Adoption of Ind AS 19 has become mandatory, from 1 April 2016, for all companies having net-worth of INR 500 crores or more. The holding, subsidiary, joint-venture or associate companies (‘affiliates’) of such companies captured by this new requirement also have to adopt Ind AS from 1 April 2016. The comparatives for Ind AS 19 compliant financial statements will be for period ending 31st March 2016 or thereafter – 1st Phase of Adoption.
– listed companies and their affiliates having net worth of less than INR 500 crores
– unlisted companies and their affiliates having net worth of INR 250 crores or more but less than INR 500 crores,
the adoption of Ind AS 19 is mandatory starting from 1 April 2017, with comparatives for period ending 31st March 2017 or thereafter.
This means that Indian companies are required to report their Financial Statements in line with IFRS principles. Previously, Indian companies reported their employee benefits under AS 15 (Revised 2005). This new requirement will result in significant changes in the recognition, presentation and disclosure of post-employment benefits.
This publication summarises the key accounting changes and their impact from an actuarial perspective, as a result of this migration.
A. Recognition of Actuarial Gains or Losses through Other Comprehensive Income (OCI)
Under AS 15 (Revised 2005), all actuarial gains and losses are immediately recognised through P&L. In contrast, under the new regime, these will be recognised immediately through OCI. Actuarial gains or losses result from the actual experience during the year turning out to be different than assumed at the start of the year.
A.1 Key Impact
The fact that actuarial gains and losses are now recognised in OCI, may result in Financial Statement users and analysts placing greater scrutiny or importance on amounts recognised in OCI, actuarial estimates and the disclosure of historical experience gains or losses.
B. Net Interest Income or Expense
Ind AS 19 replaces the concept of expected return on plan assets or the interest cost on the defined benefit liability with the ‘Net Interest Income or Expense’.
The Net Interest Income (or Expense) is calculated as the product of the surplus (or deficit) of Plan Assets over the defined benefit liability and the discount rate used to measure the employee benefit obligation, each as at the beginning of the reporting period.
B.1 Key Impact
As evident from the below illustration, where a valuation of defined benefit liabilities identifies a fund deficit, companies will no longer be able to take the credit, of the excess of the expected returns from their Plan assets over the discount rate assumed for the valuation of the liability.
Illustration as at 1 April 2016
Defined Benefit Obligation: INR 1,500 Cr
Plan Assets: INR 1,400 Cr
Expected Return on Plan Assets: 9%
Discount Assumption: 6%
Current AS 15
Expected Return (1,400*9%) = INR 126 Cr
Interest Cost (1,500*6%) = INR 90 Cr
Net Income (126-90) = INR 36 Cr
Ind AS 19
Net Defined Benefit Liability (1,500-1,400) = INR 100 Cr
Net Interest Expense (100*6%) = INR 6 Cr
C. Assumption for Discount Rate
Under Ind AS 19, companies that have subsidiaries or branches domiciled outside India, can use the yield rate of high-quality corporate bonds of the respective domiciled country for determining the discount rate for valuing employee benefit liabilities related to such subsidiaries or branches, provided that the corporate bond market for such a country is deep and liquid.
Under AS 15, for valuing Plans’ defined benefit liabilities related to such foreign branches or countries, only the yield rate of government bonds of such foreign countries was permissible.
D. Increased Disclosures – Providing Risk Insights
Ind AS 19, in concurrence with international best practice, requires an entity to be more transparent to enable the users of the Financial Statements to fully comprehend the underlying inherent risks. This has created more disclosure requirements under the new Ind AS 19 regime, discussed as follows:
D.1 More information on Employee Benefit Plans
Ind AS 19 requires entities to disclose more information and details of their employee benefit Plan which includes the nature of the benefits, description of the regulatory framework in which the Plan operates and a description of any other entities responsible for the governance of the Plan. It further expands the disclosure requirements to provide greater insights into the risk exposure and concentration of risks.
D.2 Classification of assets on different risk definitions
Ind AS 19 requires principle based disclosure on the Plan’s assets so as to comprehend its underlying nature and risks, in comparison to previous prescriptive rules, requiring the classification of the assets into different categories.
Thus, under the new standards, companies need to disclose:
– those assets that have a quoted market price and those that do not
– type of issuer of the assets and credit rating
D.3 Provide Split of Actuarial Gains and Losses
Ind AS 19 requires the actuary to split the arising actuarial gains and losses into the demographic and financial assumptions.
Under AS 15, as no segregation was required, the gains/losses arising from such factors were offset against each other.
Separate disclosure will help the user to understand the main drivers of such actuarial gains and losses. Also companies and valuing actuaries have to choose more realistic and prudent assumptions.
D.4 Sensitivity Testing
Under Ind AS 19, companies now have to additionally conduct sensitivity tests and disclose the results, showing the effects on their defined benefit obligation of possible changes in the significant assumptions such as:
– Discount Rate
– Attrition Assumption
– Mortality Assumption
Further disclosures are required, to show the method and assumptions used to determine the degree of sensitivity and limitations and the details of any changes in the method and assumptions from the previous period.
D.5 Risk Management Disclosure
Under Ind AS 19, entities are also required to disclose different risk management and mitigation strategies adopted such as Asset/Liability Management and the extent to which the duration of the assets matches that of the liabilities. Further information is required to be disclosed on the maturity profile, i.e. cash-outflow and inflow of the Plan, in addition to the company’s funding arrangements and funding policy.
How Can We Help
At Lux, we provide our clients with comprehensive actuarial valuation and reporting services, relating to their employee benefits under National and International Generally Accepted Accounting Principles.
Through our extensive experience of IAS 19 reporting, we can help you to adopt Ind AS 19 for the first time and thereafter conduct your regular actuarial valuations year-on-year.
Furthermore, we can deliver a training programme to your executive board and senior management team to enable them to fully understand the changes introduced by the new standards and how they will impact on your Financial Statements and your HR and Finance practices.
Lux Actuaries & Consultants
Lux Actuaries & Consultants is an international actuarial, employee benefit and risk analytical consulting company with operations in the Gulf, Europe and India.
This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be used as a substitute for detailed research or to exercise professional judgment.
Lux Actuaries & Consultants will not accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate regulations.