THE IMPACT OF INFLATION ON TFR

THE IMPACT OF INFLATION ON TFR
The years prior to 2021 were characterized by low inflation and interest rates, a trend that was no longer felt in 2021, as the cost- of-living marked increases that it had not been used to for some time.
It is interesting to verify how this situation impacts on the institution of severance pay (TFR), especially on the provisions in companies.


REGULATORY FRAMEWORK
However, it is necessary to first make a very brief regulatory premise considering article 2120 of the Civil Code, paragraphs 4 and 5:

  • "4. The treatment referred to in the previous first paragraph, with the exclusion of the portion accrued during the year, is increased, on a compound basis, on 31 December of each year, with the application of a rate consisting of 1.5 per cent in a fixed amount and by 75 per cent of the increase in the consumer price index for blue-collar and white-collar families, ascertained by ISTAT, compared to December of the previous year. ";

  • "5. For the purposes of applying the revaluation rate referred to in the previous paragraph by fractions of a year, the increase in the ISTAT index is that resulting in the month of termination of the employment relationship compared to that of December of the previous year. Fractions of a month equal to or greater than fifteen days are counted as a whole month. "


CONSIDERA TIONS

It can be deduced that the employee leaving indemnity in the company, on 31 December of each year, is revalued by at least 1.5% in the event that the consumer price index for households, ascertained by ISTAT, remains unchanged or is negative in the annual period: consequently, the severance pay never remains "firm".
In the last 10 years this case (minimum revaluation of 1.5%) has occurred three times: in 2014, 2015 and 2020; still in the same period, the revaluation coefficient remained lower than 2% in the years 2013, 2016 and 2019.
The year 2021 was characterized as a period in which inflation raised its head: the consumer price index for households ascertained by ISTAT was 3.81%.
Consequently, the rate in December 2021 for the revaluation of severance indemnities (TFR) set aside as at 31 December 2020 reached 4.359238%, the highest record value since 1995.
So, what happened at 31.12.2021 on the severance indemnity set aside in the company?
Let's take a simple example: let's consider a small metalworking company with only one employee, who has a severance pay set aside for € 50,000.00 at 31.12.2020 and a gross annual salary in 2021 of € 24,000.
Simplifying, we have that in the course of 2021:

  • the accrued severance pay was € 24,000 / 13.5 = € 1,777.77;

  • the revaluation of the severance indemnity set aside at 31.12.2020 was € 50,000 x 4.359238% = € 2,179.61;

  • overall the severance indemnity set aside has grown by over € 3,957.00, a portion that represents the provision for the severance pay for the year and therefore a cost item in the income statement.


CONCLUSIONS
If we analyze the revaluation of the above example, € 2,179.61 euro, from an industrial accounting perspective we realize how it represents an incremental impact on the hourly cost of labor of about € 1.36 per hour worked, generating therefore a higher cost for the entrepreneur.
The year 2021 does not seem to be, at least for now, an isolated case: in fact, 2022 has already presented itself with an even worse inflation projection in the first two months of the year, so much so that the consumer price index for families, ascertained by ISTAT for the two-month period, was 2.44%. This index determines a revaluation coefficient of the employee leaving indemnity set aside as at 31/12/2021 of 2.086158% in the event that it should be paid to workers, whose relationship ceased in the period February 15, 2022 - March 14, 2022.
It is therefore evident that, although the current rise in inflation is seen by many as a short-term phenomenon, every employer should adopt a correct management of company liquidity: parking the employee severance indemnity in cash, in fact, can cost expensive!

 

Edited by: Marco D'Orsogna Bucci, Chartered Accountant of Labor and Statutory Auditor

You can download the article in PDF here

For more information:

marcodorsogna@valoreassociati.it

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