Gratuity and Employee Benefits: Accounting Implications of India's Labour Law Reforms:

Gratuity and Employee Benefits: Accounting Implications of India's Labour Law Reforms The Accounting Standards Boards under ICAI has recently issued FAQs on key accounting implications arising from the New Labour Codes to clarify major accounting questions.

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The Government of India is making some big changes to the country’s labour laws by combining 29 different laws into 4 main ones. These new laws are called the Labour Codes, and they are:

1. Code on Wages, 2019
2. Code on Social Security, 2020
3. Industrial Relations Code, 2020
4. Occupational Safety, Health and Working Conditions Code, 2020

Any increase in an entity's obligation resulting from the implementation of the New Labour Codes should be recognised and accounted for in line with the principles outlined in AS 15 Employee Benefits or Ind AS 19 Employee Benefits, depending on which standard applies to the entity. The changes to gratuity benefits resulting from the New Labour Codes are considered plan amendments under accounting standards like AS 15 or Ind AS 19. Past service cost arises when an employer either introduces a new defined benefit plan or changes the benefits payable under an existing one. This cost relates to the benefits that will be provided in the future but is tied to the employees' service in past periods. Therefore, past service cost is recognised over the period, regardless of the fact that the cost refers to employee services in previous periods.

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When there’s an increase in gratuity liability because of changes in the Labour Codes, it’s considered a past service cost. This means that the benefits employees will receive are being adjusted, and the accounting treatment of this cost depends on the following rules: Under Ind AS 19 (Indian Accounting Standards): Requires past service cost to be immediately recognised as an expense in the Statement of Profit and Loss. Under Indian GAAP, AS 15: If the past service cost is for employees who have already completed the necessary years of service (i.e., they are "vested"), this cost should be recognised immediately. For employees who haven’t completed the required service yet, the past service cost is amortised over the time it takes for them to complete the service period.