While AS 15 is very similar to the IFRS equivalent standard (IAS19), Ind-AS 19 has introduced a number of changes which will impact the financial reporting for companies in India.
Indian Accounting Standard (IND AS) 19 is replacing AS 15 (revised, 2005) with regulatory guidelines making it mandatory for companies with a net worth exceeding INR 5,00 Crores to make this transition effective 1 April 2016. Sooner or later all companies, will have to transition to IND AS 19 and hence understanding the changes will be critical to stay prepared, ensure accurate forecasting and identifying key drivers impacting the value of employee benefit liabilities on the financial statements.
While the new standard is very similar to the IFRS equivalent standard (IAS19), Ind-AS 19 has introduced a number of changes which will impact the financial reporting of post-employment and other long term employee benefit schemes for companies in India.
1) For post-employment benefits, actuarial gains and losses arising from experience differing from what was assumed, changes in assumptions and investment gains and losses on plan assets are to be recognised immediately through the Other Comprehensive Income (OCI) statement. Currently under AS 15, actuarial gains and losses are recognised immediately in Profit and Loss (“P&L”).
Though this will mean a relatively stable P&L as the impact of gain and losses flows through the OCI account, here are some implications to ponder over:
a. Would the reserves in the OCI impact the capital raising capabilities? Would the reserves be available for distribution?
b. Should the opening balance of the OCI be disclosed within reserves and surplus by reinstating the P&L from year “0” (share in retrospective actuarial gains/losses with respect to the existing employees to be taken as opening balance in the OCI account on adoption of IND AS 19)? Some auditors are advocating this thought process and this definitely can give a boost to the P&L account retrospectively.
c. Since gains and losses would no longer flow through the P/L, should we expect a greater level of scrutiny by auditors on the basis being used for valuation?
Answers to some of these questions seem obvious, for example, capital raising capabilities would be impacted and OCI reserves would be paid post distribution of dividend/profit; however an expert view from Auditors should be solicited to avoid conflicts and surprises at the time of Audit.
2) Interest cost and expected return on plan assets are replaced with net interest income/cost on the net asset or liability recognised on the balance sheet. This net interest income or cost is measured based on the plan's discount rate.
This approach has been introduced in order to remove judgment in selecting the assumption on expected return on assets. This could also be seen as a step towards encouraging matching of assets and liability duration and yields.
3) For plan changes, the non-vested portion of the related past service cost /credit can currently be spread across the future time period over which benefits are vested. Going forward under IND AS 19, all past service costs / credits must be fully recognised immediately in P&L.
Companies who previously had unrecognised past service costs/ credit should also discuss transition requirements with their Actuary and Auditors.
The revised standard also provides additional guidance on the recognition of plan expenses and the treatment of special events. For settlements and curtailments, e.g. when a plan is terminated, or there is a significant reduction in headcount, the revised standard requires the cost to be recognised immediately in the P&L under service cost.
4) Impact on the balance sheet position at the time of adoption of IND AS 19 - The principle of calculation of net liabilities (liability minus the asset) remains the same. Companies might have an option of reinstating the liabilities for foreign subsidiaries where they have a market in deep corporate bonds and the discount rate could be changed accordingly. Moreover, for those schemes where there are unrecognised past service costs/credits, the balance sheet position may change.
5) There is greater focus on disclosures, which have been expanded to include more insight about the risks to the company associated with post-employment and other long-term benefits. These risks include the timing, amount and uncertainty of future cash flows, and the implications of the regulatory environment in which plans operate.
If a company adopts IND AS 19 effective 1 April 2016, it must also show the comparative position for the financial year 2015-2016 as if reported under the revised standard. It is our understanding however that the additional disclosure information may not be required for this comparative year.
In summary, understanding the changes will be critical for companies to stay prepared and engaging their Auditors and Actuaries at an early stage would serve well.
(Anuradha Sriram is Director – Benefits India, Towers Watson while Monika Bhargava is Consulting Leader – Benefits India (West), Towers Watson)