Where to recognise the impact caused by New Social Security code
Content Overview:
- Background
- Where can this change in liability be recognized?
- Treatment of Impact on liability
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
As we are aware that after the implementation of code on social security, there will be the impact on gratuity liability ascribe to the following key changes: Change in definition of wages
Change investing criteria for Fixed-term employees and Journalist
Now, here the question arises where to recognize the impact that this change will create on the gratuity liability?
In this article, we have highlighted the possible scenarios resulting in the change and how to recognize the change depending on the accounting standards adopted by the client.
Where to Recognize & How Much To Recognize?
The answer to this question needs an assessment of what factors are causing the change and the accounting
The impact on Gratuity Liability as a result of Changes in the New Code will form either as a part of Past Service Cost or Actuarial Gains and Losses. Let’s understand what these items are:
Past service cost arises when there is a change in the existing defined benefit policy.
Actuarial Gains and Losses arise when the actual experience of the plan differs from what was anticipated using the actuarial assumptions
Thus by the above definition,
Ind AS 19 accounting standard prescribes a different system to account for actuarial gain and loss entries when compared with the AS 15(R) standards. Whereas under AS 15(R), actuarial gains and losses are directly recognized in the statement of profit and loss, under Ind AS 19 the actuarial gains and losses are not recognized in the P&L statement but are instead recognized in a separate account known as Other Comprehensive Income (OCI).
Whether to recognition of the impact on liability either as past service cost or as actuarial gains and losses will
depend on the factor due to which the liability has been impacted and the accounting standard that has been followed. For instance, if the impact is due to a change in defined benefit policy then the impact will be recognized as past service cost in profit and loss account and if the impact is due to an increase in current components then the impact will be recognized as actuarial gains and losses either in profit and loss account or in Other comprehensive income (depending on accounting standards).
Treatment of impact on liability:
The impact caused due to change in wages definition:
As per the Social security code the term “wages” mean all remuneration consisting of specific inclusions, specific exclusions part A and B, if the salary components do not form part of specific exclusions then it will be added to inclusive components. In addition to that if the specific exclusions, part A exceeds 50% of total remuneration then the excess amount will be added to wages for calculating gratuity.
The recognition of the impact on liability will depend on what policy is adopted by the company’s management. They can adopt two possible strategies:
- Increase in current salary structure (i.e., Basic salary or dearness allowance) and nullifying other inclusive components
- Addition of new components to wages definition
Strategy 1 implies revising the salary structure such that all the inclusive components get add up to Basic and Dearness allowances.
strategy 2 implies that there is no change in current salary structure components and the definition of wages has been revised from Basic + Dearness allowances by adding up other salary components varying from company to company.
The impact caused due to adoption of strategy 1 will result in recognition of liability as actuarial gains and losses which forms a part of other comprehensive income (depending on the accounting standard) whereas adoption of strategy 2 will result in recognition of liability as past service cost in profit and loss account treated as a change in benefits policy.
Impact caused due to change investing criteria:
Change investing criteria of fixed-term employees and Journalist the impact will be recognized as past service cost in profit and loss account for accounting standards AS 15, IND AS 19, IAS 19 because the impact has arisen due to a change in benefits policy.
Here is a Snapshot Tabulated View on how to recognize the Impact
