period in which the obligation arises.
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Classification of Liabilities
A liability is classified as current if the obligation to settle the liability falls on the company within a period of 12 months after the reporting date. As per Note 3 of Guidelines for Schedule III, a liability is classified as current if it is due within 12 months, or if the company does not have an unconditional right to defer the settlement of the liability for atleast 12 month after the reporting date. In accordance with these criteria, a liability is classified as “current” if a company does not have an unconditional right as on the Balance Sheet date to defer its settlement for twelve months after the reporting date. All other liabilities that fall outside the settlement period of 12 months are classified as non-current.
The above principle is applied to individual liabilities and based on this test, they are classified as current or non-current. In the Actuarial Valuation process, the actuary should determine the liability classification based on the definition of current and non-current liabilities.
Treatment of liabilities for Post Employment Benefit Obligations
For a post employment benefits obligation scheme of a company, there could be an obligation to settle the liabilities due to few employees who have resigned. This liability would have to be discharged within a period of 12 months, and thus is classified as current liability. On the other hand, for the employees who are likely to continue in service for more than 12 months, no liability would arise and thus the liability due towards them may be classified as non-current liability. For instance, for an employees gratuity scheme, the current and non-current liability bifurcation may be shown in the actuarial valuation report as per Figure 1.
Figure 1: Current and Non-current provisions for gratuity
In the case of leave encashment, the leave policy of a company may allow the employees to claim their accumulated leaves at any point within the year. In this case, this liability needs to be classified as current. However, some companies may retain the right to defer or postpone the leaves of its employees. In these cases, if the liability discharge may happen outside the 12 month period, it may be classifies as non-current.