Download Quick Reference on Accounting Standard (AS) 15 Employee Benefits
The objective of this Standard is to prescribe the accounting treatment and disclosure for employee benefits in the books of employer except employee share-based payments. It does not deal with accounting and reporting by employee benefit plans.
Employee benefits are all forms of consideration given by an enterprise in exchange for service rendered by employees.
Employee benefits include:
- Short-term employee benefits
- Post-employment benefits
- Other long-term employee benefits
- Termination benefits
Short-term employee benefits
- Short-term employee benefits are employee benefits (other than termination benefits) which fall due wholly within twelve months after the end of the period in which the employees render the related service.
- Recognise the undiscounted amount of short-term employee benefits expected to be paid in exchange for the service rendered by the employee during an accounting period:
- as a liability (accrued expense), after deducting any amount already paid; and
- as an expense, unless another AS requires or permits the inclusion of the benefits in the cost of an asset.
- Post-employment benefits are employee benefits (other than termination benefits) which are payable after the completion of employment.
- Post-employment benefit plans are formal or informal arrangements under which an enterprise provides post-employment benefits for one or more employees.
Defined Contribution Plans: Defined contribution plans are post-employment benefit plans under which an enterprise pays fixed contributions into a separate entity (a fund) and will have no obligation to pay further contributions if the fund does not hold sufficient assets to pay all employee benefits relating to employee service in the current and prior periods.
Accounting for defined contribution plans
- Enterprise’s obligation is limited to the amount that it agrees to contribute to the fund.
- Actuarial risk (that benefits will be less than expected) and investment risk (that assets invested will be insufficient to meet expected benefits) fall on the employee.
- Obligations are measured on an undiscounted basis, except where they do not fall due wholly within twelve months after the end of the period in which the employees render the related service.
- Enterprise should recognise the contribution payable to a defined contribution plan in exchange for the service provided by the employee:
- as a liability (accrued expense), after deducting any contribution already paid; and
- as an expense, unless another Accounting Standard requires or permits the inclusion of the contribution in the cost of an asset (see, for example, AS 10, Property, Plant and Equipment).
- Small and Medium-sized Company and entities falling in Level II and Level III may not discount contributions that fall due more than 12 months after the balance sheet date.
Defined Benefit Plans: Defined benefit plans are post-employment benefit plans other than defined contribution plans.
Accounting for defined benefit plans
- Enterprise’s obligation is to provide the agreed benefits to current and former employees.
- Actuarial risk (that benefits will cost more than expected) and investment risk fall, in substance, on the enterprise.
- Accounting by an enterprise for defined benefit plans involves the following steps:
- using actuarial techniques to make a reliable estimate of the amount of benefit that employees have earned in return for their service in the current and prior periods.
- discounting that benefit using the Projected Unit Credit Method in order to determine the present value of the defined benefit obligation and the current service cost
- determining the fair value of any plan assets
- determining the total amount of actuarial gains and losses
- where a plan has been introduced or changed, determining the resulting past service cost; and
- where a plan has been curtailed or settled, determining the resulting gain or loss
- Actuarial gains and losses should be recognised immediately in the Statement of Profit and Loss as income or expense.
Other long-term employee benefits: Other long-term employee benefits are employee benefits (other than post-employment benefits and termination benefits) which do not fall due wholly within twelve months after the end of the period in which the employees render the related service.
The amount recognised as a liability for other long-term employee benefits should be the net total of the following amounts:
- the present value of the defined benefit obligation at the balance sheet date
- minus the fair value at the balance sheet date of plan assets (if any) out of which the obligations are to be settled directly
For other long-term employee benefits, an enterprise should recognise the net total of the following amounts as expense or (subject to paragraph 59 of AS 15) income, except to the extent that another Accounting Standard requires or permits their inclusion in the cost of an asset:
- current service cost
- interest cost
- the expected return on any plan assets and on any reimbursement right recognised as an asset
- actuarial gains and losses, which should all be recognised immediately
- past service cost, which should all be recognised immediately
- the effect of any curtailments or settlements
Small and Medium-sized Company and non-company entities falling in Level II and Level III in which average number of persons employed is 50 or more, may not follow recognition and measurement principles in respect of accounting for defined benefit plans and other long-term employee benefits. However, actuarially determined accrued liability is to be provided for. For this purpose:
- Projected Unit Credit method to be followed,
- Discount rate used should be determined by reference to market yields at the balance sheet date on government bonds & actuarial assumption to be disclosed)
In case of non-company entities falling in Level II and Level III in which average number of persons employed is less than 50, recognition and measurement principles in respect of accounting for defined benefit plans and other long-term employee benefits are not mandatory and any other rational method instead of Projected Unit Credit method may be used for calculation of accrued liability.
Termination Benefits: Termination benefits are employee benefits payable as a result of either:
- an enterprise’s decision to terminate an employee’s employment before the normal retirement date; or
- an employee’s decision to accept voluntary redundancy in exchange for those benefits (voluntary retirement).
An enterprise should recognise termination benefits as a liability and an expense when, and only when:
(a) the enterprise has a present obligation as a result of a past event;
(b) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and
(c) a reliable estimate can be made of the amount of the obligation.
Small and Medium-sized Company an d non-company entities falling in Level II and Level III may not discount con tributions that fall due more than 12 months after the balance sheet date.
Some disclosure exemptions are also given to SMCs and non-company entities falling in Level II and Level II.