The Indian Accounting Standards IND AS 19 introduced by the Ministry of Corporate Affairs for reporting financials aims to being more transparency and compatibility with accounting standards followed globally. The Ind AS19 is closely modelled on the International Accounting Standards IAS 19 standard. Thus, IND AS 19 brings conformity of accounting standards followed by Indian companies with that of International companies. This has been brought in to replace the existing AS 15(R) standards which has been followed by all Indian companies before Ind AS 19. In this article, we look at some of the key changes that Ind AS 19 brings in when compared with AS – 15(R).
TABLE OF CONTENTS
- Changes in Profit and Loss
- Net Interest on the Defined Benefit Liability
- Recognition of Termination Benefits
- Financial Assumptions such as Discount Rate
- Additional disclosures under IND AS 19:
Changes in Profit and Loss Account
Under AS 15(R), all the actuarial gains or losses flow through the profit and loss account. However under Ind AS 19, there is a key change viz. - the introduction of OCI (Other Comprehensive Income). In post-employment defined benefit plans such as gratuity valuations, earned leave and pensions, actuarial gains and losses under Ind AS 19 will now flow through OCI table without impacting the profit and loss account. The concept of OCI did not exist in AS-15(R) however is being brought into IND AS 19 reporting.
Actuarial gains and losses are split into 3 components – Gain/loss due to change in financial assumptions, gain/loss due to change in demographics assumptions and gain/loss due to change in experience. These components that are brought into the OCI depend on the actuarial assumptions used, and are called re-measurement effect.
Figure: Example of OCI under IndAS 19
As opposed to AS 15 R, where the gain/loss directly impacted your Profit and Loss, in case of IND AS 19, all actuarial gains/losses for Defined Benefit Obligations will flow through Other Comprehensive Income tables.Thus the impact of actuarial gains and losses is accounted separately, ensuring minimal volatility in the Profit and Loss Account due to change in actuarial assumptions. It is to be noted however, that when accounting for Other Long-Term Employment Benefits such as long term service awards, actuarial gains and losses continue to flow through the profit and loss statements, even in IND AS 19.
Net Interest on the Defined Benefit Liability
Ind AS 19 now requires disclosure of the net interest on the defined benefit liability. The net interest on defined benefit liability includes Interest income on plan assets (which is a factor of the discount rate along with the fair value of the plan assets) and interest cost of the defined benefits obligation. Under AS 15(R), expected return was calculated using a separate assumption, however now it is linked to the discount rate.
Recognition of Termination Benefits
Ind AS 19 provides additional guidance in recognition and measurement of termination benefits. Under AS 15 (R), the guidance specifies that termination benefits must be discounted when they fall outside 12 months from the end of the reporting period. Whereas under Ind AS 19, termination benefits are accounted based on whether they are an enhancement to post-employment benefit plans, or if they are expected to be settled within 12 months, the requirements of short term employee benefit are used and if they are expected to be settled outside 12 months, the requirements of other long term benefits is applied.
Financial Assumptions such as Discount Rate
As per IND AS 19, it is mandated to use financial assumptions such as discount rate and return on plan assets with reference to market yields at the end of reporting period on government bonds.
Additional disclosures under IND AS 19:
Ind AS 19 now requires additional disclosures for reporting employee benefit obligations, and how the benefits plan broadly affects the company's finances. These disclosures include
- Sensitivity analysis is to be performed based on changes in one assumption (Discount rate +/- 1% or Salary Escalation +/- 1% or Attrition Rate +/- 0.5%, etc) while keeping the other factors unchanged.
- IND AS 19 also requires estimation and disclosure of the expense for the next financial year and the expected future cash-flows for the next 10 years.
- IND AS 19 also mandates presentation of the expected cash flow for the next five years for each year and then for years 6-10 in a consolidated approach. We has to show the effective period of the future liability and also the annual contributions. It has to show accrued benefits, projected benefits and vested benefits.