Employee benefits expense and finance costs under Schedule III

Employee benefits expense and finance costs sit next to each other on the face of the Statement of Profit and Loss. In small-company drafts both tend to be filled straight from Tally group totals: "Salary" goes to employee benefits, "Interest" goes to finance costs, and bank charges, tax interest and directors' fees end up wherever the group happened to be. This guide sets out what Schedule III (Division I) requires for the employee benefit expense and finance cost notes, what ICAI's Guidance Note on Division I (Revised January 2022) adds, the AS 15 and AS 16 points that change the figures, and a worked example of both notes. It applies to companies following the Accounting Standards. Ind AS companies use Division II. For the whole format, see our Schedule III guide.

Employee benefits expense and finance costs under Schedule III: the text

Part II of Division I (the Statement of Profit and Loss) has "Employee benefits expense" and "Finance costs" as separate expense lines on the face. The detail comes from the General Instructions for the Preparation of the Statement of Profit and Loss:

The Guidance Note deals with employee benefits in paragraph 9.5.4 and finance costs in paragraph 9.5.5.

Employee benefit expense in Schedule III: the four sub-heads

Salaries and wages. The Guidance Note (para 9.5.4.1) says the aggregate amounts paid or payable for salaries and wages are disclosed here, together with bonus, leave encashment, compensation and similar payments. It also says:

• "Employee" includes directors in whole-time or part-time employment of the company. Directors who only attend Board meetings and are not under a contract of service are excluded. So are consultants and advisers with no employer-employee relationship.
• The test is a contract of service (included) against a contract for services (excluded). Whether part-time staff are included depends on which of the two they have.
• Where a separate gratuity fund is maintained, the contribution to it goes under contribution to provident and other funds. The Guidance Note does not deal with unfunded gratuity. In practice, the provision charged for the year is usually shown within salaries and wages (some companies show it as a separate line in this note); apply one treatment every year.

In practice this means a whole-time director's salary belongs in employee benefits expense. Sitting fees and commission to non-executive directors, and fees to retainers who are not employees, go to other expenses. Many companies show directors' remuneration as a separate line within the note, which also helps the key management personnel disclosure in the related party disclosures under AS 18.

Contribution to provident and other funds. The amounts paid or payable to provident fund and other funds such as gratuity fund, superannuation fund, ESI and labour welfare fund (para 9.5.4.2). Contributions for contract labour may be shown separately here. The Guidance Note adds that penalties and similar amounts paid to statutory authorities are not "contributions" and should not be shown in this line. Damages and interest for late PF deposits therefore need to be taken out of the PF ledger before drafting.

ESOP and ESPP expense. Measured and disclosed under ICAI's Guidance Note on Accounting for Employee Share-based Payments (para 9.5.4.3). AS 15 does not apply to employee share-based payments (AS 15, para 1).

Staff welfare expenses. The total expenditure on staff welfare (para 9.5.4.4).

AS 15 basics: gratuity, leave and the SMC relaxations

The amounts in this note depend on AS 15, Employee Benefits, as notified in the Companies (Accounting Standards) Rules, 2021. The categories it defines (para 7) drive the accounting:

A Small and Medium-sized Company (SMC) under the 2021 Rules is, broadly, an unlisted company that is not a bank, financial institution or insurer, with turnover (excluding other income) up to ₹250 crore in the preceding year and borrowings (including public deposits) not exceeding ₹50 crore at any time during that year, and that is not a holding or subsidiary of a non-SMC. AS 15 gives an SMC these relaxations:

• It need not apply paragraphs 11 to 16 to short-term accumulating compensated absences which are non-vesting (leave that cannot be encashed on leaving).
• For defined benefit plans, it need not apply the recognition and measurement principles in paragraphs 50 to 116, the presentation requirements in paragraphs 117 and 118, or the disclosures in paragraphs 119 to 123. It must still disclose the actuarial assumptions under paragraph 120(l).
• For other long-term employee benefits it need not apply paragraphs 129 to 131.
• It need not discount defined contribution amounts or termination benefits falling due more than 12 months after the balance sheet date.

The point often missed: the relaxations for defined benefit plans and other long-term benefits come with a condition. The SMC "should actuarially determine and provide for the accrued liability", using the Projected Unit Credit Method and a discount rate based on market yields on government bonds at the balance sheet date. The 2021 Rules contain no exemption based on the number of employees. A gratuity provision worked out as 15 days' salary for every completed year of service, with no actuarial valuation, is not what the relaxation allows. The provision itself is split between non-current and current in the balance sheet, as explained in our guide to other current liabilities and provisions under Schedule III.

Finance cost in Schedule III: interest, other borrowing costs and exchange differences

Paragraph 9.5.5 of the Guidance Note explains the three parts of finance costs:

• Interest expense: interest on borrowings from banks and others, and on debentures, bonds or similar instruments. Finance charges on finance leases are also interest expense.
• Other borrowing costs: commitment charges, loan processing charges, guarantee charges, loan facilitation charges, discounts or premium on borrowings, other ancillary costs incurred in connection with borrowings, and the amortisation of such costs.
• Applicable net gain/loss on foreign currency transactions and translation: AS 16 treats exchange differences on foreign currency borrowings as borrowing costs "to the extent that they are regarded as an adjustment to interest costs" (para 4(e)). The Guidance Note says that for presentation there is no requirement to apply the para 4(e) limit, so the entire exchange difference on foreign currency borrowings, to the extent not capitalised, can be presented under finance costs. Other exchange differences go to other expenses or other income under para 5(i)(i).

These line up with AS 16's own list of what borrowing costs may include (para 4): interest and commitment charges, amortisation of discounts or premiums, amortisation of ancillary costs of arranging borrowings, finance lease charges and the exchange differences above. The underlying definition is "interest and other costs incurred by an enterprise in connection with the borrowing of funds" (para 3.1). Our guide to borrowings under Schedule III covers the balance sheet side, including interest accrued.

Interest expense classification: what goes where

The table gives the source for each treatment, and marks the ones that are a matter of practice:

Two points on the MSME interest. Section 23 of the MSMED Act provides that interest payable or paid under the Act is not allowed as a deduction in computing income under the Income-tax Act, 1961, so the amount must also be traced into the tax computation. And Schedule III requires the five MSMED interest disclosures in the trade payables note; the interest paid and accrued shown there should reconcile with the MSME interest in finance costs. Our guide to MSME dues and section 43B(h) covers the disclosure and the tax side.

AS 16 capitalisation: what does not reach finance costs

AS 16 (para 6) requires borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset to be capitalised as part of its cost. A qualifying asset is one that necessarily takes a substantial period of time to get ready for its intended use or sale, ordinarily twelve months unless a shorter or longer period can be justified (para 3.2 and its Explanation). Assets ready for use when acquired, and inventories routinely produced in large quantities over a short period, are not qualifying assets (para 5).

• Specific borrowings: capitalise the actual borrowing costs less any income on temporary investment of those funds (para 10).
• General borrowings: apply a weighted average capitalisation rate to the expenditure, capped at the borrowing costs actually incurred (para 12).
• Start, pause and stop: capitalisation starts when expenditure and borrowing costs are being incurred and the activities are in progress (para 14), is suspended during extended periods when active development is interrupted (para 17), and ceases when substantially all the activities are complete (para 19).
• Disclosure: the accounting policy for borrowing costs and the amount capitalised during the period (para 23).

In practice, the amount capitalised is shown in the finance costs note as a deduction from the gross interest, or stated in a footnote. Either way it should agree with the borrowing costs added to capital work-in-progress in the PPE and CWIP note.

Format of both notes, with a worked example

Take a private manufacturing company that is an SMC, FY 2025-26, figures illustrative. It has two whole-time directors, a funded PF and ESI, an unfunded gratuity valued by an actuary, a term loan, a cash credit, loans from directors, and a new factory shed under construction for over a year that is financed by part of the term loan.

What the example shows:

• The directors' salaries are in employee benefits, and the related ₹18.00 lakh and the ₹3.60 lakh of interest on directors' loans both feed the related party note.
• The tax interest of ₹0.72 lakh was in the "Income tax" ledger in Tally. It has been taken out of current tax and shown as a separate interest line, as the Guidance Note requires.
• Bank charges of ₹1.10 lakh stay in other expenses (in miscellaneous expenses, if below the 1% threshold explained in our guide to other expenses under Schedule III).
• The ₹4.20 lakh capitalised appears as an addition to CWIP, and the accounting policy note states the AS 16 policy.
• The PF ledger had ₹0.18 lakh of damages under the EPF Act. That amount was moved to other expenses, so the contribution line shows contributions only.

Review points before you sign

• The four employee benefit sub-heads are shown, and the total agrees with the face.
• Whole-time directors' remuneration is in employee benefits; sitting fees and non-executive commission are not.
• The gratuity and leave figures come from an actuarial valuation (Projected Unit Credit Method), even for an SMC, and the actuarial assumptions are disclosed.
• No penalties, damages or late-payment interest are in the contribution line.
• Interest on income tax is in finance costs, separately disclosed, and not in current tax.
• Finance costs are split into interest expense and other borrowing costs, and ordinary bank charges are not in either.
• Borrowing costs capitalised agree with the CWIP or asset additions, and the amount and the policy are disclosed.
• MSME interest in finance costs reconciles with the MSMED disclosures and the section 23 add-back in the tax computation.

Frequently asked questions

Sources

• Companies Act, 2013 — Schedule III, Division I, Part II and General Instructions for the Statement of Profit and Loss, paras 3 and 5 (India Code, amended text)
• Schedule III amendment — G.S.R. 207(E), 24 March 2021 (Gazette)
• ICAI — Guidance Note on Division I – Non Ind AS Schedule III to the Companies Act, 2013 (Revised January 2022), paras 9.5.4, 9.5.5 and 9.8.1
• ICAI — AS 15, Employee Benefits (Companies (Accounting Standards) Rules, 2021), including the Small and Medium-sized Company relaxations
• ICAI — AS 16, Borrowing Costs, paras 3 to 6, 10, 12, 14, 17, 19 and 23
• Micro, Small and Medium Enterprises Development Act, 2006 — sections 16, 22 and 23

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