Differences between IND AS 19 vs AS 15(R)

Introduction 

Accounting standards need to make sure that companies are properly accounting their future liabilities towards their workforce. Particularly in the context of gratuity and other post-employment benefit plans in India, these accounting methods are regulated by AS 15(R) and IND AS 19, as AS 15(R) is based on the former. IND AS 19 has therefore been replaced in alignment with the International Financial Reporting Standards (IFRS) schedule. In this blog, we will explore the key differences between these two rules, focusing on Other Comprehensive Income, Net Interest on DBO. We will also summarize with details of analysis of the impact on the company and its financial statements.

Overview of AS 15(R) and IND AS

Before dividing into differences. It is important to understand these two standards first:

AS 15(R) (Revised) - This is an accounting standard for employee benefits which is aligned with Indian General Accounting Principles (Indian GAAP). It deals with accounting for post-employment benefits such as gratuity benefits and short-term benefits from employers to employees.

IND AS 19 - This standard is part of the Indian Accounting Standards (IND AS) which has been merged with International Financial Reporting Standard. IND AS 19 provides a more refined and structured approach for accounting of employee benefits. It is significantly different from previous Indian GAAP standards.

While both standards objective is to regulate how companies account for employee benefits, they are designed in different frameworks.

Concept of Other Comprehensive Income (OCI)

Other Comprehensive Income (OCI) is an important component of financial statements that includes income, revenue, gains and losses not recognized in the income statement.

Points include:

Remeasurements

IND AS 19 refers to changes in the value of defined benefit obligations and plan assets to: "Valuation measures" which are registered directly with OCI.

IAS 15 does not classify these changes in the same way. This may affect the presentation of the overall financial statements.

Impact on Profit and Loss

Measuring according to IND AS 19 means there is less fluctuation in the performance of profits or losses. This is because it does not include certain fluctuations that may affect income.

AS 15 may lead to additional fluctuations in our profits or losses. This is because all profits and losses are included in the profit and loss demonstration.

Disclosure requirements

IND 19 requires additional quantitative and qualitative disclosures related to OCI components, increasing transparency for stakeholders.

AS 15 has less stringent disclosure requirements. This may limit the information available to financial disclosure users.

Recognition Timing 

In accordance with IND AS 19, recognition of actuarial profits and losses is immediate in OCI, whereas IAS 15 may allow different provisions. It is based on dealing with past service costs and other factors.

Net Interest on the Defined Benefit Liability 

Both AS 15(R) and IND AS 19 require companies to: Liquid assets must be accounted for in the defined benefit obligation (DBO) and the fair value of the plan assets. However, the interest calculation method differs significantly between the two standards.

According to AS 15(R): AS 15(R) allows companies to calculate the interest on the net defined benefit liability. This rate is also used as a proxy for the expected return on the assets.

Under IND AS 19: IND AS 19 enforces a more detailed approach to calculating the net interest. IND AS 19 provides a method to calculate the net interest rate by discounting back the defined benefit plan to the start of the year. This also separates expected return of plan assets and the interest cost on defined benefit liabilities.

Additional Disclosures under IND AS 19

Both AS 15(R) and IND AS 19 require companies to disclose certain details about employment benefit plans, such as the nature of the benefits provided. Therefore, IND AS 19 introduces several additional disclosure requirements.

To comply with IAS 15(R): IAS 15(R) requires relatively simple disclosures. The focus is primarily on the financial impact of the benefits provided, such as defined benefit obligations. Planned assets and the expenses recognized in profit or loss. The disclosure does not as much details as required by IND AS 19.

To comply with IND AS 19: IND AS 19 significantly expands disclosure requirements. This requires disclosure of details such as:

The amount recognized in the profit or loss, including any past service cost.

Reconciliation of opening and closing balances of defined benefit obligations and plan assets.

Actuarial assumptions used include discount rates, expected returns from the plan assets, inflation rate and demographic assumptions.

Sensitivity analysis on important assumptions such as discount rates, mortality rates, and expected wage increases.

These additional disclosures provide stakeholders with a clearer understanding of the financial impact of the benefit plans that apply. This increases transparency and helps them in better decision making.

Conclusion

Important differences, such as treatment of Other Comprehensive Income, the use of discount rates and the additional disclosures required by IND AS 19 provide a clearer view of an organization's financial obligations related to the employee benefit. The introduction of OCI in IND AS 19 ensures that companies’ actuarial gains and losses can be reported without affecting their income and losses. This reduces fluctuations in reported income.

Frequently Asked Question

1) How does AS 15(R) treat actuarial gains/losses?
AS 15(R) allows recognizing these gains/losses directly in the profit and loss account or under reserves.

2) What is net interest on defined benefit liability?

It represents the cost of carrying a defined benefit liability, calculated using the discount rate.

3) How is net interest calculated under AS 15(R)?

It is calculated using the discount rate on the net defined benefit liability.

4) How is net interest calculated under IND AS 19?

IND AS 19 separates the interest on the defined benefit liability and expected return on plan assets for better clarity.

5) What are the disclosure requirements under AS 15(R)?

Basic disclosures include the defined benefit obligation, plan assets, and expense recognized in profit or loss.

6) What are the additional disclosure requirements under IND AS 19?

IND AS 19 requires sensitivity analysis, actuarial assumptions, reconciliation of liabilities, and detailed cost components.

7) Does AS 15(R) require sensitivity analysis?

No, sensitivity analysis is not required under AS 15(R).

8) Does IND AS 19 require sensitivity analysis?

Yes, IND AS 19 mandates sensitivity analysis for key actuarial assumptions like discount rate and salary growth.