Past Service Cost Under New Labour Codes | Ind AS 19 and 34 Explained

1. Facts

Domato Limited hereinafter referred to as “the company, is engaged in the business of restaurants. The company prepares its financial statements in accordance with Ind AS and provides quarterly interim financial results under Ind AS 34. The Company employs a large workforce that is eligible for defined benefit gratuity and long-term leave encashment plans, both of which are actuarially valued in accordance with Ind AS 19.

During the financial year 2025–26, the New Labour Codes became effective from 21st November 2025. Under the said code, there is change in the definition of wages and eligibility criteria for benefits such as gratuity and leave encashment. Due to such change itis expected that it would increase employee related liabilities for many entities. Given the effective date of the codes and the absence of detailed Rules, entities are required to carefully assess the timing of recognition, measurement and presentation of the additional obligations. Although the Rules under the Codes are yet to be notified, legal advice obtained by the company indicates that the revised definition of wages and the expanded employee coverage for gratuity are immediately applicable for employees whose last working day falls on or after 21st November 2025. Consequently, the actuarial valuation as at 31st December 2025 reflects a significant increase in the gratuity and leave encashment obligations due to inclusion of additional wage components and higher base salaries for benefit computation.

In this context, the management of the company is in dilemma regarding the appropriate accounting treatment of the increased obligation. Further, the management wants to understand whether the increase in gratuity liability arising from the “New Labour Codes” should be treated as a change in actuarial assumptions, resulting in actuarial losses recognised in other comprehensive income, or as a plan amendment triggered by legislative changes, giving rise to past service cost that should be recognised immediately in the statement of profit and loss.

Further, the management wants to understand whether the additional employee benefit obligation should be recognised in the interim financial results for the quarter ended 31st December 2025 or whether recognition can be deferred until the annual financial statements for the year ending 31stMarch 2026, notwithstanding the absence of notified Rules.

2. Relevant Provisions

Ind AS 19 – Employee Benefits

Para 8 of Ind AS 19

Service cost comprises:

(a) current service cost, which is the increase in the present value of the defined benefit obligation resulting from employee service in the current period;

(b) past service cost, which is the change in the present value of the defined benefit obligation for employee service in prior periods, resulting from a plan amendment (the introduction or withdrawal of, or changes to, a defined benefit plan) or a curtailment (a significant reduction by the entity in the number of employees covered by a plan); and

(c) any gain or loss on settlement.

Para 102 of Ind AS 19

Past service cost is the change in the present value of the defined benefit obligation resulting from a plan amendment or curtailment.

Para 103 of Ind AS 19

An entity shall recognise past service cost as an expense at the earlier of the following dates:

(a) when the plan amendment or curtailment occurs; and

(b) when the entity recognises related restructuring costs or termination benefits

Ind AS 34 – Interim Financial Reporting

Para 28 of Ind AS 34

An entity shall apply the same accounting policies in its interim financial statements as are applied in its annual financial statements, except for accounting policy changes made after the date of the most recent annual financial statements that are to be reflected in the next annual financial statements. However, the frequency of an entity’s reporting (annual, half-yearly, or quarterly) shall not affect the measurement of its annual results. To achieve that objective, measurements for interim reporting purposes shall be made on a year-to-date basis.

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