Labour code: Companies must recognize increased liability in Dec quarter, says ICAI chief
The labour codes mandate that at least 50% of an employee's total remuneration must be treated as wages, the basis for gratuity calculation. This is expected to increase gratuity and leave benefit liabilities.
New Delhi: Companies must recognize the impact of the new labour codes in their December-quarter profit and loss statements, even as a new financial reporting format and lower compliance requirements for unlisted subsidiaries are in the pipeline, according to the head of the accounting profession’s self-regulator.
Businesses are required to reflect any additional gratuity liability arising from the labour codes upfront in their December-quarter results, Charanjot Singh Nanda, president of the Institute of Chartered Accountants of India (ICAI), said in an interview, citing a guidance note issued by the accounting rule-maker.
The labour codes mandate that at least 50% of an employee's total remuneration must be treated as wages, the basis for gratuity calculation. This is expected to increase gratuity and leave benefit liabilities for many employers who currently compute gratuity on a smaller base because of allowances accounting for a larger share.
The guidance note, reviewed by Mint, says that any increase in gratuity liability due to application of the new labour codes is ‘past service cost’ as it results in benefits payable. It must be immediately recognized as an expense in the profit and loss statement as per Ind AS 19, the accounting rule for employee benefits that listed and large unlisted companies are required to follow, according to the note.
For smaller companies, accounting standard 15 mandates that the additional cost has to be immediately recognized in the case of workers who have completed the required service period, while it can be amortized over the vesting period for others.
While unlisted companies prepare only annual financial statements, and not necessarily quarterly, this information will be used in their listed parent’s consolidated accounts. Additionally, unlisted companies preparing to go public and preparing their quarterly results for this purpose must take into account the impact of the labour code, experts said.
According to experts, the accounting standards on employee benefits (AS 15 and Ind AS 19) do not provide any exemption or one-time relief for the accounting treatment of the increase in gratuity liability arising from past service costs.
“Managements should estimate the financial implications considering the expanded wage definition and the requirements notified till date," said Amit K Agarwal, partner & leader, Accounting Advisory, BDO India. “For example, while preparing the results for the quarter ending December 2025, managements should estimate the increase in gratuity liability as per the expanded definition of wages."
The labour codes standardize the definition of wages, which should include basic pay, dearness allowance and retaining allowance and all other allowances are treated as exclusions. If the excluded components exceed 50%, the excess automatically gets included in wages for statutory calculations. The move impacts calculations for gratuity, employees' state insurance, leave encashment, overtime and statutory bonus, leading to increased costs for organizations.
“Under AS 15, or Ind AS 19 on employee benefits, such an increase in gratuity liability would tantamount to a past service cost and should be recognized as an expense in the statement of profit and loss," added Agarwal.
More accounting changes
ICAI president Nanda said that two more accounting changes are in the offing, including a new standard called Ind AS 119, which deals with subsidiaries without public accountability.
“This standard will be applicable from 1 January 2027," Nanda said. This, he added, will reduce some compliance requirements for subsidiaries whose accounts are consolidated with those of the parent, which follows global best practices under Ind AS. It aims to extend the relaxations given globally to such entities to similarly placed Indian entities, he added. ICAI’s Council will deliberate on the feedback on the draft released for public comments and decide on implementing the standard in its own wisdom, said Nanda.
The ICAI president also said that a revised Ind AS 118, which pertains to a new format for financial statements, is now due for notification. The new format does not alter the way financial performance is measured but lays down a more structured and consistent approach to disclose performance.
Nanda added that India's economic growth trajectory towards a $5 trillion economy makes the role of chartered accountants (CAs) increasingly crucial for a robust and compliant financial ecosystem.
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