When and How to report the impact of Gratuity liability – Code of Social Security.

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Content Overview:

  • Brief Overview of the topic
  • Reporting of impact
  • Conclusion

Who should Read:

  • Company HR, Finance Personnel dealing with Retirement Benefits & Compensations
  • Statutory Auditors
  • Internal Auditors
  • Labour Law Consultants
  • General Users of Financial Statements

Background

Implementation of social security code is certainly going to impact the Gratuity liability owing to key changes in
the definition of wages and Vesting Criteria for Select Employee Categories. Based on the information available in the public domain the expected date for implementation of code on social security could be very soon. https://www.thehindu.com/news/national/labour-codes-could-be-implemented-before-april-1/article33560366.ece

Some of the key questions we come across as a part of our Actuarial work are:
1. “When should an Entity recognize the impact?”
2. “Should the impact be recognized from the date of implementation or from the date of the notification itself or even when the date is not notified?”

Reporting of impact

Let us first find the answer to the question, which date shall be considered for reporting the impact of code on social security?
We know that Gratuity liability is the Present Value of the expected future gratuity payouts as at the valuation date. So, if the government notifies the implementation date for Code on Social Security then the notification date itself should be taken into account rather than the date of implementation for reporting the impact on the liability owing to the New Code.

We foresee two scenarios under which an organization will have to report the impact on Gratuity Liability on Implementation of the New Code in the current year, i.e. Financial Year 2020-2021

Scenario 1: If the notification is before 31-March-2020
Scenario 2: If notification is after 31-March-2021 but before finalization of accounts
*As per AS-4 and Ind AS-10, any events, occurring between the valuation date and the date on which the financial statement is approved, which has material impact needs to be considered while calculating liability.

Here is a Tabulated View of the Reporting requirements under different scenarios

Our Recommendation:

We advise the clients to get the Impact assessment done as on 31-March-2021 or before this period for gratuity
valuation so that the management will be aware in advance what will the impact on Implementation of Code on Social Security.

Even if there is no notification passed before finalization of Company Books for FY 2020-21, the entity will be able to plan mitigation strategies to optimize the impact and disclose the impact as a contingent liability which can serve as a part of Good Corporate Governance practice.