The revised accounting standard would make the role of the actuary vital, not just to calculate actuarial valuations of the liability with respect to employee benefit schemes but also to fully understand the new disclosures.

MR CHRIS MAYES, BENEFIT CONSULTANT, WATSON WYATT

The revised AS-15 accounting standard, which ushers in a new era in accounting for employee benefits, will have a substantial impact on the financial statement of employers, says Mr Chris Mayes, Benefit Consultant, Watson Wyatt, a global consulting firm that partners corporates on people and financial issues, particularly employee benefits and insurance and financial services.

On the implications of the revised accounting standard, he said that it would make the role of the actuary vital, not just to calculate actuarial valuations of the liability with respect to employee benefit schemes but also to fully understand the new disclosures.

The standard was introduced in 2005 and didnt take effect in the fiscal gone by. But it is finally here and we are not expecting any more delays.

On why this new standard means more than ever that the role of the actuary is essential for understanding of the standard and compliance with it, as India Inc. enters a new regime in line with international practices, Mr Mayes said: Employers in India have so far accounted for the cost of retirement benefit schemes in their financial statements under AS-15 (1995).

For un-funded defined benefit (DB) schemes, the accruing liability determined on the basic of actuarial valuations has been charged to the P&L account.

For funded schemes and schemes administered through a life insurer, the annual contribution amount certified by the actuary/insurer has typically been taken as an appropriate charge to the P&L.

In addition, the AS-15 (1995) provided no guidance on the assumptions to be used in the actuarial valuations of the benefits, nor methodology, he added.

Actuaries have, therefore, turned to the professional guidance of the Actuarial Society of India to maintain some broad consistency in this regard.

Now, the accounting framework for DB retirement schemes changes significantly, according to Mr Mayes.

Outlining the key areas of impact, he said that actuarial assumptions will now need to be market-based, i.e., the discount rate has to be based on market yield on government bonds of term consistent with the term of the liabilities and the scheme assets to be shown at their market value.

Besides, P&L charges need to be split into service cost, interest cost, expected return on assets and actuarial gains/ losses. Moreover, disclosure requirements have been significantly enhanced, which he believes will improve transparency and enable consistent comparison of financial statements.

This includes reconciliation of the opening and closing balances of the assets and liabilities, the effects during the period attributable to actuarial gains and losses and a derivation of the actual return earned on scheme assets.

The adoption of the standard was originally planned to be mandatory for accounting years commencing on or after April 1, 2006. However, pressure from corporations, especially banks, led to delay in its adoption.

Now, its mandatory for accounting years commencing on or after December 31, 2006. This means that all companies with a March 31 accounting year-end will need to adopt AS-15 Revised for the current accounting year.

Mr Mayes also expressed confidence that the revised standard will help in identifying the differing objectives of funding and accounting valuations, which have often been muddled up in the past. The actuarial assumptions and the methodology for such valuations have been prescribed in the revised standard.

Stating that one of the most significant changes in the standard is the introduction of a new methodology for calculating P&L charges, he said that for a defined benefit plan, the annual cost will be made up of several components, including current service cost the actuarial present value of benefits attributed by the plans benefit formula to employee service in that year.

The P&L charges will include interest cost on the plans liabilities over the year, minus expected return on plan assets, plus amounts recognised in the current year related to past service costs in the respect of vested current and retired employees, settlements and curtailments over the current year and actuarial gains/losses attributable to the experience adjustment on the plan liabilities and assets, and changes in actuarial assumptions.

What is the state of preparedness among chief financial officers of Indias top companies?

Mr Mayes informed that in 2006, Watson Wyatt conducted a survey of CFOs in India to gauge the level of understanding and to identify their concerns associated with the implementation of the new standard.

The comprehensive survey included the thoughts and understandings of over 225 of Indias largest companies, which are required to adopt the AS-15 revised. Apart from many interesting findings, the survey discovered that 13 per cent of the respondents were not at all familiar with the new standard.

Of the rest, 78 per cent felt AS-15 Revised will improve the quality of financial reporting in the country, while 75 per cent expect that the need for actuarial services will increase.

Volatility of reported cost from year to year on account of specificity of actuarial assumptions has emerged as the biggest concern, closely followed by the concern that contributions can no longer be taken as the reported P&L cost of employee benefits.

The survey also found that 44 per cent of the companies are little or not at all prepared to implement the new standard. Mr Mayes urged all CFOs to ensure in advance that their finance teams have fully analysed the likely impact of the new standard before it takes effect.

D. Murali
C. Ramesh