Schedule III of the Companies Act, 2013 requires companies to present their balance sheet with assets and liabilities classified into current and non-current portions. This classification applies equally to provisions for employee benefits — including gratuity, earned leave, and pension. The Guidance Note on Schedule III issued by the ICAI (February 2016) provides the framework for how this should be done.
The Regulatory Basis
Para 7.3 of the ICAI Guidance Note on Schedule III addresses employee benefit provisions specifically. The key test is whether the company has an unconditional right to defer payment beyond twelve months. For most employee benefit obligations, this right does not exist in an absolute sense — employees can resign, retire, or pass away at any time — so the classification must be estimated using actuarial assumptions rather than contractual terms.
Classification by Benefit Type
Short-Term Benefits (Salaries, Bonuses, Non-Accumulating Leave)
Amounts that are expected to be settled wholly within twelve months of the reporting date are classified entirely as current liabilities. This is straightforward — outstanding salaries payable, performance bonuses accrued for the year, and any non-accumulating leave balances are all current.
Post-Retirement Benefits — Funded Plans
Where the gratuity or pension plan is funded through an approved trust or insurer, the current liability represents the expected contribution to the fund over the next twelve months. This figure depends on three factors:
- The company's funding policy — whether it funds the shortfall over one year or several years.
- Any minimum contribution requirements stipulated by the fund manager or trust deed.
- The expected increase in the gross obligation over the next twelve months — i.e., the current year service cost and interest cost, net of expected benefit payments.
The actuary considers all these factors when disclosing the current and non-current split. It is not sufficient to simply ask "how much is payable in the next twelve months" — the funded nature of the plan changes the relevant question to "how much needs to be contributed to the fund."
Post-Retirement Benefits — Unfunded Plans
For unfunded plans, the current portion represents the benefits expected to be paid out directly within the next twelve months. These are estimated based on the actuary's assumptions for mortality, attrition, and expected retirements during the period. A typical year-end actuarial report will separately disclose the projected benefit payments for the next one, two, three, four, and five years, and then in aggregate for years six through ten — which directly informs the current/non-current split.
Compensated Absences (Accumulated Leave)
Accumulated leave — privilege leave or earned leave — introduces an additional dimension: the possibility that employees may avail (take) their leave during the next twelve months, in addition to leaves that become payable on exit. The current liability for leave encashment therefore has two components:
- The value of leave expected to be availed in the next twelve months (estimated using an assumed availment rate).
- The value of leave expected to be paid out on death, resignation, or retirement within the next twelve months.
The sum of these two components constitutes the current liability for accumulated leave. Leave that is neither expected to be availed nor paid out within twelve months is classified as non-current.
Illustrative Scenarios
Scenario A: Funded Gratuity Plan, Moderate Attrition
A manufacturing company maintains an LIC group gratuity fund. The gross obligation is ₹8.2 crore. The fund corpus is ₹6.8 crore. The net liability is ₹1.4 crore. Based on the company's funding policy and expected increases in obligation, the actuary estimates a contribution of ₹55 lakh is needed in the next twelve months — this is the current liability. The remaining net liability is non-current.
Scenario B: Unfunded Gratuity Plan, High Attrition
A technology services firm carries an unfunded gratuity liability of ₹3.6 crore. The actuary projects ₹42 lakh in gratuity payments during the next twelve months based on assumed attrition, expected retirements, and mortality. This ₹42 lakh is the current liability; the remaining ₹3.18 crore is non-current.
Scenario C: Earned Leave — Mixed Availment and Exit
A services company has accumulated leave obligation of ₹1.9 crore. The actuary estimates that ₹18 lakh worth of leave will be availed in the next twelve months, and ₹9 lakh will be paid out on exits. Total current liability: ₹27 lakh. Non-current: ₹1.63 crore.
What Should You Do?
- When commissioning an actuarial valuation, explicitly request the current and non-current bifurcation for each benefit — gratuity, leave, and any other long-term benefit separately.
- For funded plans, share your company's funding policy with the actuary so that the current contribution estimate is grounded in your actual funding strategy, not a generic assumption.
- For leave encashment, share your company's leave availment policy and historical data — this helps the actuary set a more accurate availment rate assumption.
- Ensure the bifurcation is reflected consistently in your balance sheet format and in the notes to accounts — auditors will cross-check these.