The employer-employee relationship is directly related to Employee Benefits, and the costs associated with these benefits will be reflected on the Organisation’s Financial Statements. The ICAI issued an accounting standard, AS 15, covering the accounting treatment for Employee Benefits in India. AS 15 provides companies with methods of appropriately recognizing Employee Benefits as expenses and providing companies with obligations to disclose them in their financial statements.
This article identifies the types of employee benefits covered by AS 15, the purpose of AS 15, and the need for AS 15 in Indian businesses.
Introduction
Employees are one of the most valuable assets of any organisation. Apart from salary, employers provide various benefits such as provident fund contributions, gratuity, leave encashment, and post-retirement benefits. These benefits create present and future obligations for the employer and must be properly accounted for in the books of accounts.
AS 15 was introduced to bring uniformity and clarity in accounting for employee benefits. It lays down when and how these benefits should be recognised as expenses and liabilities, ensuring that financial statements present a true and fair view of the organisation’s obligations towards its employees.
Objective of AS 15
The primary objective of AS 15 is to prescribe the accounting treatment and disclosure requirements for employee benefits. The standard aims to ensure that –
- Employee benefit expenses are recognised in the period in which the employee renders service, and
- Liabilities arising from employee benefits are recognised as and when they accrue.
This approach prevents understatement of expenses and helps stakeholders understand the actual cost of employing human resources.
Scope of AS 15
AS 15 applies to all employers, including companies, partnership firms, and other entities that prepare financial statements in accordance with Indian accounting standards. The standard covers all forms of consideration given by an entity in exchange for services rendered by employees.
It applies irrespective of whether the benefits are paid directly to employees or through a fund, trust, or insurance arrangement.
Meaning of Employee Benefits Under AS 15
Employee benefits refer to all forms of consideration given by an employer in exchange for services rendered by employees or for the termination of employment. These benefits may be provided during employment, after retirement, or upon termination.
AS 15 classifies employee benefits into different categories based on the timing and nature of the obligation.
Short-Term Employee Benefits
Short-term employee benefits are those benefits that are expected to be settled wholly within twelve months after the end of the period in which employees render the related service.
Examples include wages and salaries, bonuses payable within a year, paid annual leave, sick leave, and non-monetary benefits such as medical facilities. These benefits are recognised as an expense in the period in which the employee provides the service, without discounting.
The accounting treatment for short-term benefits is relatively simple, as there is no long-term obligation involved.
Post-Employment Benefits
Post-employment benefits are benefits payable after the completion of employment, such as a provident fund, a pension, gratuity, and post-retirement medical benefits.
AS 15 further divides post-employment benefit plans into defined contribution plans and defined benefit plans.
In defined contribution plans, the employer’s obligation is limited to the amount contributed to the fund. Once the contribution is made, there is no further liability. Provident fund contributions are a common example.
In defined benefit plans, the employer’s obligation is to provide agreed benefits, and the cost depends on factors such as employee salary, years of service, and life expectancy. Gratuity and pension schemes usually fall under this category and require actuarial valuation.
Other Long-Term Employee Benefits
Other long-term employee benefits are benefits that are not due to be settled wholly within twelve months and are not post-employment benefits. These include long-term leave encashment, sabbatical leave, and long-service awards.
Such benefits are accounted for using principles similar to defined benefit plans, and actuarial valuation is generally required to measure the obligation accurately.
Termination Benefits
Termination benefits arise when an employer decides to terminate an employee’s employment before the normal retirement date or when an employee accepts voluntary retirement in exchange for benefits.
AS 15 requires termination benefits to be recognised as an expense when the entity has a present obligation to make such payments. These benefits are recognised immediately and are not spread over future periods.
Recognition and Measurement Under AS 15
AS 15 emphasises that employee benefit expenses should be recognised in the period in which the related service is rendered. For defined benefit plans and long-term benefits, obligations are measured using actuarial techniques that consider future salary increases, employee turnover, and mortality rates.
Discounting is applied to long-term obligations to reflect the time value of money, ensuring a realistic measurement of liabilities.
Disclosure Requirements
AS 15 requires detailed disclosures, particularly for defined benefit plans. These disclosures help users of financial statements understand the nature of employee benefit obligations, the assumptions used in valuation, and the financial impact on the organisation.
Transparent disclosure enhances credibility and allows stakeholders to assess long-term financial commitments.
Importance of AS 15 for Businesses
AS 15 has a vital impact on ensuring the timely execution of financial discipline and is also the basis for good business practice by ensuring the financial transparency of an organisation. Properly accounting for the value of employee benefits also provides a more predictable and reliable future cash flow plan for management to utilise.
As companies continue to grow and develop, adherence to AS 15 will help to maintain current investor confidence in addition to meeting all of the legal requirements of statutory financial reporting.
Conclusion
AS 15, which is the Indian Accounting Standard that outlines how to account for and report on employee benefits, helps businesses understand their obligation to provide employees with benefits. It does so by categorizing employee benefits into different types and establishing clear guidance on how to measure and recognize those benefits. The result is that businesses will recognize and reflect employee benefit costs correctly in their financial statements. Businesses need to comply with the requirements of AS 15 if they want to have an accurate accounting system, effectively manage their long-term liabilities, and be transparent about their financial reporting.
