The only permanent thing is change. While Corporate India is grappling with sustainability of growth and profits in the face of inflation and global economy worries, it has been making multiple strides to improve the credibility of the India growth story through initiatives like IFRS convergence, reporting in XBRL and an increased focus on governance.
The IFRS changes are expected to bring substantial changes in revenue recognition, consolidation, deferred tax, lease, financial liabilities, amongst others. In order for the companies to be prepared for a timely compliance with IFRS changes, a robust framework encompassing the following aspects is critical.
People are critical assets to ensure profitable growth and hence creating visibility of and emphasising the impact of IFRS changes on people costs to the HR fraternity and actively involving them in the change management is very important. HR can also be a strategic business partner in the overall IFRS change management process that finance teams will be going through.
With regards to people costs in particular, the International Accounting Standards Board (IASB) has issued IAS 19, Employee Benefits (IAS 19, rev.2011). IAS 19, rev. 2011 is effective for fiscal years beginning on or after 1 January 2013; retrospective application (restatement of prior periods’ financial statements and financial information presented for comparative purposes) is required, which means that the change is relevant from 1 January 2012.
As amended, IAS 19 will require immediate recognition of all changes in the funded position of the employers’ retirement plans. The key changes for plan sponsors to consider from a HR perspective are:
Immediate recognition of all noncash changes in funded position impacting the Balance sheet instead of the P&L account. This means that gains or losses arising from the experience being different from the assumptions or change in assumptions would now be routed through the balance sheet rather than through the P&L.. For instance, if for a gratuity valuation as at 31 March 2010, the salary escalation assumption used was 7% and the estimated liability at the end of the financial year 2011 was Rs.100 million. At the end of the year the liability would be calculated on the actual data as at that date. If the actual salary escalation was 10% during the year, then the liability as at 31 March 2011 could be Rs.140 million resulting in a loss of Rs. 40 million. While under the existing reporting scenario, the entire loss of Rs.40 million would have flown through the P&L, under the proposed IFRS standard, the amount would be taken to reserves leaving the P&L intact.
The key impacts to note are:
There has to be greater scrutiny on the assumptions used for valuations as the use of appropriate assumptions of salary escalation, attrition, leave utilisation etc. will enable the employee benefit accrual cost to be measured more accurately. Also, auditors would now have a greater focus on assumptions to ensure that the profit and loss account is not managed on account of employee benefit costs as the gains/ losses out of experience being different from assumptions will not flow through the P&L.. HR’s role becomes critical in supporting the business with choosing suitable assumptions.
As a by product, the employee cost in the profit and loss account would now be the true cost of benefit accrual and can be used as a reference for policy decisions/ reward and benefit positioning
Besides the employee benefit costs accrual could be a valuable input to the total reward structuring and communication as well
Expanded disclosures to provide more insight into the company’s risks associated with the retirement plans, including the timing, amount and uncertainty of future cash flows, and the implications of the regulatory environment in which the plans operate. From a HR perspective, the points to note are:
The expanded disclosures would provide valuable MIS into decision making and policy changes besides reward and benefit structuring
Taking a step further, this could provide material inputs to the manpower planning process by giving the projected head count under the assumed attrition scenario
The need of the hour is a cohesive approach where the finance, HR teams and the actuary / talent and rewards consultant discuss these key implications of change and take a comprehensive look at:
Assumptions review for employee benefit actuarial valuations
Review corporate rewards strategy from an IFRS perspective especially looking at the variable compensation programmes such as share based payments, long term incentives besides long term and retirement benefits
Review the employee performance metrics and align them to the business performance metrics measurement changes/ reporting under the modified IFRS regime
Assess the impact of revenue recognition changes on performance incentives, bonuses and make suitable alignment / communication, and
Be aligned to the change in recognition of benefit plan change costs directly in P&L and make considered decisions while making benefit plan changes
Towers Watson, a global leader in the employee benefits consulting space, considers the recent IFRS Amendments as a step in the right direction to further enhance disclosures and transparency regarding employee benefit liabilities.
Anuradha Sriram – Director, Benefits Practice, Towers Watson, India
Republished from the October 2011 issue with permission from Human Capital magazine
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