Accounting Implications under Ind AS - With Practical Numerical Illustrations
The consolidation of 29 labour laws into four New Labour Codes is one of the most consequential regulatory reforms for Indian corporates in recent years. While the immediate focus has been on HR policy redesign and payroll restructuring, the real impact lies quietly in the financial statements.
From an Ind AS perspective, the New Labour Codes fundamentally alter the measurement of employee benefit obligations, triggering significant one-time hits to profit, net worth, and deferred taxes.
This article analyses the accounting implications under Ind AS, supported by simple numerical illustrations to highlight the real financial impact.
1. Redefinition of "Wages": The Primary Accounting Trigger
Under the Code on Wages, 2019, wages must constitute at least 50% of total remuneration, comprising:
- Basic Pay
- Dearness Allowance
- Retaining Allowance
If these components fall below 50%, they are deemed to be 50% for statutory calculations.
Numerical Illustration - Impact on Gratuity
Pre-Labour Code Salary Structure
Particulars
Monthly Amount (Rs )
Basic Pay
30,000
HRA & Other Allowances
70,000
Total CTC
1,00,000
Gratuity earlier computed on Rs 30,000.
Post-Labour Code Requirement
Minimum wage base = 50% of Rs 1,00,000 = Rs 50,000
Even without salary restructuring, gratuity must be computed on Rs 50,000.
Gratuity Formula (Last drawn wages × 15 / 26) × Years of service
Scenario
Wages (Rs )
Service (Years)
Gratuity (Rs )
Earlier
30,000
10
1,73,077
New Labour Code
50,000
10
2,88,462
Increase
-
-
1,15,385
This incremental obligation relates to past service and is treated as a plan amendment.
2. Fixed-Term Employees: Expansion of Gratuity Coverage
Earlier, gratuity was payable only after five years of continuous service. Under the New Labour Codes:
- Fixed-term employees become eligible after one year
Illustration
- Fixed-term employee wages: Rs 40,000 per month
- Service period: 2 years
Gratuity liability:
(40,000 × 15 / 26) × 2 = Rs 46,154 per employee
If an organisation has 200 fixed-term employees:Additional gratuity liability = Rs 92.31 lakhs
Entire amount recognised immediately under Ind AS 19.
3. Accounting Treatment under Ind AS 19: Past Service Cost
The increase in gratuity or leave obligation arising from:
- Wage redefinition, or
- Eligibility expansion
qualifies as a plan amendment.
Key Requirement under Ind AS 19
Past service cost must be recognised immediately in the Statement of Profit & Loss
4. One-Time P&L Impact: What It Looks Like in Numbers
Assume:
- Increase in gratuity obligation: Rs 5.0 crore
- Increase in leave encashment obligation: Rs 1.5 crore
Ind AS Impact in the Year of Applicability
Particulars
Amount (Rs Cr)
Past service cost - Gratuity
5.00
Past service cost - Leave
1.50
Total P&L Impact
6.50
Entire expense recognised immediately.
5. Interim Financial Reporting: No Deferral Allowed
Though the Labour Codes are effective from 21 November 2025, entities cannot defer the impact.
Under Ind AS 34:
- The increased liability must be recognised in the first interim period after enactment
- For listed companies, this typically means Q3 results (December 2025)
6. Events After Reporting Period: Disclosure Obligation
For periods ending before 21 November 2025, the enactment is a:
- Non-adjusting event under Ind AS 10
However, entities must disclose:
- Nature of the change
- Estimated financial impact, if determinable
7. Exceptional Item Presentation: Matter of Judgment
If an entity's:
- Normal annual employee cost = Rs 40 crore
- One-time Labour Code impact = Rs 6.5 crore
Given its material and non-recurring nature, the expense may be presented as an exceptional item, subject to transparent disclosure and consistency.
8. Tax Impact: Deferred Tax Asset Creation
Since gratuity and leave encashment are largely deductible on payment basis:
- Accounting expense recognised now
- Tax deduction available later
Illustration
- Increase in gratuity provision: Rs 5 crore
- Tax rate: 25%
Deferred Tax Asset = Rs 1.25 crore, subject to recoverability assessment under Ind AS 12.
Final Thoughts: Beyond Payroll Compliance
The New Labour Codes are not just a compliance or HR exercise. From an Ind AS standpoint, they represent a material financial reporting event affecting:
- EBITDA
- Net worth
- Deferred tax balances
- Investor and analyst perception
Early actuarial assessment, strong finance-HR coordination, and clear disclosures are critical to managing the transition smoothly.
The author can also be raeched at parasjain2807@gmail.com
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