2020-04-07 10:22:04Finance and AccountingEnglishAS 15 deals with all kinds of employee benefits which include short-term, long-term, post employement, other long-term and termination...https://quickbooks.intuit.com/in/resources/in_qrc/uploads/2020/04/Accounting-Standard-15-AS-15-Employee-Benefits.jpghttps://quickbooks.intuit.com/in/resources/finance-and-accounting/as-15/Accounting Standard 15 (AS 15): Employee Benefits

Accounting Standard 15 (AS 15): Employee Benefits

10 min read

AS 15 deals with all kinds of employee benefits which include:

(i) Short term employee benefits such as wages

(ii) Post-Employment benefits such as gratuity

(iii) Other Long-Term Employee Benefits such as sabbatical leave

(iv) Termination benefits

AS 15 was issued by ICAI and came into effect with regards to accounting periods on or after April1 , 2006. This article talks about the various kinds of employee benefits and the underlying provisions.

Applicability of AS 15

1. Accounting Standard 15 is applicable to the following enterprises at any time during the accounting period.

  • Enterprises having their equity or debt securities listed whether in India or outside India
  • The enterprises undergoing the process of getting their equity or debt listed
  • Banks including Cooperative Banks
  • Financial Institutions
  • Enterprises undertaking Insurance business
  • All enterprises including industrial, commercial and business reporting enterprises having an annual turnover of more than Rs 50 Crores in the preceding accounting period based on the audited financial statements
  • Enterprises including industrial, commercial and business reporting enterprises having borrowings including public deposits of more than Rs 10 Crores at any time during the accounting period.
  • Holding as well as subsidiary enterprises of any of the ones mentioned above at any time during the accounting period.

2. All the enterprises that do not form part of the ones mentioned above under point A and have 50 or more persons on an average employed during the year. There are however exceptions to such enterprises which can be referred to in AS 15 (Revised 2005).

3. Enterprises that do not form part of categories mentioned in point A above and have less than 50 persons on an average employed during the year. There are however exceptions to such enterprises which can be referred to in AS 15 (Revised 2005).

Employee Benefits

As per Accounting Standard 15, an employee is defined as a person rendering service to an enterprise on a full-time, part time, permanent, casual or temporary basis. For the purpose of AS 15, employees include whole time directors and other management personnel.

Furthermore, AS 15 deals with employee benefits which include:

1. Short-Term Employee Benefits. These include wages, salaries, social security contributions (such as contribution to an insurance company made by an employer in order to pay for the medical care of its employees), paid annual leave, profit-sharing and bonuses (if such bonuses are payable within 12 months of the end of the period) and non-monetary benefits (these include cars, housing, medical care and free/subsidized goods or services) for current employees.

2. Post-Employment Benefits. These include gratuity, pensions, other retirement benefits, post employment life insurance and post employment medical care.

3. Other Long-Term Employee Benefits. These include sabbatical leave, jubilee or other long-term service benefits, long-term disability benefits. Furthermore, if such benefits are not paid wholly within 12 months after the end of the period, then, profit-sharing, bonuses and deferred compensation would be paid.

4. Termination Benefits. That is benefits given to an employee when he leaves the organization.

Short-Term Employee Benefits

As per AS 15, Short-Term employee benefits consist of:

  • Wages, salaries and social security contributions
  • Short-Term paid absences such as paid annual leave where such absences are expected to take place within 12 months after the end of the period during which the employees provide related employee service.
  • Profit-Sharing and Bonuses payable within 12 months after the end of the period during which employees provide related services.
  • Non-Monetary Benefits including medical care, housing, cars and free/subsidized goods or services for current employees.

Recognition and Measurement

Whenever an employee provides service to an enterprise during an accounting period, the enterprise must identify the un-discounted amount of short-term employee benefits that are anticipated to be paid for that service.

Accordingly, such employee benefits are recognized as:

(i) a liability after deducting any amount of employee benefit that has already been paid. Furthermore, if the amount of employee benefits paid is more than the un-discounted amount of benefits, the enterprise is required to identify such an excess as a prepaid expense. That is, as an asset. This prepayment should be identified as an asset in such a way that it results in reduction in future employee benefit payment or cash refund.

(ii) as an expense till the time any other accounting standard permits benefits to be included in the cost of the asset.

Post-Employment Benefits

As mentioned above, Post-Employment Benefits consist of:

(i) Retirement Benefits – eg. pension and gratuity

(ii) Other Benefits – e.g. post-employment life insurance and post-employment medical care

Now, such benefits are extended to the employees via arrangements known as post employment benefit plans.

Any enterprise applies accounting standard 15 to all such arrangements irrespective of the fact whether such arrangements involve establishment of a separate entity to receive contributions and pay benefits.

Furthermore, these post-employment benefit plans are classified into:

(i) Defined Contribution Plans

(ii) Defined Benefit Plans

Such a classification depends upon the economic substance of the plan as obtained from its principal terms and conditions.

(I) What Are Defined Contribution Plans?

As per Defined Contribution Plans, an enterprise’s obligation is restricted only to the amount that it agrees to contribute to such a fund. That is to say, the amount of Post-Employment Benefits received by an employee is based on:

(i) the amount of contributions made by such an enterprise as well as the employee towards this post employment benefit plan or the insurance company and

(ii) investment returns earned on such contributions

Thus, the actuarial risk, that is benefits would be less than expected and investment risk, that is, assets invested would not be sufficient to pay for the expected benefits, both fall on the employee.

Furthermore, there can be cases where the employee benefit obligation is not just restricted to the amount that such an enterprise agrees to contribute towards the fund. These include the cases when the enterprise has an obligation via:

(i) a plan benefit formula that is not linked only to the amount of contributions

(ii) guarantee of a specified returns on the contribution either indirectly via a plan or directly

(iii) informal practices that lead to an obligation

Recognition and Measurement

Whenever an employee provides service to an enterprise during an accounting period, the enterprise must identify the the contribution payable to a defined contribution plan in exchange for that service.

Such employee benefits are recognized as:

(i) a liability after deducting any amount of contribution already been paid. Furthermore, if the amount of contribution already paid is more than the contribution due for service before the date of the balance sheet, such excess contribution should be recognized as an asset. This prepayment should be identified as an asset in such a way that it results in reduction in future employee benefit payment or cash refund.

(ii) as an expense till the time any other accounting standard permits contribution to be included in the cost of the asset.

Furthermore, there can be cases where contributions made to the Defined Contribution Plan do not become due wholly within 12 months after the end of the period after which the employees provide related service.

In such cases, contributions should be discounted using Discount rate as specified in the accounting standard 15.

(II) What Are Defined Benefit Plans?

As per Defined Benefit Plans the enterprise has an obligation to extend the agreed benefits to both the current as well as the former employees. Furthermore, the actuarial risk, that is benefits would cost more than expected and investment risk, both fall on the enterprise.

Accounting Treatment for Defined Benefit Plans is complex. This is because actuarial assumptions are needed in order to measure the obligation expense. Furthermore, there are also chances of actuarial gains and losses.

In addition top this, the obligations are measured on discounted basis as such an obligation may be settled years after employees provide the related service.

Therefore, the reporting enterprise may need the services of a qualified actuary in order to measure obligations under Defined Benefit Plans.

Recognition and Measurement

Defined Benefit Plans may either be unfunded or wholly or partly funded via contributions made by the enterprise and at times made by its employees into an entity or a fund. Such a fund is legally different from the reporting enterprise from which the employees benefits are paid.

Accordingly, the payment of such funded benefits depends not only on the financial position as well as the investment performance of the fund but also on the enterprises potentiality to provide for any any shortfall of the assets of the fund.

As a result, the expense identified for Defined Benefit Plan is not mandatorily the amount of contribution that is outstanding for the given period.

Accounting for the Obligation Under a Defined Benefit Plan

The enterprise should account for not only its legal obligation as per the formal terms of the Defined Benefit Plan but also for any other obligation that emerges out of enterprises’ informal practices.

Informal practices may lead to an obligation where the enterprise has no other option but to pay for the employee benefits.

Balance Sheet

The amount to be recognized as a defined benefit liability in the balance sheet should be the net total of the following amounts:

(i) present value of the defined benefit obligation at the balance sheet date

(ii) subtract any past service cost not yet recognized

(iii) subtract the fair value at the balance sheet date of plan assets (if any) out of which the obligations are to be settled directly

Statement of Profit and Loss

The enterprise need to recognize the total of the following amounts in the P&L Statement:

(i) current service cost

(ii) interest cost

(iii) expected return on any plan assets and on any reimbursement rights

(iv) actuarial gains and losses

(v) past service cost to the extent the accounting standard requires an enterprise to recognize it

(vi) effect of any curtailments or settlements

Actuarial Assumptions

The actuarial assumptions are nothing but an enterprise’s best estimates of the variables that would determine the cost of providing post-employment benefits. These assumptions comprise of:

(i) Demographic assumptions about the future characteristics of current and former employees eligible for benefits. These include:

  • mortality, both during and after employment
  • rates of employee turnover, disability and early retirement
  • proportion of employees eligible for the benefits under the plan
  • claim rates under medical plans

(ii) financial assumptions that deal with aspects like:

  • discount rate
  • future salary and benefit levels
  • future medical costs, including, where material, the cost of administering claims and benefit payments in case of medical benefits
  • expected rate of return on plan assets

Other Long-term Employee Benefits

Other long-term benefits are nothing but the employee benefits that do not become due wholly due within 12 months subsequent to the end of the period in which the employees offer the related service.

These benefits include:

(i) long-term compensated absences such as long-service or sabbatical leave

(ii) jubilee or other long-service benefits

(iii) long-term disability benefits

(iv) profit-sharing and bonuses which are payable twelve months or more after the end of the period in which the employees offered the related service

(v) deferred compensation paid twelve months or more after the end of the period in which it is earned

Recognition and Measurement

Balance Sheet

The amount to be recognised as a defined benefit liability should be the net total of the following amounts:

(i) present value of the defined benefit obligation at the balance sheet date

(ii) subtract the fair value at the balance sheet date of plan assets (if any) out of which the obligations are to be settled directly

Statement of Profit and Loss

The enterprise need to recognize the total of the following amounts as expense in the P&L Statement for other long-term employee benefits:

(i) current service cost

(ii) interest cost

(iii) expected return on any plan assets and on any reimbursement rights

(iv) actuarial gains and losses

(v) past service cost to the extent the accounting standard requires an enterprise to recognise it

(vi) effect of any curtailments or settlements

Termination Benefits

As per AS 15, Termination Benefits refer to the employee benefits that are payable as a result of:

(i) an enterprise’s decision to put an end to an employee’s employment before the normal retirement date

(ii) employee’s decision to retire voluntarily in lieu of such benefits

AS 15 takes termination benefits different from other employee benefits. This is because the event that results in such an obligation is termination and not employee service.

Recognition and Measurement

The enterprise must identify the termination benefits as a liability and an expense if only:

(i) the enterprise has a present obligation on account of a past event

(ii) it is possible that the outflow of resources that symbolize economic benefits would be needed to settle the obligation

(iii) amount of estimate can be estimated reliably

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

Related Articles

Accounting Basics: What is Financial Accounting?

In this article, you will learn: Financial Accounting Meaning Financial Accounting Objectives…

Read more

Accounting Basics: What is Cost Accounting?

In this article you will learn: What is Cost Accounting? Cost Accounting…

Read more

AS 14: Accounting For Amalgamations

Let’s Understand TDS Online Payemnt in Detail Types of Amalgamations Methods of…

Read more