What Is AS 15?
Accounting Standard 15 (AS 15), titled "Employee Benefits," was issued by the ICAI and prescribes the accounting and disclosure requirements for all forms of consideration given by an enterprise in exchange for services rendered by employees. The revised AS 15 is one of the most complex Indian accounting standards, dealing with a wide spectrum of employee benefits from simple short-term salaries to complex defined benefit pension obligations.
Scope
AS 15 applies to all forms of employee benefits except employee share-based payment transactions (which are covered by the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations). Employee benefits include:
- Short-term employee benefits
- Post-employment benefits
- Other long-term employee benefits
- Termination benefits
Classification of Employee Benefits
1. Short-Term Employee Benefits
Short-term benefits are those expected to be settled wholly within twelve months after the end of the period in which the employees render the related service. Examples include:
- Wages, salaries and social security contributions
- Short-term compensated absences (paid sick leave, annual leave) — where absences are expected to occur within 12 months
- Profit-sharing and bonus payments within 12 months
- Non-monetary benefits (medical care, housing, cars) for current employees
Accounting treatment: Recognised as an expense when the employee renders service. The undiscounted amount of short-term benefits is recognised as a liability (accrued expense) after deducting any amount already paid.
2. Post-Employment Benefits
Post-employment benefits are payable after the completion of employment. They include pensions, gratuity, post-employment medical benefits, and post-employment life insurance. These are classified into:
| Parameter | Defined Contribution Plans | Defined Benefit Plans |
|---|---|---|
| Obligation | Enterprise pays fixed contributions to a separate fund; no further legal or constructive obligation | Enterprise has an obligation to provide agreed benefits; actuarial and investment risk falls on the enterprise |
| Risk Bearer | Employee bears the actuarial and investment risk | Enterprise bears the actuarial and investment risk |
| Accounting | Simple — expense equals contribution payable for the period | Complex — requires actuarial valuation to determine obligation |
| Examples | Provident Fund (PF), Employee State Insurance (ESI), National Pension System (NPS) | Gratuity, defined benefit pension, post-retirement medical benefits |
| Actuarial Valuation | Not required | Required — using Projected Unit Credit Method |
Defined Benefit Plans — Detailed Treatment
For defined benefit plans, AS 15 requires:
- Actuarial valuation using the Projected Unit Credit Method to determine the present value of the defined benefit obligation
- Plan assets to be measured at fair value
- Recognition of the net defined benefit liability (or asset) in the balance sheet — being the present value of obligation minus fair value of plan assets
- The P&L charge comprises: current service cost, interest cost, expected return on plan assets, actuarial gains/losses, and past service cost
Actuarial Assumptions
Actuarial assumptions are the enterprise's best estimates of the variables that will determine the ultimate cost of providing post-employment benefits. They include:
- Demographic assumptions — mortality, employee turnover, disability, early retirement
- Financial assumptions — discount rate, future salary levels, medical cost trend rates, expected return on plan assets
The discount rate is determined by reference to the market yields on government bonds at the balance sheet date.
3. Other Long-Term Employee Benefits
These include benefits not expected to be settled wholly within 12 months, such as:
- Long-service leave or sabbatical leave
- Jubilee or long-service benefits
- Long-term disability benefits
- Deferred compensation programmes
The measurement is similar to defined benefit plans but simplified — actuarial gains/losses and past service cost are recognised immediately in P&L.
4. Termination Benefits
Termination benefits arise when employment is terminated before normal retirement date or when an employee accepts voluntary retirement. An enterprise should recognise termination benefits as a liability and expense when it is demonstrably committed to:
- Terminating the employment of an employee or group of employees before normal retirement, or
- Providing termination benefits as a result of an offer to encourage voluntary redundancy
Disclosure Requirements
For defined benefit plans, extensive disclosures are required:
- General description of the type of plan
- Reconciliation of opening and closing balances of the present value of the defined benefit obligation
- Reconciliation of opening and closing balances of the fair value of plan assets
- Total expense recognised in P&L — broken down into current service cost, interest cost, expected return on assets, actuarial gains/losses, and past service cost
- Principal actuarial assumptions used: discount rate, salary escalation rate, expected return on plan assets, attrition rate
Conclusion
AS 15 is one of the most comprehensive Indian accounting standards, reflecting the significant obligations that enterprises have towards their employees. Proper application requires collaboration between management, actuaries, and auditors. Understanding the distinction between defined contribution and defined benefit plans is critical for accurate financial reporting.
At TaxClue, our team of qualified CAs assists businesses with employee benefit accounting, actuarial valuation coordination, and compliance with accounting standards. Contact us for expert assistance.