Library / Technical Accounting Manual: IFRS, IAS and Ind AS Equivalents
IAS 19 - Employee Benefits
Indian equivalent: Ind AS 19 - Employee Benefits
Objective and scope
IAS 19 governs how a company accounts for everything it owes its employees in return for their service - salaries, bonuses, paid leave, and especially long-term promises like pensions and gratuity - making sure the cost is recognised when the employee earns it, not just when it is paid.
Core principle
Employee benefits are earned today but often paid years later (a pension, a gratuity). IAS 19 says: recognise the cost as the employee works, and for defined benefit promises, use an actuary to estimate the future obligation and discount it to today's value. The distinction between defined contribution and defined benefit plans is everything. |
Defined terms and technical terminology
Term | Technical meaning |
|---|---|
Short-term benefits | Benefits due within 12 months - wages, salaries, paid annual leave, bonuses. Recognised as the employee serves. |
Defined contribution (DC) plan | The employer pays a fixed contribution (e.g., to a provident fund) and has no further obligation. Simple: expense the contribution. |
Defined benefit (DB) plan | The employer promises a specified future benefit (e.g., gratuity = 15 days' pay per year of service). The employer bears the risk. |
Defined benefit obligation (DBO) | The present value of the future benefit employees have earned to date, estimated by an actuary. |
Actuarial assumptions | Estimates (salary growth, discount rate, mortality, turnover) used to value the DB obligation. |
Remeasurements | Actuarial gains/losses and returns on plan assets - recognised in OCI, not profit. |
Application and worked illustrations
The two plan types
Defined contribution is easy: the employer pays a set amount (say 12% of salary to a provident fund) and is done - the expense equals the contribution. All investment risk sits with the employee. Defined benefit is hard: the employer promises a specific future payout, so it carries the risk that costs rise. IAS 19 requires the obligation to be measured actuarially using the projected unit credit method and discounted to present value.
Worked example 1 - defined contribution
A company contributes 12% of a ₹50,000 monthly salary to a provident fund = ₹6,000/month. The accounting is simply an expense of ₹6,000 each month; no future obligation remains.
Journal entry - Monthly DC contribution | ||
|---|---|---|
Account | Debit (₹) | Credit (₹) |
Employee benefit expense (P&L) | 6,000 | |
Cash / Payable | 6,000 | |
Worked example 2 - defined benefit (gratuity)
A company promises gratuity of 15 days' salary per year of service, payable on retirement. An actuary estimates the present value of all such promises earned to date at ₹80,00,000 - this is the defined benefit obligation. The annual P&L charge combines the current service cost (benefit earned this year) and net interest on the obligation. Any remeasurement (from changed assumptions, e.g., a lower discount rate raising the obligation) goes to Other Comprehensive Income, not profit, to avoid volatile earnings.
Other long-term and termination benefits
Compensated absences (accumulating leave that can be carried forward/encashed) are accrued as earned. Termination benefits (e.g., a voluntary retirement scheme) are recognised when the entity is demonstrably committed - you cannot realistically withdraw the offer.
Common mistake: expensing gratuity/pension only when paid. Defined benefit cost must be recognised as service is rendered, based on the actuarial valuation. |
Common mistake: routing actuarial gains/losses through profit. Remeasurements go to OCI and are never recycled to profit. |
IND AS LINK Ind AS 19 is aligned with IAS 19. In India this drives the accounting for gratuity (Payment of Gratuity Act), leave encashment, and pension schemes, all requiring actuarial valuation - a major practical area for Indian companies. |
Further worked illustrations
Extra numeric example - accumulating paid leave
Employees earn 20 days of annual leave; unused leave can be carried forward and encashed. At year-end, staff have 300 unused leave-days in total, and the average day's pay is ₹2,000. The company must accrue a liability of 300 × ₹2,000 = ₹6,00,000 for leave earned but not yet taken - because the employees have rendered the service that earned it, even though it will be paid later.
Journal entry - Accrue compensated absences | ||
|---|---|---|
Account | Debit (₹) | Credit (₹) |
Employee benefit expense (P&L) | 6,00,000 | |
Leave provision (liability) | 6,00,000 | |
INDIAN REGULATORY CONTEXT Every Indian company covered by the Payment of Gratuity Act must obtain an actuarial valuation of its gratuity obligation under Ind AS 19. The actuary uses assumptions like the discount rate (often benchmarked to government bond yields), salary escalation, and attrition. A fall in bond yields raises the obligation - and that remeasurement goes to OCI, keeping reported profit stable. |
TECHNICAL EDGE CASE A company's gratuity obligation is ₹80,00,000 when the discount rate is 7%. If market yields fall and the rate drops to 6%, the present value of the same future payments rises - say to ₹88,00,000. That ₹8,00,000 increase is an actuarial loss recognised in OCI (not profit). Nothing about the actual promises changed - only the rate used to discount them - yet the balance-sheet liability jumps. |
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