The gratuity liability is expected to rise, as the new labour codes have redefined wages and eased the eligibility for such a benefit for fixed-term workers, including the contractual ones.
This liability, the ICAI said, needs to be recognised in interim financial statements/results of companies for the December quarter, in sync with relevant accounting requirements.
These clarifications are part of a set of frequently asked questions (FAQs) issued by the Accounting Standards Board of the ICAI to sensitise stakeholders about key accounting implications of the new labour codes.
The government last month consolidated 29 existing labour laws into a unified framework comprising four codes and made these effective from November 21, although supporting rules are yet to be notified.
New gratuity rules
As per the new codes that have subsumed the Payment of Gratuity Act, 1972, gratuity payments to employees have to be calculated on the basis of last-drawn wages, which should be at least a half of total remunerations.
Moreover, fixed-term employees–including the contractual ones–will be entitled to gratuity on completing only one year of service. The requirement of five years of continuous service, however, remains for permanent employees.
Earlier, gratuity was payable to only those employees who have completed five years of continuous service in a company.
The wages, as per the new codes, comprise three components–basic pay, dearness allowance and retaining allowance.
The FAQ also clarifies that any extra liability arising out of the leave encashment rule under the new codes be recognised as an expense immediately.
Accounting practices
The Indian Accounting Standard (Ind AS) 19 and Ind AS 15 govern rules on employee benefits and how companies need to report and recognise them in their financial statements.
The Ind AS 19, which is aligned with the global standards, requires the “past service cost” of companies to be immediately recognised as an expense in the profit and loss statement. This standard is adopted by listed companies, unlisted entities beyond a certain size, banks, large shadow lenders and insurers.
Under the Ind AS 15, adopted mainly by smaller entities, this cost is recognised immediately for vested benefits and amortised for unvested ones.