COVID-19 impact: Accounting treatment of death-in-service schemes

With the unprecedented pandemic claiming many lives, Indian companies have stepped in to extend financial support to the families of affected employees. Examples of such benefits include paying last drawn salary to the employees’ family for a certain period post death of an employee, paying a higher lumpsum over and above the regular term insurance benefit or extending financial support for the childrens’ education of the deceased employee. Given the benefit design and cost implications, companies should consider the following:

• Benefits promised under such uninsured plans carry exposure to a stream of regular pay outs which are similar in nature to pension payments. This kind of future pay out bears interest rate risk as well as actuarial risk in terms of uncertainty in the amount and timing of pay outs for both on-roll employees and beneficiaries. Benevolent funds can be one of the approaches to fund these kinds of benefits.
• There are two types of members under this scheme:
• Family members of deceased employees: The liability for these members would need to be calculated actuarially as the net present value of expected future pay outs and should be provisioned for in the books of accounts.
• Active on-roll employees: Accounting Standards (both IND AS 19 as well as IAS 19) do not specifically address or provide explicit guidance on the accounting of such schemes for active employees. However, given the uncertain nature and timing of pay outs, and the fact that these benefits are not insured, these schemes may be treated as “other long-term benefits”. Hence, there is a possibility that these schemes would have to be valued actuarially. It is recommended that companies discuss the details, as well as the possible accounting treatment of such schemes with their auditors.

Willis Towers Watson Recommendations

• Schemes like these are great initiatives taken by the corporate sector and make a massive difference to the morale of the employees. However, prior to finalising the design of such death-in-service schemes, companies are encouraged to carry out detailed cost impact analysis, including considerations relating to their accounting treatment. There can be multiple benefit parameters impacting the future costs and hence would require cost projections to understand the long term financial implications.
• Assumptions which are used to determine the ongoing cost and actuarial liabilities should be set after sufficient consideration. For such schemes, the mortality rate is the most important assumption and it may be necessary to update the standard mortality tables to account for any short-term impact of COVID-19. Further, some specific assumptions related to family demographics, education inflation, etc. may also be considered which are otherwise not required for regular actuarial valuations of standard employee benefit plans in India.
• In the medium term, companies are encouraged to evaluate how they would want to administer such schemes. Insurance can help to reduce the long-term risks substantially, although the availability of customised insurance products could be a challenge. If these benefits were insured, the cost implications would be short-term and certain in nature which may not require actuarial valuations.

Disclaimer

This note should not be considered as a formal legal or tax advice.