Accounting Impact Of New Labour Codes: Key Takeaways For Employers

With the New Labour Codes effective from 21 November 2025, the accounting standards board has issued FAQs dated 26/12/2025 addressing key accounting implications and clarifying important accounting questions employers and other stakeholders may have, and are simultaneously expected to reassess their employee benefit liabilities, particularly gratuity and leave obligations.

A major impact arises from the redefined concept of “wages”, which mandates that at least 50% of total remuneration must consist of Basic Pay, Dearness Allowance, and Retaining Allowance. Gratuity is now required to be calculated on this expanded wage base, and fixed-term employees (including contractual employees) become eligible for gratuity upon completion of one year of service, leading to a likely long-term increase and wider scope in employer liabilities.

From an accounting perspective, these changes are treated as a plan of amendment, meaning that the resulting increase in gratuity and leave obligations must be recognized immediately in financial statements.

Employers will need to factor in these costs in interim financial results for periods ending on or after the effective date of 21 November 2025, along with treating the enactment of the Labour Codes as a non-adjusting event and appropriate disclosures for earlier reporting periods.

The FAQ document further clarifies that while the additional expense arising from the Labour Codes may be material, it does not automatically qualify as an exceptional item and must be evaluated based on materiality and nature. Tax implications continue to be governed by existing provisions of income tax law, with deferred tax assets recognized where future deductions are expected.

Overall, the new framework signals a shift towards stronger employee social security. Employers are advised to review wage structures, reassess actuarial valuations, and prepare for increased compliance and financial impact as the Labour Codes come into effect.