Understanding IND AS 19: Employee Benefits

Introduction

The Indian Accounting Standards (IND AS) are a set of accounting principles that Indian companies must adhere to. IND AS 19 is a standard that deals with employee benefits. It requires companies to account for their obligations towards employees, such as pensions, gratuity, and other post-employment benefits. In this article, we will explore IND AS 19 in detail.

Scope of IND AS 19

The scope of IND AS 19 extends to various types of employee benefits, including short-term and long-term benefits, termination benefits, and other post-employment benefits. Here are the subheadings that explain the scope of IND AS 19 in detail:

Short-term employee benefits

Short-term employee benefits are benefits that are expected to be settled within 12 months after the end of the period in which the employee renders service. These benefits include salaries, wages, bonuses, and short-term compensated absences, such as sick leave and vacation leave. IND AS 19 requires companies to recognize the cost of short-term employee benefits as an expense in the period in which the employee renders service.

Long-term employee benefits

Long-term employee benefits are benefits that are expected to be settled more than 12 months after the end of the period in which the employee renders service. These benefits include pensions, gratuity, and long-term compensated absences, such as sabbatical leave. IND AS 19 requires companies to recognize the cost of long-term employee benefits as an expense in the period in which the employee renders service.

Termination benefits

Termination benefits are benefits that are paid to employees as a result of termination of employment. These benefits include severance pay, early retirement benefits, and other similar benefits. IND AS 19 requires companies to recognize the cost of termination benefits as an expense when the company is demonstrably committed to either terminating the employment of current employees or providing termination benefits as a result of an offer made to encourage voluntary redundancy.

Other post-employment benefits

Other post-employment benefits are benefits that are provided to employees after they retire or leave the company. These benefits include post-employment medical care, life insurance, and housing. IND AS 19 requires companies to recognize the cost of other post-employment benefits as an expense in the period in which the employee renders service, based on the present value of the expected future payments to employees.

Recognition and measurement of employee benefits

The recognition and measurement of employee benefits under IND AS 19 require companies to account for their obligations towards employees accurately. Here are the subheadings that explain the recognition and measurement of employee benefits under IND AS 19:

Recognition

Under IND AS 19, companies are required to recognize the cost of employee benefits as an expense in their financial statements. The cost of employee benefits includes both the present value of the expected future payments to employees and any related costs, such as administrative costs. Companies are required to recognize the expense in the period in which the employee renders service, and the amount of the expense should reflect the company's best estimate of the obligation towards employees.

Measurement

The measurement of employee benefits under IND AS 19 depends on the type of employee benefit. For defined benefit plans, companies are required to measure the present value of the defined benefit obligation and the fair value of the plan assets. The difference between the two is recognized as a liability or asset in the balance sheet. Any changes in the liability or asset are recognized in the statement of comprehensive income.

For defined contribution plans, companies are required to recognize the contributions made to the pension fund as an expense in their financial statements. The employer's obligation is limited to the amount contributed to the pension fund.

For other post-employment benefits, companies are required to measure the cost based on the present value of the expected future payments to employees. The cost should reflect the company's best estimate of the obligation towards employees, taking into account factors such as inflation and changes in healthcare costs.

Discount rate

The discount rate used for calculating the present value of the expected future payments to employees should reflect the market yield on high-quality corporate bonds. The discount rate should be adjusted for any risks associated with the obligation towards employees.

Defined benefit plans

Defined benefit plans are a type of employee benefit plan where the employer promises to pay a specified amount of retirement benefits to the employees upon retirement. Here are a few examples of defined benefit plans:

Pension plans

Pension plans are the most common type of defined benefit plan. Under a pension plan, the employer promises to pay a specified amount of retirement benefits to the employee upon retirement. The amount of retirement benefits is usually based on the employee's years of service, salary, and age at retirement.

Gratuity

Gratuity is a defined benefit plan that provides a lump-sum payment to employees upon retirement or termination of employment. The amount of gratuity is usually based on the employee's years of service and salary at the time of retirement or termination.

Post-retirement medical benefits

Post-retirement medical benefits are a type of defined benefit plan that provides medical coverage to employees after they retire. The employer promises to pay a specified amount of medical benefits to the employee upon retirement. The amount of medical benefits is usually based on the employee's years of service and salary at the time of retirement.

Life insurance

Life insurance is a defined benefit plan that provides a lump-sum payment to the employee's beneficiaries upon the employee's death. The amount of life insurance benefits is usually based on the employee's years of service and salary at the time of death.

Defined contribution plans

Defined contribution plans are a type of employee benefit plan where the employer promises to contribute a specified amount of money to the employee's retirement account. Here are a few examples of defined contribution plans:

401(k) plans

401(k) plans are the most common type of defined contribution plan. Under a 401(k) plan, the employee can make contributions to the plan on a pre-tax basis, and the employer may also make matching contributions up to a certain percentage of the employee's salary. The employee's retirement benefits are based on the contributions made to the plan and the performance of the investment portfolio.

Individual Retirement Accounts (IRAs)

IRAs are a type of defined contribution plan that allows individuals to save for retirement. The contributions to an IRA can be made on a pre-tax basis or after-tax basis, depending on the type of IRA. The employer may also contribute to the employee's IRA account.

Employee Stock Ownership Plans (ESOPs)

ESOPs are a type of defined contribution plan where the employer contributes stock of the company to the employee's retirement account. The value of the retirement benefits is based on the performance of the company's stock.

Profit-sharing plans

Profit-sharing plans are a type of defined contribution plan where the employer makes contributions to the employee's retirement account based on the company's profits. The contributions may be in the form of cash or company stock.

Other post-employment benefits

Apart from defined benefit and defined contribution plans, there are other post-employment benefits that employers may provide to their employees. Here are a few examples:

Retiree medical and dental benefits

Retiree medical and dental benefits are a type of post-employment benefit that provides medical and dental coverage to employees after they retire. The employer promises to pay a specified amount of medical and dental benefits to the employee upon retirement.

Life insurance for retirees

Life insurance for retirees is a type of post-employment benefit that provides life insurance coverage to employees after they retire. The employer promises to pay a specified amount of life insurance benefits to the employee's beneficiaries upon the employee's death.

Long-term care insurance

Long-term care insurance is a type of post-employment benefit that provides coverage for long-term care services, such as nursing home care or home health care. The employer promises to pay a specified amount of long-term care benefits to the employee upon retirement.

Housing benefits

Housing benefits are a type of post-employment benefit that provides housing assistance to retired employees. The employer may provide a housing allowance or subsidized housing to retired employees.

Disclose requirements as per IND AS 19

IND AS 19, Employee Benefits, sets out the accounting and disclosure requirements for employee benefits. Here are the key requirements as per IND AS 19:

Recognition of employee benefits

Employers must recognize the cost of providing employee benefits in the accounting period in which the employee has provided service in exchange for the benefits. The cost of providing employee benefits should be measured at the present value of the defined benefit obligation or the fair value of the defined contribution plan.

Measurement of employee benefits

The measurement of employee benefits depends on the type of plan. For defined benefit plans, the obligation should be measured based on actuarial assumptions, such as discount rate, salary growth, and life expectancy. For defined contribution plans, the obligation should be measured based on the amount contributed by the employer and employee.

Disclosure requirements

Employers must disclose the following information in their financial statements:

• A description of the employee benefit plans, including the nature and extent of the benefits provided and the number of employees covered under the plans.
• The accounting policy for recognizing and measuring employee benefits.
• The present value of the defined benefit obligation and the fair value of plan assets.
• The amount of expense recognized in the income statement and the amount of contributions made to defined contribution plans.
• The assumptions used in measuring the defined benefit obligation.
• The changes in the fair value of the plan assets during the period.
• The expected contribution to the plan for the next year.

Actuarial valuation

Employers must perform actuarial valuations of their defined benefit plans at least once every three years. The actuarial valuation should be performed by a qualified actuary and should include an analysis of the financial position of the plan and the assumptions used in measuring the plan's obligations.

Few examples of disclosure as per IND AS 19

As per IND AS 19, Employee Benefits, companies are required to disclose information about employee benefit plans in their financial statements. Here are a few examples of the disclosures required by IND AS 19:

Description of employee benefit plans

Companies are required to provide a description of their employee benefit plans in their financial statements. The description should include the nature and extent of the benefits provided, the number of employees covered under the plans, and any significant changes in the plans during the year.

Accounting policy

Companies must disclose their accounting policy for recognizing and measuring employee benefits. This should include the basis of measurement for each type of plan, such as the discount rate and other actuarial assumptions used in measuring defined benefit obligations.

Defined benefit obligations

Companies must disclose the present value of the defined benefit obligation and the fair value of the plan assets. They should also disclose the assumptions used in measuring the defined benefit obligation, such as the discount rate, salary growth rate, and life expectancy.

Expense recognized

Companies must disclose the amount of expense recognized in the income statement for the year, including any gains or losses recognized during the period. They should also disclose the amount of contributions made to defined contribution plans during the year.

Changes in plan assets

Companies must disclose the changes in the fair value of the plan assets during the year. This should include the gains and losses recognized during the period, as well as any contributions made by the employer or employee.

Expected contributions

Companies must disclose the expected contributions to the plan for the next year. This information can help stakeholders understand the company's financial obligations and the potential impact on future cash flows

Conclusion

Employee benefits are an important aspect of any company's financial statements. IND AS 19 provides guidelines on how companies should recognize and measure employee benefits, including pensions, gratuity, and other post-employment benefits. By adhering to these guidelines, companies can ensure that their financial statements accurately reflect their obligations towards employees.