Impact of Gratuity Ceiling as at 31st March 2018

Highlights of the Gratuity Amendment Bill, 2017:

• The Payment of Gratuity (Amendment) Bill, 2017 was introduced in Lok Sabha by the Minister for Labour and Employment, Mr. Santosh Kumar Gangwar on December 18, 2017 and was passed in Lok Sabha on March 15, 2018 and now in Rajya Sabha on March 22, 2018
• The bill has revised the Ceiling from INR 10 lakhs to INR 20 lakhs in line with Central government employees

TImpact on Gratuity Liability if the ceiling is increased from INR 10 lakhs to 20 lakhs

As per the current Act, the Gratuity is calculated as follows:

Minimum of (a) or (b):
a) 15/26 * Last Drawn Salary * Duration of Service
b) INR 10,00,000

The bill has revised the ceiling of INR 10 lakhs [as mentioned in (b) above] to INR 20 lakhs
So we have shown the impact on the gratuity liabilities if the ceiling is increased to INR 20 lakhs on employees in various salary bands and service duration:

Explanation of table:

As shown in case 1, if the salary at the time of exit of an employee is INR 55000 and duration of service is 30 years then the gratuity liability will be as follows:

Current Act (Ceiling INR 10,00,000) = Min (55,000 * 30 * 15/26 ; 10,00,000) = INR 825,000
Proposed Bill (Ceiling INR 20,00,000) = Min( 55,000 * 30 * 15/26 ; 20,00,000) = INR 825,000

So there will no impact because of change in the ceiling.

Impact, Recognition & Disclosures as at 31st March, 2018

Implication

Additional Impact depending on the demographic profile of employees in the company.
Impact of Ceiling based on Company Demographics

Based on our current research, we believe that this change will not materially impact the gratuity liabilities of the organizations due to the following reasons:

• High Attrition rates experienced by organizations in many sectors
• High Salaried Employees, mostly Directors have already uncapped gratuity limits in many organizations

Recognition

This will vary depending on the accounting standard followed.The increase will be recognized as a ‘Past Service Cost’.
If Ind AS 19/ IAS 19 is followed, the entire amount may be recognized in Profit & Loss Account in the year of change.

If AS-15 followed, the benefits will be bifurcated into vested and unvested. The increase in the liability to the extent of unvested benefits will have to amortize overtime when benefits become vested.

Past Service Cost

Is the increase or decrease from the introduction of, or changes to, post-employment benefits or other long-term employee benefits. Past service cost may be either positive (where benefits are introduced or improved) or negative (where existing benefits are reduced)

Unvested Benefits

Benefits which are not yet accrued as on the reporting date and based on future service

Example:

If the increase in past service cost attributable to employees who have not completed 5 years (unvested benefits) is INR 500,000 and average 2 years are left before employees complete 5 years (their average duration is 3 years), then the past service cost will be amortized over 2 years.

Disclosures:

• Additional disclosure quantifying the impact on the books
• Unamortized amount in case of AS 15 (Revised) to the extent of unvested Benefit