ICAI AASB Issues Guidance on Labour Codes Impact

The Government of India has implemented the consolidated Labour Codes with effect from 21 November 2025, replacing 29 existing labour laws.
This reform has wide-ranging implications for employee-related costs, statutory liabilities, and financial reporting across entities.

1. ICAI AASB Issues Guidance for Auditors

In response to the implementation of the Labour Codes, the Auditing and Assurance Standards Board (AASB) of the Institute of Chartered Accountants of India (ICAI) has issued guidance to assist auditors in addressing the accounting and audit implications arising from the new legal framework.

The guidance aims to promote consistent application, robust audit procedures, and adequate disclosures.

2. Impact of Revised Wage Definition and Expanded Coverage

The Labour Codes introduce:

• A revised definition of ‘wages’, and
• Expanded employee coverage under various labour and social security laws

These changes are expected to increase employee benefit obligations, particularly in respect of:

• Gratuity, and
• Leave-related liabilities

3. Accounting Treatment under Ind AS and AS

The guidance clarifies that:

• Incremental employee benefit obligations arising from the Labour Codes are to be recognised as past service cost
• Recognition should be in accordance with:

1. 1. Ind AS 19 – Employee Benefits, and
   2. AS 15 – Employee Benefits, as applicable

This has a direct impact on:

• Profit or loss
• Actuarial valuations
• Measurement of defined benefit obligations

4. Audit Implications under SA 250

From an audit perspective, compliance with the Labour Codes falls within the scope of SA 250 – Consideration of Laws and Regulations in an Audit of Financial Statements.

Key audit implications include:

• Heightened audit risk in areas such as:

1. 1. Payroll processing
   2. Statutory dues and compliances
   3. Actuarial assumptions and estimates

• Increased risk of non-compliance or misstatement, particularly during the transition phase

5. Focus Areas for Auditors

The guidance emphasises the need for:

• Focused audit procedures around employee benefit computations
• Evaluation of management’s assumptions and actuarial valuations
• Verification of statutory compliance with the Labour Codes
• Ensuring robust disclosures relating to:

1. 1. Changes in employee benefit obligations
   2. Nature and financial impact of the Labour Codes

6. Key Takeaway

The implementation of the consolidated Labour Codes represents a significant structural shift in India’s labour law framework with substantial accounting and audit implications. The AASB’s guidance supports auditors in navigating increased complexity, ensuring appropriate recognition of employee benefit costs, strengthened compliance under SA 250, and transparent financial reporting.

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