How CA, CS, Auditors Audit Firms can help in prevent Indian and Multinational Companies from Non-Compliance of AS 15 (Revised 2005) & IndAS 19?
Introduction: Delve into the critical realm of preventing non-compliance of AS 15 (Revised 2005) & IndAS 19 by CA, CS, Auditors & Audit Firms. Unravel the background, understanding the functions of the National Financial Reporting Authority (NFRA) and its power to scrutinize financial statements. In recent years, penalties and debarments have been imposed on professionals for non-compliance. This article sheds light on the applicability of AS 15 (Revised 2005) & IndAS 19, emphasizing the role of CA’s, Auditors, and Audit Firms in ensuring compliance for Employee Benefits.
Background
MCA vide its notification dated 13th November 2018 notified National Financial Reporting Authority (NFRA) Rules, 2018. The main functions NFRA Authority are:-
1. Monitoring and enforcing the compliance with accounting standards and auditing standards,
2. Overseeing the quality of Audit service and suggesting measures for improvement,
3. Power to investigate,
4. Disciplinary proceedings, Manner of enforcement of orders passed in disciplinary proceedings, Punishment in case of non-compliance etc.
In recent past years, NFRA Authority has scrutinized the Financial Statements of Indian and Multinational Companies and found CA’s, Auditors, Audit Firms and Professionals guilty for non-compliance of Accounting Standards and then Authority has penalized them with Fines and Debarred from Audit of the Companies.
In view of the above provisions, it becomes mandatory for CA’s, Auditors, Audit Firms & Professionals involved in finalization of Financial Statements to check the proper compliances for the provisions of these Accounting Standards. In this article, we have highlighted the provisions for compliance of 2 Accounting Standards (i.e. AS 15 (Revised 2005) & IndAS 19) prescribed by The Institute of Chartered Accountants of India (ICAI) for Accounting and Disclosure requirement for Employee Benefits.
Applicability of AS 15 (Revised 2005) & IndAS 19
Indian and Multinational Companies Operating India needs to prepare the Financial Statement such as Balance Sheet & Profit/Loss Accounts at the closure of each financial year in compliance of Accounting Standards as stipulated in Section 133 of the Companies Act 2013, so that they can give a true and fair view of state of affairs of the company.
On the basis of Annual Turnover Indian and Multinational Companies are required to comply with following 2 Accounting Standards as issued by The Institute of Chartered Accountants of India (ICAI) for Accounting of Employee Benefits such as Gratuity, Leave Encashment, Pension, PRMB, Long Service Award:-
1. Companies with Turnover more than 250 Cr. and their subsidiaries required to comply with Indian Accounting Standard 19 – IndAS 19
2. Companies with Turnover less than 250 Cr required to comply with Accounting Standard 15 (Revised 2005) – AS 15 (Revised 2005)
The main objectives of the above Standards are to prescribe the guidelines and disclosures for Accounting for Defined Benefit Plans (i.e. Gratuity, Leave Encashment, Pension etc.). In order to comply with above standards a company is required to recognize: –
(a) a liability when an employee has provided service to company in exchange for defined benefits to be paid in the future; and
(b) an expense when the company consumes the economic benefit arising from service provided by an employee in exchange for defined benefits.
(For More Details Accounting and Disclosure requirement, refer Para 49, Para 50 and Para 51 of AS 15 (Revised 2005) & Para 63, Para 64, Para 65, Para 66 & Para 67 of IndAS 19)
While AS-15 & IndAS 19 Employee Benefits governs the measurement of various employee benefit obligations, their classification as current and non-current liabilities will be governed by the criteria laid down in the Schedule III. Employee benefit obligations (Both Funded and Un-funded obligations) into
1. Current Liability
2. Non-Current Liability
Defined Benefit Plans
The Indian and Multinational companies are required to get Actuarial Valuation Reports comply with AS 15 (Revised 2005) & IndAS 19 for The Employee Benefits Plans which nature of Defined Benefit. The List for the few defined benefit plans is given below :-
- Gratuity Plan.
- Earned Leave Plan.
- Sick Leave Plan.
- Defined Benefit Pension Plans.
- Post -Retirement Medical Benefit Plans.
- Settlement Allowances on Retirement.
- Long Service Award Plans/Incentive Plans.
- Interest Rate Guarantee for Exempted Provident Funds.
- Any other long term employee benefit , where actuarial inputs are needed
Components of fully compliant Actuarial Valuation Reports
Generally, Actuarial Reports fully compliant with the Accounting Standards are prepared by the Actuarial Valuation Service Providers and these reports are certified by An Actuary, who is the Fellow Member of the Institute of Actuaries of India having The Fellowship Certificate and a valid Certificate of Practice (COP).
The Institute of Actuaries of India (IAI) prescribes Core Principal of Actuarial Work and Professional Standard for the Actuarial Valuations Reports for Employee Benefits in compliance of AS 15 (Revised 2005) & IndAS 19 in Actuarial Practice Standard 27 (i.e. APS 27, Applicable from 01.01.2018).
An Actuarial Valuation Report fully compliant with requirement of IndAS 19 & AS 15 (Revised 2005) and as per Actuarial Practice Standard 27 (i.e. APS 27) have following components:
Data – The valuation report shall include an appropriate summary statistics of data used in valuation. The summary statistics, at the minimum, shall include the following information: –
i. Numbers of employees valued;
ii. Total salary used in the valuation;
iii. Average age;
iv. Average past service / completed years of service, etc.
Assumptions – The valuation report shall give details of the assumptions used in the valuation. The assumptions shall typically include: –
i. Salary growth rate;
ii. Discount rate;
iii. Attrition rates;
iv. Mortality / disability rates
Benefit Valued – The valuation report shall include complete description of the benefits valued. This shall, inter alia, include: –
i. Specifying whether the gratuity benefit is considered with or without any monetary limit;
ii. Giving a complete description of the benefits considered for valuation, including if the benefit offered is different from the minimum benefit prescribed under the Gratuity Act and / or if there are non-uniform accrual rate for gratuity benefit (e.g. a higher benefit is offered for later years of service).
iii. Vesting period, if any;
iv. Retirement / superannuation age
Modeling / Model – The member shall ensure application on the Projected Unit Credit (PUC) Method in attributing benefit to the service rendered in the past. This shall mean:
In case of employee’s service in later years leading to a materially higher level of benefit than in earlier years, an enterprise should attribute benefit on a straight-line basis from:
(a) the date when service by the employee first leads to benefits under the plan; until
(b) the date when further service by the employee will lead to no material amount of further benefits under the plan, other than from further salary increases.
Report / Output – The valuation report shall clearly and completely spell out all the inputs (data, assumptions and benefit structure) considered for valuation, including adequate disclosures and disclaimers on the extent each of the inputs have been validated. The report shall also clearly highlight the limitations and extent to which the user of the report and third parties can rely on the valuation report. (For more details you may visit my Tax-guru Profile at https://taxguru.in/author/tikaramchaudhary@gmail.com/)
How to Identify the Compliance requirement for Indian and Multinational Companies ?
The following criterion is followed by the CA, CS & Auditors to know the applicability of Accounting Standards and disclosure requirement by the Companies:-
(i) SME Companies – SME requires to give disclosures as per Clause L of Para 120 of AS 15 (Revised 2005) – (For more details refer MCA notification dated 07.12.2006 )
(ii) Non SME Companies – Non SME requires to give disclosures as per Para 120 of AS 15 (Revised 2005)
(iii) Listed Companies & their subsidiaries with Net-worth more 250 cr. In this case, companies and their subsidiaries has to give disclosure of in compliance of IndAS 19.
(iv) NBFC (Non-Banking Financial Company) with Net-worth more 250 cr. – In this case, NBFC has to give disclosure of in compliance of IndAS19 with comparative numbers of previous 2 years.
Conclusion: Navigate the intricate landscape of compliance with AS 15 (Revised 2005) & IndAS 19 with this comprehensive guide. CA’s, Auditors, and Audit Firms play a pivotal role in preventing non-compliance, safeguarding companies from penalties and debarments. Gain insights into the components of fully compliant actuarial valuation reports, understand the criteria for applicability, and stay informed about the disclosure requirements for different categories of companies. For further clarifications and expert guidance, connect with the author, providing valuable insights and assistance in navigating the nuances of compliance.
I hope my this article may help you in understanding “How CA, CS, Auditors & Audit Firms can help in prevent Indian and Multinational Companies from Non-Compliance of AS 15 (Revised 2005) & IndAS 19 ?”
In case of any clarification, you may contact me at 9211637063 or email me your queries at tikaramchaudhary@gmail.com.
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