Education

Keeping employees satiated

Sunit Kumar Basu Arvind Nath | Updated on March 24, 2013 Published on March 24, 2013

Traditional modes of compensation are no longer enough to retain and motivate talented employees, especially with the availability of alternative career options.



Employee cost is a significant component in the profit and loss statements of companies. Over the past decade, it has changed significantly in terms of characteristics and composition, necessitating corresponding changes in its measurement, accounting, and disclosures.

Companies recognise that retention of talented employees is not only critical for survival and stability, but also essential for growth and brand value. However, traditional modes of compensation are no longer enough in retaining and motivating talented employees, especially with the availability of alternative career options.

Accounting Standard 15 — Employee Benefits deals comprehensively with all forms of benefits other than employee share-based payments. Apart from retirement benefits, it deals with short-term benefits such as salaries, wages, bonus, medical insurance, annual leave benefits, and other long-term benefits covering long-term service or sabbatical leave, long-term disability benefit, deferred compensation benefit, and termination costs such as VRS (voluntary retirement scheme). Another significant change brought in by the Institute of Chartered Accountants of India, through a guidance note on ‘Accounting for Employee Share-based Payments’, relates to the accounting for Employee Stock Option Plans (ESOPs), Employee Stock Purchase Plans (ESPPs), and stock appreciation rights.

The main challenge in measuring employee benefits arises when services are provided at present, but the contractual benefits are to be paid in the future. In the case of long-term benefits, where the employer makes a periodical, fixed contribution to a defined fund — such as leave encashment (including sick leave) — this is relatively simple.

However, for post-employment benefits such as gratuity or post-retirement medical assistance, the future benefits payable are based on assumptions and variables, including the demographic profile of employees, mortality rates, future increments in salary over the service period, future cost of medical treatment, and the discount rate. When an employer creates a fund or sets up a trust to meet the future obligation, the fair value of the fund or the value of the plan assets in the trust should be estimated. Because here the actuarial risk and investment risk lie with the employee.

Given the complexity of the underlying assumptions and calculations, companies take the assistance of an accredited actuary. The ICAI’s guidance note prescribes ascertaining the fair or intrinsic value of the shares granted to employees for determining the employee benefit cost. In the case of listed companies, the valuation is with reference to the market price. For unlisted companies, an independent valuation is needed using generally accepted valuation methodology for pricing financial instruments, to comply with the SEBI ESOP Guidelines, 1999.

All the components of employee benefit cost should be recognised as expense in the profit and loss statement and, in certain cases, capitalised as an attributable cost of fixed/ intangible asset, where allowed. The requirement under Indian GAAP for accounting periodical gains or losses arising from experience adjustment and changes in actuarial assumptions is different compared to other international GAAP. The net liability/ asset after adjusting fair value of plan assets is carried forward in the balance sheet.

Apart from the accounting policy followed by a company, the accounting standard requires elaborate disclosures of post-employment employee benefit costs, employee benefit obligations and related funded assets, although there are exemptions for certain disclosure requirements for small- and medium-sized companies. Some of these disclosures have to be made over a five-year period to bring out the trend. For an investor without an accounting background, such elaborate disclosures may appear as information overload. Similarly, the guidance note on share-based payments requires detailed disclosures for outstanding stock options over the accounting period.

With increasing competition to attract and retain talent, innovative ways to benefit and motivate employees are evolving. These include free/ subsidised lunch, health and fitness centre, flexible working hours, crèche facilities for working mothers, paid vacation, health, disability and dental insurance, and sponsorship for higher education. Accordingly, the cost of employee benefits will continue to be a major driver for companies, and further changes are likely in terms of measurement, recognition and disclosure of such costs in financial statements.

Sunit Kumar Basu is Partner, Price Waterhouse, and Arvind Nath is Associate Director, Price Waterhouse

Published on March 24, 2013
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