New Labour Codes and Gratuity Accounting: Actuarial Re-measurement or Past Service Cost?
Introduction
The implementation of the “New Labour Codes” in India, have compelled several organisations to revisit their salary structures, particularly due to the change in the definition and proportion of “wages”. These changes have a direct impact on employee benefit obligations such as gratuity, leave encashment, and other defined benefit plans governed by Ind AS 19, Employee Benefits. A key accounting question that arises due to the change in the definition of wages is whether the resulting increase in wages should be treated as a change in actuarial assumptions, or a plan amendment resulting in past service cost?
1. Minimum 50% of total remuneration to be treated as wages under the New Labour Codes
The new Labour Codes have mandated that minimum 50% of total remuneration should include three components, “Basic Pay”, “Dearness Allowance” and “Retaining allowance”, which are collectively referred to as ‘Wages’. If wages are lower than 50% of total remuneration, then it is presumed that wages constitute 50% of total remuneration.
2. Key terminology and definition under Ind AS 19
To understand how wages are to be accounted for under the New Labour Codes, it is important to first get familiar with the key terms and definitions prescribed under Ind AS 19.
2.1. Actuarial gain or loss under defined benefit plan
Actuarial gains and losses are changes in the present value of the defined benefit obligation resulting from:
(a) experience adjustments (the effects of differences between the previous actuarial assumptions and what has actually occurred) and
(b) the effects of changes in actuarial assumptions.
2.2. Past service cost under defined benefit plan
Past service cost is the change in the present value of the defined benefit obligation for employee service in prior periods, resulting from a plan amendment (the introduction or withdrawal of, or changes to, a defined benefit plan) or a curtailment (a significant reduction by the entity in the number of employees covered by a plan).
3. Whether increase in wages due to New Labour Code is to be treated as change in actuarial assumptions, or a plan amendment resulting in past service cost?
A change in wages can arise from two different aspects. One aspect relates to a revision in the expected rate of future salary increases compared to earlier assumptions, which constitutes a change in actuarial assumptions. The other aspect relates to a modification in the salary structure, where the manner in which salary increases are allocated among different components is altered, which constitutes a plan amendment.
The impact of these two aspects should be identified separately and accounted for according to the applicable accounting requirements for changes in actuarial assumptions and plan amendments.
Let us understand the recognition of increased wages among actuarial gain/loss and plan amendment with help of a case study.
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