As per the provisions of Section 129 of the Companies Act 2013, Indian and Multinational Companies operating in India need to prepare the Financial Statement such as Balance Sheet & Profit/Loss Accounts at the closure of each financial year in compliance with Accounting Standards as stipulated in Section 133 of the Companies Act 2013. This is to give a true and fair view of the state of affairs of the company. Accounting and Disclosure requirements for Employee Benefits Plans are laid down in the following 2 Accounting Standards as issued by The Institute of Chartered Accountants of India (ICAI):
1. Accounting Standard 15 (Revised 2005) - AS 15 (Revised 2005)
2. Indian Accounting Standard 19 - IndAS 19
The main objectives of these Standards are to prescribe the guidelines and disclosures for Accounting for Defined Benefit Plans (i.e. Gratuity, Leave Encashment, Pension etc.). In order to comply with these standards, a company is required to recognize:
(a) a liability when an employee has provided service to the company in exchange for defined benefits to be paid in the future; and
(b) an expense when the company consumes the economic benefit arising from service provided by an employee in exchange for defined benefits.
The Para 49, Para 50 and Para 51 of AS 15 (Revised 2005) prescribe requirements of Actuarial Valuation Method for Accounting of Defined Benefits and Steps for Computation of Defined Benefit Plans.
Actuarial Valuation Reports for the following Defined Benefit Plans are needed by the Indian and Multinational Companies for compliance of IndAS 19 & AS 15 (Revised 2005):
· Gratuity Plan.
· Earned Leave Plan.
· Sick Leave Plan.
· Defined Benefit Pension Plans.
· Post -Retirement Medical Benefit Plans.
· Settlement Allowances on Retirement.
· Long Service Award Plans/Incentive Plans.
· Interest Rate Guarantee for Exempted Provident Funds.
· Any other long term employee benefit, where actuarial inputs are needed.
Actuarial reports fully compliant with the requirement of IndAS 19 & AS 15 (Revised 2005) have the following components:
· Data - Summary of employee data as received from the Company as Actuarial Input
· Assumptions - Demographic and Financial Assumptions as received from the Company as Actuarial Input.
· Methodology - PUC Method
· Results - Present Value of Obligation, Expense for the year, Experience Adjustment etc.
· Disclosures - As given Paragraph 120 of AS 15 (Revised 2005) and various Paragraphs of IndAS19
The following criterion is followed by the CA, CS & Auditors to know the applicability of Accounting Standards and disclosure requirement by the Companies:
(i) SME Companies - SME requires to give disclosures as per Clause L of Para 120 of AS 15 (Revised 2005)
(ii) Non SME Companies – Non SME requires to give disclosures as per Para 120 of AS 15 (Revised 2005)
(iii) Listed Companies & their subsidiaries with Net-worth more 250 cr. - In this case, companies and their subsidiaries have to give disclosure in compliance with IndAS 19.
(iv) NBFC (Non-Banking Financial Company) with Net-worth more 250 cr. - In this case, NBFC has to give disclosure in compliance with IndAS 19 with comparative numbers of previous 2 years.
Why should the non-compliance of AS 15 (Revised 2005) & IndAS19 be observed by the CA, CS & Auditors of the Indian and Multinational Companies?
MCA vide its notification dated 13th November 2018 notified National Financial Reporting Authority (NFRA) Rules 2018. The main functions of the NFRA Authority are:
1. Monitoring and enforcing the compliance with accounting standards and auditing standards,
2. Overseeing the quality of Audit service and suggesting measures for improvement,
3. Power to investigate
4. Disciplinary proceedings, Manner of enforcement of orders passed in disciplinary proceedings, Punishment in case of non-compliance etc.
In view of the above provisions, it becomes mandatory for Finance Professionals (i.e. CA, CS, CMA, Finance Professionals & Directors) involved in the finalization of Financial Statements to check the proper compliance and provisions of these Accounting Standards.
For any clarification, you may contact me at 9211637063 or email me your queries at tikaramchaudhary@gmail.com.
From India, New Delhi
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11. Accounting Standard 15 (Revised 2005) - AS 15 (Revised 2005)
2. Indian Accounting Standard 19 - IndAS 19
The main objectives of these Standards are to prescribe the guidelines and disclosures for Accounting for Defined Benefit Plans (i.e. Gratuity, Leave Encashment, Pension etc.). In order to comply with these standards, a company is required to recognize:
(a) a liability when an employee has provided service to the company in exchange for defined benefits to be paid in the future; and
(b) an expense when the company consumes the economic benefit arising from service provided by an employee in exchange for defined benefits.
The Para 49, Para 50 and Para 51 of AS 15 (Revised 2005) prescribe requirements of Actuarial Valuation Method for Accounting of Defined Benefits and Steps for Computation of Defined Benefit Plans.
Actuarial Valuation Reports for the following Defined Benefit Plans are needed by the Indian and Multinational Companies for compliance of IndAS 19 & AS 15 (Revised 2005):
· Gratuity Plan.
· Earned Leave Plan.
· Sick Leave Plan.
· Defined Benefit Pension Plans.
· Post -Retirement Medical Benefit Plans.
· Settlement Allowances on Retirement.
· Long Service Award Plans/Incentive Plans.
· Interest Rate Guarantee for Exempted Provident Funds.
· Any other long term employee benefit, where actuarial inputs are needed.
Actuarial reports fully compliant with the requirement of IndAS 19 & AS 15 (Revised 2005) have the following components:
· Data - Summary of employee data as received from the Company as Actuarial Input
· Assumptions - Demographic and Financial Assumptions as received from the Company as Actuarial Input.
· Methodology - PUC Method
· Results - Present Value of Obligation, Expense for the year, Experience Adjustment etc.
· Disclosures - As given Paragraph 120 of AS 15 (Revised 2005) and various Paragraphs of IndAS19
The following criterion is followed by the CA, CS & Auditors to know the applicability of Accounting Standards and disclosure requirement by the Companies:
(i) SME Companies - SME requires to give disclosures as per Clause L of Para 120 of AS 15 (Revised 2005)
(ii) Non SME Companies – Non SME requires to give disclosures as per Para 120 of AS 15 (Revised 2005)
(iii) Listed Companies & their subsidiaries with Net-worth more 250 cr. - In this case, companies and their subsidiaries have to give disclosure in compliance with IndAS 19.
(iv) NBFC (Non-Banking Financial Company) with Net-worth more 250 cr. - In this case, NBFC has to give disclosure in compliance with IndAS 19 with comparative numbers of previous 2 years.
Why should the non-compliance of AS 15 (Revised 2005) & IndAS19 be observed by the CA, CS & Auditors of the Indian and Multinational Companies?
MCA vide its notification dated 13th November 2018 notified National Financial Reporting Authority (NFRA) Rules 2018. The main functions of the NFRA Authority are:
1. Monitoring and enforcing the compliance with accounting standards and auditing standards,
2. Overseeing the quality of Audit service and suggesting measures for improvement,
3. Power to investigate
4. Disciplinary proceedings, Manner of enforcement of orders passed in disciplinary proceedings, Punishment in case of non-compliance etc.
In view of the above provisions, it becomes mandatory for Finance Professionals (i.e. CA, CS, CMA, Finance Professionals & Directors) involved in the finalization of Financial Statements to check the proper compliance and provisions of these Accounting Standards.
For any clarification, you may contact me at 9211637063 or email me your queries at tikaramchaudhary@gmail.com.
From India, New Delhi
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ACCOUNTING STANDARDs FOR GRATUITY ACCOUNTING ON ACTUARIAL BASIS.docx