KPMG OnScreen Toolkit

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Revised AS 15, Employee Benefits
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Applicability

• Applicable for periods commencing on/after 1
  April 06
• In its entirety for Level I enterprises
• Specific relaxations for SMEs

• Existing AS 15 would be withdrawn

• Applicable to all employee benefits except
  employee share-based payments which are dealt
  with by a Guidance Note

• Can it be applied earlier?

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AS 15 Covers all employee benefits
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AS 15 - Four broad areas

• Wages, salaries, paid annual leave,
  profit-sharing and bonuses (payable in 12 months)
  non-monetary benefits for current employees
• Long-service leave, long-term disability
  benefits, profit-sharing, bonuses and deferred
  compensation (if not payable within 12 months of
  end of the period)
• Gratuity, pension, other retirement benefits,
  post-employment life insurance and
  post-employment medical care
• VRS

Short-term employee benefits
Long-term employee benefits
Post-employment benefits
Termination benefits
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AS 15 Short-term employee benefits (recognition
measurement)

• The undiscounted amount of benefit should be
  recognised
• As an expense, unless another standard requires/
  permits the inclusion of the benefits in the cost
  of an asset
• As a liability after deducting amounts already
  paid. If amount paid exceeds the undiscounted
  amount of benefits, the excess should be recorded
  as an asset

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Leave salary

• If leave salary is encashable immediately?
• If leave salary is encashable on termination/
  retirement?
• If you can take leave with full salary?
• If leave salary encashment can be accumulated
  only to a limited extent?
• If leave salary is non-accumulating?

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AS 15Short term compensated absences
(recognition measurement)
When the employees render service that increases
their entitlement to future compensated absences
Accumulating compensated absences
Non-accumulating compensated absences
When absences occur
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Accumulating compensated absences

• 100 employees are entitled to 10 days leave each
  year
• Unused leave may be carried forward to next year
  only
• Year ending 31-3-2006, 40 employees have not used
  the leave for year 05 06
• Average daily cost per employee is Rs 500

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Profit sharing / bonus plans

• How do we account for these?

Employees will be paid 3 percent of net profit of
the year if they serve throughout the year ?

• Would percentage be reduced proportionately to
  the employees leaving?

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Profit sharing/bonus plans

• Present obligation
• No realistic alternative but to make payments
• Reliable estimate

How do measure if the payment is due after 24
months?
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Post employment benefits

• How are gratuity and provident fund different
  from accounting point of view?

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Defined contribution plans

• Obligation limited to a defined contribution
• Risks not with the employer
• Actuarial risk (benefits will be less than
  expected)
• Investment risk (assets invested will be
  insufficient to meet expected benefits)
• If employer gives guarantee of specified returns
  on contributions

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Defined contribution plans

• Do we need actuarial valuation

• Do we need discounting

• Do we expense all contributions

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Defined benefits plans

• Actuarial Techniques to determine benefit earned
  currently assumptions of demographic and
  financial variables
• Discount benefit using Projected Unit Credit
  Method
• Fair value of plan assets
• Actuarial gains/losses
• Past service cost

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Defined benefit liability

• Present value of defined benefit obligation minus
  fair value of plan assets
• Charge to Profit and Loss Account

• This is the result of
• Current service cost
• Discount rate used (interest)
• Return on plan assets

• Actuarial gains or losses
• Past service cost as recognised
• Effect of changes in plan

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Actuarial valuation
What are the issues in present practice?

• Stringent requirements concerning measurement and
  disclosure of employee benefit costs

• Actuary to give valuation report in accordance
  with the requirement of the standard
• Company and its auditors required to review the
  valuation report in line with the standard
• A single actuarial valuation method (viz.
  Projected Unit Credit Method) recognised

Continued
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Actuarial valuation

• Discount rate to be determined by reference to
  market yields at the balance sheet date on
  government bonds
• Stringent tests to which actuarial assumptions
  should conform have been prescribed
• Disclosure of actuarial assumptions including
  discount rates

No such elaborate requirements in the existing
standard
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Actuarial assumptions

• Both demographic assumptions and financial
  assumptions should be unbiased
• Financial assumptions should be based on market
  expectations at the balance sheet date for the
  period for which the obligations are to be settled

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AS 15 Frequency of actuarial valuation

• Though, detailed actuarial valuation of present
  value of defined benefit obligations may be made
  at intervals not exceeding three years, the most
  recent valuation is required to be updated at
  each balance sheet date
• Determination of fair value of any plan assets at
  each balance sheet

Existing standard - No updation is required in
case actuarial valuation is not conducted annually
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Disclosures relating to defined benefit plans

• Paras 120 125 of the standard

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Insurance policy for gratuity
Is it a defined plan?

• Risk with enterprise
• Account for policy as plan asset

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Past service cost

• For non-vested - recognise as an expense on a
  straight-line basis over the average period until
  the benefits become vested
• For vested - recognise as an expense immediately
  in the statement of profit and loss

• Existing standard
• Does not make such a distinction
• Requires that all past service costs should be
  recognised as expense immediately

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Revised AS 15 VRS expenditure

• Require immediate expensing of the termination
  benefits including VRS expenditure (subject to
  transitional provisions)(subject to change)
• Where termination benefits fall due more than 12
  months after the balance sheet date, should be
  discounted using the discount rate
• Deviation from existing practices where VRS
  expenditure is deferred and amortised over 3-5
  years period on the basis of its pay-back

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Revised AS 15 Transitional provisions

• The difference (as adjusted by any related
  deferred tax) between
• The liability (on the date of first adoption) in
  respect of employee benefits other than
  termination benefits, computed in accordance with
  the standard
• The liability recognised as at that date as per
  the previous accounting policy
• should be adjusted against the opening balance
  of the revenue reserves and surplus

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Revised AS 15 Transitional provisions

• An enterprise that has adopted the policy of
  deferral of expenditure on termination benefits
  (including VRS expenditure) can continue to
  amortise the unamortised amount of such
  expenditure as on the date of first adoption of
  the standard. Additionally, where an enterprise
  incurs expenditure on termination benefits within
  three years of the standard first coming into
  effect, it can defer such expenditure and
  amortise it over the payback period

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Thank You