The Institute of Chartered Accountants of India (ICAI) has directed companies to immediately account for the financial impact of the new labour codes in their profit and loss statements for the quarter ending December 2025. The move will require businesses to recognize a significant rise in their gratuity and leave benefit liabilities upfront.
Immediate Recognition of Past Service Cost
Charanjot Singh Nanda, President of ICAI, confirmed in an interview that a formal guidance note mandates this action. The core change stems from the standardized definition of wages under the labour codes. At least 50% of an employee's total remuneration must now be classified as wages, which forms the basis for calculating gratuity. Previously, many companies computed gratuity on a smaller base, as various allowances formed a larger part of the pay package.
The guidance note clarifies that any increase in gratuity liability due to this expanded wage definition is a 'past service cost'. For listed companies and large unlisted entities following Ind AS 19, this additional expense must be recognized immediately in the quarterly profit and loss statement. There is no provision for exemption or one-time relief.
Accounting Treatment for Different Companies
The rules vary slightly for smaller companies following Accounting Standard 15 (AS 15). For employees who have already completed the required service period, the extra cost must be booked immediately. For others, the cost can be spread out, or amortized, over the remaining vesting period.
While unlisted companies typically prepare only annual statements, their financial data feeds into the consolidated accounts of any listed parent company. Furthermore, unlisted firms preparing for an initial public offering (IPO) and compiling quarterly results for that purpose must also incorporate this labour code impact.
Amit K Agarwal, Partner & Leader, Accounting Advisory at BDO India, advised managements to estimate the financial implications based on the expanded wage definition. He emphasized that for the December 2025 quarter results, companies should calculate the increased gratuity liability accordingly.
Broader Impact and Upcoming Changes
The new wage definition includes basic pay, dearness allowance, and retaining allowance. All other allowances are treated as exclusions. Crucially, if these excluded components exceed 50% of total remuneration, the excess amount is automatically added to the wage base for statutory calculations. This shift affects not just gratuity but also computations for employees' state insurance, leave encashment, overtime, and statutory bonus, leading to higher overall costs for organizations.
ICAI President Nanda also highlighted two forthcoming accounting changes. A new standard, Ind AS 119, aimed at subsidiaries without public accountability, is set to apply from 1 January 2027. This will reduce compliance burdens for such subsidiaries whose accounts are merged with a parent company following Ind AS, aligning India with global best practices.
Additionally, a revised Ind AS 118, which introduces a new format for financial statements, is due for notification. This revision promises a more structured and consistent approach to disclosing financial performance without altering how it is measured. Nanda concluded by stating that chartered accountants will play a vital role in India's journey toward a $5 trillion economy by ensuring a robust financial ecosystem.
