Government\nof India is actively working on reforms of various old laws out of which one is\nnew Labour Code which was cleared by both the houses of parliament in July 2019\nand received Presidents assent l on 8th August 2019 and called \u201cThe code of\nWages 2019\u201d<\/p>\n\n\n\n
However,\nmany provisions of the Code of Wages 2019 are still not implemented and are yet\nto be made effective.` The major challenge in bringing about any labour reforms\nis to facilitate employment growth while protecting workers’ rights. Further,\nwith the passage of time, labour laws needed an overhaul to ensure\nsimplification and updation, along with provisions which can capture the needs\nof emerging forms of labour (e.g., migrant workers, contract workers, gig\nworkers etc.).<\/p>\n\n\n\n
Although\nthe Code on Wages received the assent of the President of India on 8 August\n2019, the other three codes were presented in the monsoon session of the\nParliament in September 2020.<\/p>\n\n\n\n
The\nCode of Wages seeks to amend and subsume the laws relating to wages and bonus\nand matters connected therewith or incidental thereto.<\/p>\n\n\n\n
Key\nchanges of the labour code are as follows:<\/p>\n\n\n\n
Fixed Term Employment<\/em><\/strong> Gratuity\nshall be payable on pro rata basis, in case of an employee employed on\nfixed-term employment or a decreased employee.<\/p>\n\n\n\n Impact on Gratuity benefits<\/em><\/strong> Overtime: <\/strong>The\nCode has introduced a provision stating that overtime of workers is subject to\ntheir consent for the work.<\/p>\n\n\n\n Strikes\nand Lock outs – <\/strong>a. Notice period for strike or lock-out – Within 60 days before\nstrike (as opposed to 6 weeks in current regime) b. Prohibition on strike or\nlockout within 14 days of notice – applicable to all establishments (Reporting\nby the employer to the authority within 5 days)<\/p>\n\n\n\n Retrenchment\/ Lay off\/ Closure<\/strong> There\nis a new provision added to provide powers to Central Government to defer or\nreduce the contribution rates (under PF and ESI) for a period of up to 3 months\nat a time in the case of a pandemic, endemic, or national disaster. This is\nobviously coming from the on-going Covid-19 pandemic.<\/p>\n\n\n\n Hours\nof work<\/strong>: 8 hours of daily work is mandatory for all workers; Period of\nwork including rest interval and spread over to be notified. Prohibition of\noverlapping shifts is applicable to all establishments except for mines.<\/p>\n\n\n\n Leave\nwith wages<\/strong>: The Code applies provisions relating to annual leave with\nwages to workers of all establishments (1 day for every 20 days of work\nperformed for establishments other than underground mines and 1 day for every\n15 days of work performed underground in mines). The eligibility limit has been\nchanged to 180 days from 240 days of working.<\/p>\n\n\n\n Deductions: <\/strong>Under\nthe Code, an employee’s wages may be deducted on certain grounds including: (i)\nfines, (ii) absence from duty, (iii) accommodation given by the employer, or\n(iv) recovery of advances given to the employee, among others. These deductions\nshould not exceed 50% of the employee’s total wage.<\/p>\n\n\n\n Determination\nof bonus: <\/strong>All employees whose wages do not exceed a specific monthly\namount, notified by the central or state government, will be entitled to an\nannual bonus. The bonus will be at least: (i) 8.33% of his wages, or (ii) Rs\n100, whichever is higher. In addition, the employer will distribute a part of\nthe gross profits amongst the employees. This will be distributed in proportion\nto the annual wages of an employee. An employee can receive a maximum bonus of\n20% of his annual wages.<\/p>\n\n\n\n Implications<\/em><\/strong> Gratuity\nfor fixed term contractual employees on a pro-rata basis, even if the contract\nis for less than 5 years, may result in additional gratuity cost, once the new\ncode is enacted. AS 15 and Ind AS 19 require all post-employment defined\nbenefit scheme to be measured using projected unit credit method.<\/p>\n\n\n\n Changes\nin the terms or membership of a defined benefit plan might result in a plan\namendment or a curtailment or settlement. IAS 19 requires an entity to\ndetermine the amount of any past service cost, or gain or loss on settlement,\nby remeasuring the net defined benefit liability before and after the\namendment, using current assumptions and the fair value of plan assets at the\ntime of the amendment. Current service cost and net interest are usually calculated\nusing assumptions determined at the beginning of the period.<\/p>\n\n\n\n However,\nif the net defined benefit liability is remeasured to determine past service\ncost or the gain or loss on settlement, current service cost and net interest\nfor the remainder of the period are remeasured using the same assumptions and\nthe same fair value of plan assets. The additional expense is charged to profit\nor loss in the period after the plan amendment, curtailment or settlement, and\nit might mean that the net defined benefit liability is remeasured more often.\nUnder AS 15, the additional impact can be deferred and charged to profit and\nloss over the employment term.<\/p>\n\n\n\n AS 12: Recognition of\nDuty Credit Entitlement Certificates as government grants<\/strong><\/p>\n\n\n\n Query<\/strong> Since Y Ltd. utilized\nthe above entitlement against the import of capital goods, the company has\ncapitalized only net cost of capital goods in the books i.e. net of import\nduty. Y Ltd. treated the entitlement as government grant under AS 12 Accounting\nfor Government Grant. <\/em>Whether the accounting treatment adopted by Y\nLtd. is correct in respect of above transaction?<\/p>\n\n\n\n Answer<\/strong> As per AS 12, the\nassistance provided by the government to an entity either in cash or in kind\nfor past or future compliances with certain conditions shall be treated as\ngovernment grant. It shall exclude those forms of grants which cannot be\nreasonably valued upon and which cannot be distinguished from normal trading\ntransaction. Further, para 8.1 and 10.1 of AS 12 distinguishes between the\ncapital grant and the grant in nature of promoters’ contribution. Those grants\nwhich are related to specific fixed assets shall be accounted under capital\ngrant and grants which are provided with reference to total investment shall be\naccounted under grant in nature of promoters’ contribution.<\/p>\n\n\n\n Looking into the facts,\nit can be seen that assistance is provided with reference to foreign exchange\nearnings during the previous financial year; not with reference to total\ninvestment in entity. Thus, it would be appropriate to account the above\ntransaction under AS 12 but it should be treated as grant related to revenue.\nAs per the conditions mentioned for utilization of duty credit entitlement, it\ncan be noted that it is not necessary to utilize the credit entitlement for\nimport of capital goods only but can be used for import of consumables, office\nequipment.<\/p>\n\n\n\n Further, the credit\nentitlement can be transferred to another entity within the same group which\nmakes it revenue generating in nature. Therefore, Y Ltd. is not correct in\nshowing the grant as deduction from gross value of capital goods.<\/p>\n\n\n\n References<\/strong><\/p>\n\n\n\n Equipment provided free\nof cost by the buyer cannot be recognized as an asset in the books of entity<\/strong><\/p>\n\n\n\n Query<\/strong> B Ltd. accounted the\nabove BFEs as inventory and considered its value (cost price) as a part of sale\nvalue in the year of delivery. Whether the accounting treatment adopted by B\nLtd. in respect of above transaction is correct?<\/p>\n\n\n\n Answer<\/strong> As per para 49 (a) of\nthe Framework for the Preparation and Presentation of Financial\nStatements<\/em>, any item can be termed as an inventory if it meets the\ndefinition of asset – a resource controlled by the entity as a result of its\npast events from which future economic benefits are expected to arise to the\nentity.<\/p>\n\n\n\n From the facts provided,\nit can be noted that the BFEs are directly supplied by the buyer to B Ltd. for\ninstallation purpose free of cost for which no cost is incurred by B Ltd. Thus,\nneither any cost is incurred by B Ltd. nor any amount is recoverable on account\nof such BFEs except installation charges which are included in the contract\nprice. Further, these BFEs are returned to the buyer as a part of product once\nthe product is complete. Therefore, these BFEs cannot be considered as an asset\nand cannot be treated as a part of inventory. Also, its value (cost price of\nBFEs) cannot be considered as a part of sale value or revenue to the entity.<\/p>\n\n\n\n References<\/strong><\/p>\n\n\n\n Relevant Extract<\/strong><\/p>\n\n\n\n Para 49 of Framework for the Preparation and Presentation of Financial Statements<\/strong> Government of India is actively working on reforms of various old laws out of which one is new Labour Code which was cleared by both the houses of parliament in July 2019 and received Presidents assent l on 8th August 2019 and called \u201cThe code of Wages 2019\u201d However, many provisions of the Code of Wages 2019 are still not […]<\/p>\n","protected":false},"author":3,"featured_media":400,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":"","_links_to":"","_links_to_target":""},"categories":[14],"tags":[87,88,118,25],"class_list":["post-398","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-general","tag-ind-as","tag-indian-accounting-standards","tag-labour-code","tag-statutory-audit"],"yoast_head":"\n
New definition introduced for “Fixed Term Employment” (FTE) to provide benefits to such employees at par with permanent worker. Termination on completion of tenure of FTE will also not be counted as retrenchment. Completion of five years is not mandatory where termination of employment is due to death or disablement. <\/p>\n\n\n\n
Permanent employees would be eligible for gratuity after completion of five years as presently exists under the Act, while fixed term employees will have no such criteria, such employees will be paid on the basis of the tenure of their employment with the organization. <\/p>\n\n\n\n
Establishment with 300 or more workers to take prior approval of Central or State Government before lay off or retrenchment or closure. (as opposed to current threshold of 100 workers) <\/p>\n\n\n\n
Overall, the code is expected to benefit the employees across various sectors, especially, those working in the unorganized sectors, gig workers and platform workers. The Code requires employers of gig workers and platform workers to contribute an amount of 2% (maximum 5%) of their turnover for the purpose of funding the schemes aimed at providing social security to the workers. It is expected to increase the cost of companies’ operations. It is uncertain whether these costs would be passed on to the workers by way of deductions in their remunerations. <\/p>\n\n\n\n
A company Y Ltd. has been granted duty credit entitlement certificates equivalent to 5% of foreign exchange earned in the previous financial year under Served From India Scheme. These credit entitlements shall be valid for three years and can be used for import of any capital goods including spares, office equipment and consumables, etc. The entitlement can be transferred to another entity within the same group in case it remains unutilized. Y Ltd. utilized the above entitlement against the import of capital goods and has not paid any import duty on the said import. <\/p>\n\n\n\n
No, the accounting treatment adopted by Y Ltd. is not correct. <\/p>\n\n\n\n\n
A Company say, B Ltd. is engaged in the business of Warships and Submarines. One of its buyer has entered into a contract for construction and delivery of two ships on a fixed price contract basis along with variable component is respect of certain items of cost. Since the product has to be prepared as per the buyer’s specification, B ltd. has installed certain machineries – Buyer’s Furnished Equipment (BFE) supplied by the buyer for which the installation charges were paid by the buyer and included in the contract price. The buyer has delivered the equipment to B Ltd. free of cost for installation purpose. <\/p>\n\n\n\n
No, the accounting treatment adopted by B Ltd. is not correct in respect of above transaction. <\/p>\n\n\n\n\n
(a)An asset is a resource controlled by the enterprise as a result of past events from which future economic benefits are expected to flow to the enterprise.<\/em> <\/p>\n","protected":false},"excerpt":{"rendered":"