Accounting Standard (AS) 15: Employee Benefits
Scope of AS 15
The statement applies to benefit usually comprising of Provident Fund, Superannuation/Pension Fund, Gratuity, Leave encashment or retirement, Post retirement health and welfare schemes and other benefits provided by an employer to employees either in pursuance of legal requirement or otherwise, but does not extend to employers’ obligation which cannot be reasonably estimated (e.g. ex-gratia ad-hoc on retirement).
There may be obligation on the part of the employer either against defined contribution plan or defined benefit schemes as elaborated below:
Defined Contribution Plans (DCP)
1) Retirement benefit is determined by contribution at agreed/specified rate to the Fund together with earnings thereof.
2) Contribution (e.g. PF) whether paid or payable for the reporting period is charged to P/L statement.
3) Excess if any is treated as prepayment.
Defined Benefit Plans (DBP)
1) Amount paid is usually determined with reference to employee’s earnings and/or years of service (if the basis of contribution are determined, it will be treated as defined contribution scheme).
2) However, if the employer’s responsibility is subject to specified benefits or a specified level of benefits, it is defined benefit scheme.
3) The extent of employer’s obligation is largely uncertain and subject to estimation of future condition and events beyond control.
Accounting treatment for Gratuity Benefit and Other Defined Benefit Schemes
Accounting treatment for Gratuity benefit and other defined benefit schemes depends on the arrangement made by the employer:
(a) No separate fund i.e. out of nonspecific own fund
1) Provision for accruing liability in the P/L Account for the accounting period is made.
2) The provision is based on an actuarial method or some other rational method (assumption that all employers are eligible at the end of the accounting period)
(b) Own separate/specific fund established through Trust
The amount required to be contributed on actuarial basis is certified by the Actuary, and the actual contribution plus and shortfall to meet the actuarial amount is charged to P/L Account for the accounting period, any excess payment treated as prepayment.
(c) Fund established through Insurer: in the same manner as in (b) above
Actual valuation may be carried out annually (cost can be easily determined for the purpose of contribution as a charge to P/L) or periodically (say, once in 3 years) where Actuary’s certificate specifies contribution on annual basis during inter-valuation period.
Leave encashment is an accrued estimated liability based on employers’ past experience as to such benefit actually availed off and probability of encashment in future and therefore should relate to the period in which relevant service is rendered in compliance with section 128 – accrual basis and AS-15.
Disclosure under AS-15
(a) In view of the varying practices, adequate disclosure of method of accounting for an understanding of the significance of such costs to an employer.
(b) Disclosure separately made for statutory compliance or otherwise the retirement benefit costs are treated as an element of employee remuneration without specific disclosure.
(c) Financial statements should disclose whether actuarial valuation is made at the end of the accounting period or earlier (in which case the date of actuarial valuation and the method used for accrual period if not based on actuary report).
Treatment of Voluntary Retirement Scheme Payments
1) Termination benefits to be paid irrespective of the voluntary retirement scheme i.e. balance in P.F, leave encashment; gratuity etc.
2) Termination benefits which are payable on account of VRS i.e. monetary payment on the basis of years of completed service or for the balance period of service whichever is less and notice pay.
Expert Advisory Committee (EAC) opines in favour of treating the costs (except gratuity which should have been provided for in the respective accounting period) as deferred revenue expenditure since it is construed upon as saving in subsequent periods, on some rational basis over a period, preferably over 3 – 5 year. However, the terminal benefit is, to the extent these are not deferred should be treated as expense in the P/L Account with disclosure.