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ICAI FAQ on Key accounting implications arising from the New Labour Codes
Against the backdrop of the implementation of the New Labour Codes, the revised definition of 'wages' under the four Labour Codes, including the Code on Wages, 2019, and the Code on Social Security, 2020, has implications for accounting for employee benefits. In particular, the requirement that basic wages constitute at least 50% of total remuneration affects the measurement of gratuity and other wage-linked benefits such as provident fund, ESIC, and leave encashment. To address implementation-related accounting questions, the Institute of Chartered Accountants of India (ICAI) has issued an FAQ document titled "FAQs on Key Accounting Implications arising from the New Labour Codes" ('ICAI FAQs'). This alert summarizes the clarifications from the ICAI FAQs.
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Based on legal evaluation referred to in the ICAI FAQs, the revised wage definition under the New Labour Codes is applicable with immediate effect from the date of notification in the Official Gazette, i.e., 21st November, 2025. Accordingly, employees whose last working day falls on or after 21st November 2025 are required to be paid gratuity in accordance with the provisions of the New Labour Code. This legal interpretation underpins the accounting implications discussed in the FAQs and determines the timing of recognition of the related impacts.
The FAQs indicate that entities may see an increase in their gratuity obligation due to a higher salary base for gratuity computation and the extension of gratuity to fixed-term employees who have completed one year of service, thereby increasing the defined benefit obligation (DBO). Applying the principles of AS 15 and Ind AS 19, the resulting change in the obligation arising from the revised wage definition is considered a plan amendment, because it alters the benefit formula. The impact represents past service cost (PSC) relating to employee service already rendered, which is expected to be positive in most cases.
The accounting treatment of PSC for DBO differs under AS 15 and Ind AS 19. Under AS 15, past service cost relating to vested benefits (DBO) must be recognised immediately in the Statement of Profit and Loss. For unvested benefits (DBO), the PSC is deferred and amortised on a straight-line basis over the remaining vesting period. For balance sheet presentation, the unamortised portion of PSC is reduced from the defined benefit obligation and disclosed separately.
Under Ind AS 19, past service cost must be recognised immediately in the Statement of Profit and Loss, with no scope for deferment. Such cost cannot be recognised in Other Comprehensive Income, as it does not arise from changes in actuarial assumptions.
ICAI has reiterated the principles as per AS 15 and Ind AS 19 that any past service cost related to other long-term benefits cannot be deferred, and must be recognised immediately in the Statement of Profit and Loss.
The ICAI FAQ also provides guidance on disclosure. The need to disclose the impact as an exceptional item should be assessed based on the relevant facts, circumstances and the size of the impact. In all cases, entities are expected to include an explanatory note describing the nature of the change and its financial impact.
The ICAI has further clarified that these principles apply equally to interim financial statements, including Q3 results. Interim financial statements under both AS and Ind AS are required to follow the same accounting policies that would be applied at the year-end. Accordingly, costs that cannot be deferred at year-end cannot be deferred at the quarter-end.
For entities with a December year-end, the impact is particularly immediate, as the gratuity liability as at 31 December 2025 will need to be measured using the revised wage definition.
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Our Comments
The ICAI FAQs explain how and when to recognize the accounting impact of the New Labour Code. Since the changes to the wage definition apply from 21 November 2025, entities may see an impact on gratuity and other employee benefit costs in the current period, including interim results, depending on their specific circumstances. While the impact is largely one-time, it should be properly assessed, appropriately reflected in the financial statements, and clearly explained to users. In addition to gratuity, entities will also need to reassess other employee benefits linked to basic wages, such as provident fund, ESIC, and leave encashment, to the extent these are affected by the revised wage definition.
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