AS 15 Employee Benefits deals with all the forms of employee benefits, all forms of consideration given by an enterprise in exchange for the services rendered by employees.
1. Applicability of AS 15
AS 15 came into effect from 1st April 2006 and is applicable for Level – 1 enterprises. However, certain relaxation has been given to the Level – 1 enterprises, depending upon if they have employed 50 or more employees.
Level – 1 enterprises are those enterprises whose turnover for the last preceding financial year was more than Rs 50 Crores. This also includes any holding or subsidiary company of the same.
2. Employee Benefits
For the purpose of AS 15, an employee is defined as an employee who may provide services to an entity on a full-time, part-time, permanent, casual or temporary basis. AS 15 also includes directors and other management personnel under the definition of employees.
The following can be considered for the establishing an employee relationship:
i. Employment Contracts
ii. Individuals are considered employees for legal/tax/social security purposes
iii. There is a huge amount of direction provided by the employer and the necessary tools have been provided by the employer
iv. Services have to be performed at a location provided by an employer
3. Short-Term Benefits
Short-term benefits are those benefits which are payable within twelve (12) months after the end of the period in which the service was rendered. These expenses are accounted straightforward as no actuarial assumptions are required to measure the cost.
Short-term benefits are classified into 4 different categories:
i. Regular period benefits (Eg: Salary, Wages etc)
ii. Compensation of short-term absence (Ex: Sick leave, Annual leave, etc)
iii. Bonus/Profit payable within 12 months from the end of the period in which employee rendered services
iv. Non-Monetary Benefits (ex: Medical Insurance, Housing, etc)
The general criteria of the standard lays down that an enterprise should recognise as an expense (unless another AS permits a different treatment) the undiscounted amount of all short-term employee benefits attributable to services that been already served in the period and any difference between the number of expenses so recognized and cash payments made during the period should be treated as a liability or prepayment (asset) as appropriate.
4. Post-Employment Benefits
The accounting treatment and disclosures for post-employment benefit plan rely upon whether it is a defined contribution or a defined benefit plan.
A. Defined Contribution Plans are the post-employment benefits in which an enterprise pays fixed contributions into a separate fund and will no obligations to pay any amount in future.
Under this plan, the actuarial and investment risk falls upon the employee as there might be a chance that the benefits will be less than expected or the assets will be insufficient to meet expected benefits.
B. Defined Benefits Plans are the post-employment benefits which are not covered by the defined contribution plans.
Under this plan, the actuarial and investment risk falls upon the employer and a very detailed actuarial calculation is performed to determine the charge.
5. Other Long-Term Benefits
There are few other long-term benefits which an enterprise gives to its employees. Some of them are:
i. Long-term paid leave such as sabbatical leave
ii. Jubilee/Other long-term services
iii. Long-term disability benefits
iv. Profit/Bonus which is to be paid to the employee after 12 months for the period in which the service was rendered
6. Termination Benefits
Termination benefits are those benefits which result in payable if is an enterprise’s decision to terminate an employee’s employment or it is the decision of the employee to accept voluntary redundancy in exchange of the benefits Ex: Payments made under Voluntary Retirement Scheme (VRS).
Termination benefits have to be recognized by an enterprise as a liability or an asset only when a detailed formal plan for the termination is approved and a reliable estimate can be made of the obligation to be paid.
7. Accounting Treatment
The accounting treatment for the employee benefits must be recognized in the balance sheet of the enterprise. The amount to be recognized as a defined benefit liability should be the net totals of the following amounts:
i. Present Value of the defined benefit obligations at the balance sheet
ii. Any past service cost not yet recognized
iii. Fair Value at the balance sheet date of the plan assets (if any) out of which the obligations are to be settled directly
If the Fair Value of the plan assets is higher than the liability, then it gives rises to the Net Assets.
As per AS 15 in such a situation, the enterprise should measure the resulting asset at the lower of the amount so determined or the present value of any economic benefits available in the form of refunds from the plans or contributions
As per ICAI “The standard identifies various components of defined employee costs:
a. Current service cost
b. Interest Cost
c. The expected return on any plan assets
d. Actuarial gains and losses
e. Past service cost
f. Effects of any settlements or curtailments”
If the enterprise is uncertain about the number of employees who will accept the number of termination benefits, then there will be a contingent liability. Such Contingent Liability must be disclosed as per the provisions of AS-29
If an enterprise has to disclose the information about termination benefits for key management personnel, then it has to be disclosed as per AS-18.
9. Actuarial Assumptions and Treatment
An enterprise should consider the actuarial assumptions only if it is unbiased and mutually compatible. The actuarial assumptions have to treated as an enterprise’s best estimate of the post-employment benefits. The calculation should be prudent and not too conservative.
As per the standard, the following actuarial assumptions should form part:
A. Demographic assumptions about the future of the current and former employees who are eligible for benefits. Such matters are:
i. Employee Turnover Rate
ii. Plan Members with dependents
iii. Claim rates under the plan
B. Financial Assumptions such as the discount rate, future salary, and benefits, expected rate of return on assets, medical benefits costs. It should be based on the market rate as on the date of the balance sheet.
Actuarial Gains and Losses comprises of the effects of the difference between the previous and actual actuarial assumptions or the changes in the assumptions. Actuarial Gains or Losses should be determined by profit or loss immediately as income or expense.