AS 15 Employee Benefits | Advanced Accounting for CA Intermediate PDF Download

Introduction

AS 15 Employee Benefits covers all types of employee benefits, encompassing any form of compensation provided by an enterprise in return for services rendered by employees.

AS 15 does not address inventory compensation. Read further to learn more about AS 15 in detail:

Applicability of AS 15

AS 15 became effective on April 1, 2006, and applies to Level – 1 enterprises. However, certain relaxations are provided to Level – 1 enterprises based on whether they employ 50 or more employees.

Level – 1 enterprises are defined as those with a turnover exceeding Rs 50 Crores in the last financial year, including any holding or subsidiary companies.

Employee Benefits

An employee, as per AS 15, refers to an individual serving an entity in various capacities: full-time, part-time, permanent, casual, or temporary. The definition extends to directors and management personnel.

Criteria for establishing an employee relationship include:

• Presence of employment contracts
• Consideration of individuals as employees for legal, tax, and social security purposes
• Evidence of substantial direction and provision of necessary tools by the employer
• Requirement for services to be performed at a location designated by the employer

Short-Term Benefits

Short-term benefits are benefits that are payable within twelve months after the service is provided. These expenses are accounted for straightforwardly without the need for actuarial assumptions. Short-term benefits can be categorized into four main types:

• Regular period benefits (e.g., Salary, Wages, etc)
• Compensation of short-term absence (e.g., Sick leave, Annual leave, etc)
• Bonuses/Profits payable within 12 months from the end of the service period
• Non-Monetary Benefits (e.g., Medical Insurance, Housing, etc)

The standard criteria specify that a company should recognize as an expense, unless another accounting standard allows a different approach, the undiscounted amount of all short-term employee benefits related to services already provided in the period. Any variance between the recognized expenses and cash payments made during the period should be recorded as a liability or prepayment (asset) accordingly.

Post-Employment Benefits

• Post-employment benefit plans' accounting treatment and disclosures depend on whether they are defined contribution or defined benefit plans.

Defined Contribution Plans

• In defined contribution plans, an organization makes fixed contributions to a separate fund and has no future payment obligations.
• Employees bear the actuarial and investment risks in this plan, potentially leading to benefits lower than expected or insufficient assets to cover expected benefits.

Defined Benefit Plans

• Defined benefit plans are post-employment benefits not included in defined contribution plans.
• In this plan, employers bear the actuarial and investment risks, necessitating detailed actuarial calculations to determine the charge.

Other Long-Term Benefits

• Long-term benefits beyond the regular ones that a company offers to its employees are also significant. Some of these include:
• Extended paid time off like sabbatical leave
• Recognition for long-term service through events like jubilees
• Support for long-term disabilities
• Additional compensation such as profit-sharing or bonuses, which are typically disbursed to the employee after a year, relating to the period during which the service was provided
• Termination Benefits
• Termination benefits refer to the compensations that become payable when a company decides to end an employee's service or when an employee chooses voluntary redundancy in exchange for certain benefits. An example of this is payments issued through a Voluntary Retirement Scheme (VRS). These benefits are recognized by a company as either a liability or an asset only after a formal termination plan is approved, and there is a reliable estimation of the payment obligation.

Accounting Treatment

The accounting treatment for employee benefits should be reflected in the balance sheet of the enterprise.

Defined Benefit Liability Calculation:
The defined benefit liability to be recognized is the net total of:

• Present Value of defined benefit obligations at the balance sheet date
• Any unrecognized past service cost
• Fair Value at the balance sheet date of plan assets (if applicable for direct settlement of obligations)

Net Assets:

• If Fair Value of plan assets exceeds the liability, it results in Net Assets.

Measurement:

• Asset valuation should be at the lower of determined amount or present value of potential economic benefits like refunds or contributions.

Components of Defined Employee Costs:

• Current service cost
• Interest Cost
• Expected return on plan assets
• Actuarial gains and losses
• Past service cost
• Effects of settlements or curtailments

Disclosures 

• If a company is unsure about how many employees will accept termination benefits, there could be a contingent liability. This Contingent Liability needs to be disclosed in accordance with AS-29.
• When a company needs to reveal information regarding termination benefits for top management personnel, it should be disclosed as per AS-18.

Actuarial Assumptions and Treatment

An enterprise must consider actuarial assumptions that are unbiased and mutually compatible. These assumptions represent the enterprise's best estimate of post-employment benefits. Calculations should be prudent without being overly conservative.

Demographic Assumptions

• Employee Turnover Rate
• Plan Members with dependents
• Claim rates under the plan
• Mortality

Financial Assumptions

Financial assumptions include:

• Discount rate
• Future salary and benefits
• Expected rate of return on assets
• Medical benefits costs

These financial assumptions should be based on the market rate as of the balance sheet date.

Actuarial Gains and Losses

• Actuarial Gains and Losses refer to the impacts arising from the variance between the anticipated and actual actuarial assumptions or alterations in these assumptions.
• These gains or losses should be recognized immediately in the income statement as income or expense.

Conclusion

Actuarial Gains and Losses involve the effects of discrepancies in expected versus actual actuarial assumptions or changes in these assumptions. These gains or losses must be promptly recognized in the financial statements as income or expense.