Ind AS 19 should be a welcome news for most companies, as the P&L statement will become very stable and the actuarial losses will flow through the OCI.
For companies coming under the ambit of Indian Accounting Standards (Ind AS), the transition from the previous AS-framework is expected to be challenging and the impact could be significant.
From an employee benefits perspective, the reporting requirements will change from AS 15 to Ind AS 19. Ind AS 102 will be applicable for share based benefits, but that is not covered in this post.
Ind AS 19 will bring about many changes in how employee benefits reporting is carried out. This post sets out three most important differences between AS 15 and Ind AS 19, and how companies will be affected by them. It is worth noting at this point that these changes only affect 'post-employment benefits' such as gratuity and pension, whereas 'other long-term benefits' (OLTB) will not be affected by Ind AS 19. Most leave benefit schemes fall within the OLTB category.
1. Introduction of Other Comprehensive Income or OCI
A part of what was P&L expense will be reported as OCI under Ind AS 19. Overall, the sum of P&L expense and OCI under Ind AS 19 will remain the same as P&L under AS 15.
The concept of OCI did not exist under AS 15. To consider the impact this will have on a reporting company, let's first understand how P&L expense is calculated under AS 15.
AS 15 P&L statement consists of several elements, such as current service cost, interest cost, expected return on assets and actuarial losses. Ind AS 19 separates these elements into P&L statement and OCI. Generally speaking, for unfunded schemes, actuarial losses will be reported under OCI, and all other elements would continue to be part of the P&L statement. For funded schemes, an additional amount could be attributed to OCI from P&L statement, as explained in the next section. Note that the actuarial gains and losses are referred to as 'remeasurements' under Ind AS 19.
Impact on reporting companies:
The introduction of OCI will make the P&L statement significantly more stable.
2. Introduction of Net INTEREST COST
Expected return on assets (ERA) and interest cost will be comined into one measure 'net interest cost'. It will be calculated as interest on opening deficit, where 'interest rate' will be the beginning of year discount rate.
Net interest cost is a new concept under Ind AS 19. However, as with OCI, this measure can be matched and compared with other measures of AS 15 to understand the impact on the financial position of a company.