Indian Accounting Standards (AS) can be understood as standards for the IFRS (International Financial Reporting Standards) to ensure that Indian Companies are accessible globally. These standards adopted were made mandatory for certain companies. The main objective is to ensure uniformity in financial statements and reports and to make the same user-accessible and transparent. The regulatory board is the ASB (Accounting Standards Board) formed in 1977. Prior to this, India followed IGAAP (Indian Generally Acceptable Accounting Principle).
Indian AS applicability updated by the ministry of corporate affairs (MCA) at par with the Companies Indian Accounting Standards (IND AS) Rules 2015. The application of these rules shall be started from the accounting period of 2016-2017. After that three amendments have been brought to the rules namely in 2016, 2017 and 2018. These standards need to be followed by the company and its auditors while making their audit or financial statements.
Indian MNC's and Companies are working towards meeting global best practice standards as set out in the IndAS 19. Increasingly, auditors and regulators are insisting that companies implement IndAS 19. IndAS 19 is the Accounting Standard governing employee benefits accounting requirements. Under IndAS 19, long-term employee benefits require an actuarial valuation.
IndAS 19 requires a re-measurement of long-term employee benefits and their corresponding liabilities. Such benefits include End of Service Gratuity Benefits or lump sum termination benefits, which must be valued, validated and certified by an actuary. An IndAS 19 actuarial valuation is an assessment of a company’s current and future liabilities using an agreed set of financial and demographic assumptions that are based on the companies best estimates, preferably supported by historical data.
As per Para 57 of IndAS 19 - It encourages, but does not require, an entity to involve a qualified actuary in the measurement of all material post-employment benefit obligations. For practical reasons, an entity may request a qualified actuary to carry out a detailed valuation of the obligation before the end of the reporting period. Nevertheless, the results of that valuation are updated for any material transactions and other material changes in circumstances (including changes in market prices and interest rates) up to the end of the reporting period.
Accounting for defined benefit plans is complex because actuarial assumptions are required to measure the obligation and the expense and there is a possibility of actuarial gains and losses. Moreover, the obligations are measured on a discounted basis because they may be settled many years after the employees render the related service and hence An IndAS 19 actuarial valuation requires skilled personnel, both in qualification and in specific experience and application, to meet the stringent reporting requirements. It makes sense to appoint an experienced actuary to annually perform this task.
It is important for companies to understand with certainty their end of service gratuity liabilities and to determine whether they are under or over accruing for these employee benefit obligations. It is also important to understand the impact these liabilities will have on a company’s future cash flow.
Any company or entity that chooses to meet IndAS 19 disclosure requirements will have to comply with IndAS 19 as one of the underlying requirements. Adhering to IndAS 19 may be mandated by government, or company Head Office, or by desire to commit to global financial reporting standards and to access world markets, or as a matter of best practice.
Companies/NBFCs requires Actuarial reports fully compliant with requirement of IndAS 19 with following components
- Data - Summary Employee Statistics
- Assumptions - Demographic and Financial Assumptions
- Methodology - PUC Method
- Results - we set out the figures you should use in the year-end financials, in an easy-to-understand format, directly transferable to your financial statements
- Disclosures - Disclosure Components in compliance of IAS 19 are as under :
Movements in the present value of the Defined Benefit Obligations
- Opening defined benefit obligation
- Current Service Cost
- Interest Cost
- Remeasurement (gains)/losses:
- Actuarial (gains)/losses arising from changes in demographic assumptions
- Actuarial (gains)/losses arising from changes in financial assumptions
- Actuarial (gains)/losses arising from experience adjustments
- Past service cost, including losses/(gains) on curtailments
- Liabilities extinguished on settlements
- Liabilities assumed in a business combination
- Exchange differences on foreign plans
- Benefit Paid
- Closing defined benefit obligation
Movements in the fair value of the Plan Assets
- Opening fair value of plan assets
- Interest Income
- Remeasurement gain/(loss):
- Return on plan assets (excluding amounts included in net interest expense)
- Others (describe)
- Contributions from the employer
- Benefits paid
- Closing fair value of plan assets
Service Cost
- Current Service Cost
- Past Service Cost including curtailment gains/losses
- Gains or Losses on non routine settlements
- Total
Net Interest Cost (Income)
- Interest Cost on Defined Benefit Obligation
- Interest Income on Plan Assets
- Net Interest Cost (Income)
Remeasurements of the net defined benefit liability (asset) in other comprehensive income
- Return on plan assets (excluding amounts included in net interest expense)
- Actuarial (gains)/losses arising from changes in demographic assumptions
- Actuarial (gains)/losses arising from changes in financial assumptions
- Actuarial (gains)/losses arising from experience adjustments
- Other (describe)
- Adjustments for restrictions on the defined benefit asset
- Components of defined benefit costs recognised in other comprehensive income
Amount recognised in the Statement of Profit or Loss
- Service Cost
- Net Interest Cost (Income)
- Defined Benefit Cost recognized in statement of Profit or Loss
The amount included in the Statement of Balance Sheet
- Present value of defined benefit obligation
- Fair value of plan assets
- Funded status
- Restrictions on asset recognized
- Other [describe]
- Net liability arising from defined benefit obligation
Components of Net-Defined Benefit Obligation
- Net defined benefit liability at the start of the period
- Service Cost
- Net Interest Cost (Income)
- Remeasurements
- Contribution paid to the Fund
- Benefits paid directly by the enterprise
- Net defined benefit liability at the end of the period
Maturity Profile of Defined Benefit Obligation
- Weighted Average duration of the defined benefit obligation
- Duration of defined benefit obligation
- Duration of defined benefit payments
Sensitivity Analyses
Changes in Defined benefit obligation due to x % Increase/Decease in Financial Assumptions (i.e. Change in Discount Rate and Salary Increase)
Changes in Defined benefit obligation due to x % Increase/Decease in Demographic Assumptions.(i.e. Change in Withdrawal Rate and Mortality Rate)
IND AS 19 applicability
IND AS 19 applicability in India can be understood based on the financial year divided into phases:
Phase I: For the Financial year 2016-17
The companies whose net worth was more than 500 crores had to report as per the Ind AS 19. The Holding, subsidiary, joint venture or associate of the above companies is also required to follow these standards.
Phase II: For the Financial year 2017-18
The unlisted companies whose net worth was more than 250 crores or more (but not less 500 crores. This shall be applicable to all the listed companies. The Holding, subsidiary, joint venture or associate of the above companies is also required to follow these standards. Also, for the companies whose equity or debt securities are listed on the stock markets in India or outside India.
Phase III: Effective from 1st April 2020
IND AS 19 is applicable to all banks, Insurance companies and also to the Non-banking Financial institutions. The net worth of the company should be either more or equal to Rs. 500 crores. The IND AS 19 for Banks and the insurance company will be different which shall be notified by the IRDA (Insurance Regulatory and Development Authority). Net worth shall be calculated for the past four financial years.
Phase IV
For all the NBFCs which have a net worth of equal to or more than Rs. 250 crores but less than Rs. 500 crores, the IND AS 19 shall be applicable. The net worth shall be calculated on the basis of the past three financial years i.e. 2016-17, 2017-18 and 2018-19.
For the applicability of IND AS 19, an NBFC is that which is defined under section 45-I-f of the Reserve Bank of India Act, 1934.
Important Note for Adoption of IndAS
A company can voluntarily follow the IND AS 19. However in case a company has started to follow the IND AS 19, then it must abide with it consistently. There is no opting out of following these standards whether taken up voluntarily or mandatorily.
The standards shall be applicable to all financial statements i.e. Standalone and consolidated.
As per the clarification issued by the SEBI for the issuer companies whose offer documents are filed with SEBI, demands declaration of the financial statement for 5 previous years preceding the year of filing.
The companies on which the IND AS 19 is not applicable shall abide by the rules and standards mentioned in Companies (Accounting Standards) Rules, 2006.
For the application of the standards, both calculating net-worth and listing of the companies are mandatory.
The author can also be reached at tikaramchaudhary@gratuitytrustfund.com
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