Accounting for Retirement Benefits under AS 15 and Ind AS 19: A Comparative and Interpretive Analysis
Introduction
Accounting for employee retirement benefits is a highly complex area due to the involvement of actuarial estimates, long-term projections, and sensitivity to assumptions. The Institute of Chartered Accountants of India (ICAI) has provided guidance under Accounting Standard 15 (AS 15) – Employee Benefits, which governs Indian GAAP reporting entities. The corresponding Indian Accounting Standard (Ind AS 19) – Employee Benefits, aligned with IAS 19, applies to Ind AS-compliant entities.
*This article provides an expert-level comparison between AS 15 and Ind AS 19, highlighting key technical issues, disclosure requirements, and interpretational challenges*.
Illustrations are also provided for nuanced areas that may lead to diverse accounting treatments.
1. Scope and Applicability
AS 15 (Revised)
Applicable to all enterprises, though certain simplifications are permitted for Level II and Level III SMEs, particularly in actuarial valuation and disclosure requirements.
Ind AS 19
Applicable to companies covered under the Companies (Indian Accounting Standards) Rules, 2015. It is mandatory for listed and large unlisted companies.
2. Classification of Employee Benefits
Both AS 15 and Ind AS 19 classify employee benefits into four broad categories:
Type of Benefit Examples
Short-term Salaries, wages, bonus
Post-employment Gratuity, Pension, Provident Fund
Other long-term Leave encashment (non-current), long service awards
Termination benefits Voluntary Retirement Schemes (VRS)
3. Defined Contribution vs. Defined Benefit Plans
Feature Defined Contribution Plan Defined Benefit Plan
Risk Employee bears investment risk Employer bears actuarial risk
Accounting Complexity Simple Complex actuarial computations
Examples EPF where employer’s obligation is fixed Gratuity, Pension, Leave Encashment
4. Measurement and Recognition
AS 15:
Requires recognition of:
Present value of defined benefit obligation (DBO)
Fair value of plan assets
Actuarial gains/losses – recognized immediately in Profit & Loss Account
Ind AS 19:
Similar model with one key difference:
Actuarial gains/losses are recognized in Other Comprehensive Income (OCI) and not reclassified to P&L.
Interpretational Illustration 1: Treatment of Actuarial Gains
Scenario: A company has a defined benefit obligation where actuarial gain of ₹10 lakhs arises due to change in mortality assumptions.
Under AS 15: ₹10 lakhs is routed through the Profit & Loss account.
Under Ind AS 19: ₹10 lakhs is recognized in OCI, improving P&L but reducing net worth.
Implication: Though total equity remains the same, P&L ratios (EBITDA, PAT) differ, affecting analyst interpretation.
5. Discount Rate Determination
AS 15: Based on market yields on government bonds of similar maturity.
Ind AS 19: Requires using yields on high-quality corporate bonds (or government bonds where no active market exists).
Illustration 2: Difference in Discount Rate
Assumption:
Government bond yield: 6.8%
AAA Corporate bond yield: 7.2%
AS 15 discount rate = 6.8%, Ind AS 19 discount rate = 7.2%
Impact: Higher discount rate under Ind AS 19 results in lower DBO, affecting expense recognition and provision.
6. Actuarial Valuation Assumptions
Key assumptions include:
Discount rate
Salary escalation
Attrition rate
Mortality tables (IALM tables)
Retirement age
Ind AS 19 mandates disclosure of sensitivity analysis for each actuarial assumption, unlike AS 15.
Interpretational Issue 3: Sensitivity Disclosure
Many practitioners under-report sensitivity under AS 15, as it is not mandatory. Under Ind AS 19, a 100 bps change in discount rate may need disclosure, even if immaterial in AS 15.
7. Treatment of Past Service Cost
Standard Past Service Cost
AS 15 Amortized over vesting period
Ind AS 19 Recognized immediately in P&L
Illustration 4: Retroactive Plan Amendment
A gratuity plan is amended to increase benefits from ₹10 lakh to ₹12 lakh for past service.
Under AS 15, increased obligation (₹2 lakh) amortized over remaining vesting period.
Under Ind AS 19, ₹2 lakh is immediately expensed.
8. Curtailments and Settlements
Both standards require recognition of gains/losses when obligations are reduced (curtailment) or settled (e.g., buyouts). However, timing and disclosure nuances vary.
Illustration 5: Curtailment in VRS Scheme
A company offers VRS reducing future benefits:
AS 15 allows deferral of recognition until confirmed.
Ind AS 19 requires immediate recognition if constructive obligation exists.
9. Disclosures
AS 15:
Summary of actuarial assumptions
Reconciliation of opening and closing balances
Expense recognized in P&L
Ind AS 19:
Much more detailed, including:
Sensitivity analysis
Maturity profile of DBO
Risk exposure description (demographic, investment)
10. Transitional Challenges
Moving from AS 15 to Ind AS 19 involves:
Restating opening balances
Remeasuring DBO and plan assets using fair values
Transferring actuarial losses from retained earnings to OCI
Expert Note: Practitioners must educate management that Ind AS 19 does not impact cash flows, but can significantly alter profitability metrics due to OCI classification.
Conclusion
The treatment of retirement benefits under AS 15 and Ind AS 19, though broadly similar in structure, diverges significantly in recognition, measurement, and disclosure principles. The most critical distinction lies in the treatment of actuarial gains/losses, past service costs, and discount rate assumptions.
*Interpretational flexibility under AS 15 often leads to inconsistent practices, while Ind AS 19 demands rigour and transparency. Qualified Chartered Accountants must navigate these standards with precision, ensuring both statutory compliance and fair financial representation.*
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Name of Author: Rahul Sharma | Qualification: FCA, MBA (Finance), LLB, CAIIB | ICAI Membership No.: 402506
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