PART – II ISSUES
Q.1 Revised AS 15, Employee Benefits is applicable from when and applicable to which entities?
☞ Revised AS 15, Employee Benefits was originally to be made applicable in respect of accounting periods commencing on or after April 1, 2006. However, the council of Institute of Chartered Accountants of India, decided to defer the date of applicability of AS 15, by making it applicable for accounting periods commencing on or after December 7, 2006. The Central Government, on 07-12-2006, issued the Companies (Accounting Standard) Rules, 2006.
As per the notified rules, AS 15, (revised) is applicable for all accounting periods commencing on or after 07-12-2006. Thus, for Companies, whose accounting year ends on 31-12-07 or 31-03-08, will have to comply with the revised AS 15.
The AS 15 (revised) issued by the ICAI, has categorised a Level II enterprise as an enterprise which is not a Level I enterprise and whose average number of persons employed during the year is 50 or more. Whereas Level III enterprise is an enterprise which is not a Level I enterprise and whose average number of persons employed during the year is less than 50. Based on the Level of enterprise ICAI had given exemption from the applicability of certain paras of the revised AS 15. However, as companies are now governed by Companies (Accounting Standard) Rules, 2006, the criteria of categorising companies is two only. Small and Medium sized companies (SMC) and Non-Small and Medium sized companies. AS 15 is applicable in entirety to Non-SMC whereas SMC enjoy the following exemptions :
(a) Para 11 to 16 of the AS, to the extent they deal with recognition and measurement of short-term accumulating compensated absences which are non vesting.
(b) Para 46 and 139 of the standard which deal with discounting of amounts that fall due more than 12 months after the balance sheet date.
(c) Paras 50 to 116 dealing with recognition and measurement principles in respect of accounting for defined benefits plans. However, such companies should actually determine and provide for the accrued liability in respect of defined benefits plans using the projected unit credit method and the discount rate used should be determined by reference to market yields at the balance sheet date on Government bonds as per para 78 of the Standard.
(d) Paras 117 to 123 of the Standard dealing with the disclosure requirements in respect of accounting for defined benefit plans, except disclosing actuarial assumptions as per Para 120 (l) of the Standard.
(e) Paras 129 to 131 of the Standard dealing with recognition and measurement principles in respect of accounting for other long-term employee benefits. However, such companies should actuarially determine and provide for the accrued liability in respect of defined benefits plans using the projected unit credit method and the discount rate should be determined by reference to market yields at the balance sheet date on Government Bonds as per Para 78 of the Standard.
Catergorisation of Level II and Level III enterprise as per AS 15 (revised) will apply now only to non-corporate enterprises such as partnership, sole proprietor, co-operatives, trusts, AOP, etc.
Q.2 Viceroy Ltd. pays yearly performance incentive to its employees as well as has a policy to pay long service incentives depending upon number of years service with the company. The above are payable over and above, bonus, gratuity and pension as payable under the statute till 31-03-07. The company was accounting for the same in the year of payment. For accounting year ending 31-03-2008 is provision required?
☞ “Short term employee benefits are employee benefits (other than termination benefits) which fall due wholly within twelve months after the end of the period in which the employees render the related service”. Therefore, payment in nature of yearly performance incentive is in nature of “short term employee benefit” as the same falls due within 12 months after the end of the period in which the employees render the related services. The company should recognise the undiscounted amount of short-term employee benefit i.e. performance incentive as at 31-03-2008 as an expense in the profit and loss statement and as a liability, in the balance sheet.
“Other long term employee benefits are employee benefits (other than post employment benefits and termination benefits) which do not fall due wholly within twelve months after the end of the period in which the employees render the related service”. Payment of long service / stay incentive is in nature of “other long-term employee benefits” as they do not fall due wholly within 12 months after the end of the period in which the employees render the related service. Expense and liability should be recognised by the company. The amount of liability to be recognised, is the present value of the defined benefit obligation at the balance sheet date using the projected unit credit method to determine the related current service cost and past service cost. Since, no provision existed prior to 01-04-2007, the entire amount will be provided as an expense in the profit and loss statement unless otherwise permitted by the transitional provisions for accounting of liability prior to 01-04-2007.
Q.3 Employees of Happy Ltd., are entitled to three types of leave : annual leave (AL); sick leave (SL) and casual leave (CL). CL is credited to employees in April and can be utilised during the financial year and no carry over of the CL is permitted. SL is credited at the rate of 10 days on the first day of April to all employees. There is no limit to the number of SL that can be carried forward. On retirement balance of SL, subject to maximum of 150 days can be encashed. AL is credited based on the number of years of service as follows :
Service less than 5 years Service of 5-10 years Service of 10 -15 years Service of 15 years & above
: 15 days
: 17 days
: 19 days
: 21 days
The maximum number of AL balance that can be carried forward as on 31st March is 250 days. AL is encashable during service upto 50%.
The question for consideration is should the company treat the above as short term employee benefit, or post retirement benefit or other long term employee benefits and whether the company will need to follow differential treatment for AL / SL since part of AL is encashable during service but SL is encashable only on retirement, though both can be availed fully during service.
☞ As Casual Leave (CL) is non-accumulating i.e. it can not be carried forward, they lapse during the current year if not used and do not entitle the employees to a cash payment for unused entitlement on leaving the company. The company recognises no liability or expense for CL which remains unutilised at year end, since they lapse and are not carried forward. Such will also be the case for maternity or paternity leave.
The AL and SL entitlement of the employees of the company can be carried forward for more than twelve months after the end of the period in which employees render the related service, which can be either availed or encashed, as the case may be. Therefore, the benefit arising to the employees on account of AL and SL falls within the category of “other long-term employee benefits”. Since the benefits are not payable after the completion of employment, the same cannot be termed as “Post employment benefits”.
The recognition and measurement of AL and SL should be on actuarial basis using the projected unit credit method. The standard contains detailed requirements in this regard in paragraphs 129 and 130. However, their measurement basis may be different which should be taken care of in the actuarial valuation.
Q.4 Highprofits Ltd. has a profit-sharing plan with its employees, whereby 3% of profits is paid to employees who remain with the company throughout the year and till the date of payment i.e. till 30th September. Such scheme is also extended to contract employees. Uptil now Highprofits Ltd. was debiting the expense in the year of payment. Will the position change after revised AS 15 comes into force, for the year ending 31st March 2008?
☞ As per AS 15 (revised), an enterprise should recognise the expected cost of Profit-sharing and bonus, when and only when;
(a) the enterprise has a present obligation to make such payments as a result of past events and
(b) a realiable estimate of the obligation can be made.
A present obligation exists, when, and only when, the enterprise has no realistic alternative but to make the payments.
Based on above, Highprofits Ltd., for the year ending 31st March 2008, will have to recognise a provision for profit-sharing payable to employees assuming (considering the probability factor that some employees may leave the company without receiving profit-sharing payments.
As per the standard, full-time, part-time, permanent, casual or temporary employees are also covered. Employees would also include whole-time directors or other Management Personnel. Since, persons taken through contract are termed and construed as employees of the company, Highprofits Ltd., will also have to provide for the profit sharing payable to such contract employees, assuming that some contract employees may leave without receiving profit-sharing payments. Thus, in case of contract employees, all employee benefits such as short-term employee benefits, post-employment benefits, other long-term employee benefits as well as termination benefits will have to be accounted on accrual basis as per requirement of AS 15 (revised) and not on payment basis.
Q.5 Spectrum Ltd.’s, Employees Provident Fund is administered and managed by Spectrum Ltd. However, the rate of interest on Provident Fund is linked with the rate payable on Government Provident Fund. Spectrum Ltd. has guaranteed to compensate for the deficiency in the form of additional contribution, should the interest return on investments be less than interest payable as declared by the government managed Provident Fund. Would such plan be considered as defined contribution or defined benefit and what would be the consequences on Spectrum Ltd., if the same is considered as defined benefit plan?
☞ Provident Fund is a Post-employment benefit. Post employment benefits are classified as either defined contribution plan or defined benefit plan. Under defined contribution plans, the enterprise’s obligation is limited to the amount that it agrees to contribute to the fund, as a consequence the actuarial risk and investment risk fall on the employee; whereas, under defined benefit plan, the enterprise’s obligation is to provide the agreed benefits and the actuarial risk and investment risk fall on the enterprise.
Thus, in case of Spectrum Ltd., though contributions in form of Provident Fund is defined i.e. a percentage of salary, the contribution it agrees to pay to meet the interest shortfall makes the plan a defined benefit plan in accordance with the requirements of paragraph 26(b) of the AS 15. Spectrum Ltd. needs to actuarially value the difference in interest earnings as a result of difference between guaranteed rate of interest and actual rate of interest being earned. The differential will relate to future term of existing liabilities on valuation date i.e. say 31st March, 2008
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Q.1 Revised AS 15, Employee Benefits is applicable from when and applicable to which entities?
☞ Revised AS 15, Employee Benefits was originally to be made applicable in respect of accounting periods commencing on or after April 1, 2006. However, the council of Institute of Chartered Accountants of India, decided to defer the date of applicability of AS 15, by making it applicable for accounting periods commencing on or after December 7, 2006. The Central Government, on 07-12-2006, issued the Companies (Accounting Standard) Rules, 2006.
As per the notified rules, AS 15, (revised) is applicable for all accounting periods commencing on or after 07-12-2006. Thus, for Companies, whose accounting year ends on 31-12-07 or 31-03-08, will have to comply with the revised AS 15.
The AS 15 (revised) issued by the ICAI, has categorised a Level II enterprise as an enterprise which is not a Level I enterprise and whose average number of persons employed during the year is 50 or more. Whereas Level III enterprise is an enterprise which is not a Level I enterprise and whose average number of persons employed during the year is less than 50. Based on the Level of enterprise ICAI had given exemption from the applicability of certain paras of the revised AS 15. However, as companies are now governed by Companies (Accounting Standard) Rules, 2006, the criteria of categorising companies is two only. Small and Medium sized companies (SMC) and Non-Small and Medium sized companies. AS 15 is applicable in entirety to Non-SMC whereas SMC enjoy the following exemptions :
(a) Para 11 to 16 of the AS, to the extent they deal with recognition and measurement of short-term accumulating compensated absences which are non vesting.
(b) Para 46 and 139 of the standard which deal with discounting of amounts that fall due more than 12 months after the balance sheet date.
(c) Paras 50 to 116 dealing with recognition and measurement principles in respect of accounting for defined benefits plans. However, such companies should actually determine and provide for the accrued liability in respect of defined benefits plans using the projected unit credit method and the discount rate used should be determined by reference to market yields at the balance sheet date on Government bonds as per para 78 of the Standard.
(d) Paras 117 to 123 of the Standard dealing with the disclosure requirements in respect of accounting for defined benefit plans, except disclosing actuarial assumptions as per Para 120 (l) of the Standard.
(e) Paras 129 to 131 of the Standard dealing with recognition and measurement principles in respect of accounting for other long-term employee benefits. However, such companies should actuarially determine and provide for the accrued liability in respect of defined benefits plans using the projected unit credit method and the discount rate should be determined by reference to market yields at the balance sheet date on Government Bonds as per Para 78 of the Standard.
Catergorisation of Level II and Level III enterprise as per AS 15 (revised) will apply now only to non-corporate enterprises such as partnership, sole proprietor, co-operatives, trusts, AOP, etc.
Q.2 Viceroy Ltd. pays yearly performance incentive to its employees as well as has a policy to pay long service incentives depending upon number of years service with the company. The above are payable over and above, bonus, gratuity and pension as payable under the statute till 31-03-07. The company was accounting for the same in the year of payment. For accounting year ending 31-03-2008 is provision required?
☞ “Short term employee benefits are employee benefits (other than termination benefits) which fall due wholly within twelve months after the end of the period in which the employees render the related service”. Therefore, payment in nature of yearly performance incentive is in nature of “short term employee benefit” as the same falls due within 12 months after the end of the period in which the employees render the related services. The company should recognise the undiscounted amount of short-term employee benefit i.e. performance incentive as at 31-03-2008 as an expense in the profit and loss statement and as a liability, in the balance sheet.
“Other long term employee benefits are employee benefits (other than post employment benefits and termination benefits) which do not fall due wholly within twelve months after the end of the period in which the employees render the related service”. Payment of long service / stay incentive is in nature of “other long-term employee benefits” as they do not fall due wholly within 12 months after the end of the period in which the employees render the related service. Expense and liability should be recognised by the company. The amount of liability to be recognised, is the present value of the defined benefit obligation at the balance sheet date using the projected unit credit method to determine the related current service cost and past service cost. Since, no provision existed prior to 01-04-2007, the entire amount will be provided as an expense in the profit and loss statement unless otherwise permitted by the transitional provisions for accounting of liability prior to 01-04-2007.
Q.3 Employees of Happy Ltd., are entitled to three types of leave : annual leave (AL); sick leave (SL) and casual leave (CL). CL is credited to employees in April and can be utilised during the financial year and no carry over of the CL is permitted. SL is credited at the rate of 10 days on the first day of April to all employees. There is no limit to the number of SL that can be carried forward. On retirement balance of SL, subject to maximum of 150 days can be encashed. AL is credited based on the number of years of service as follows :
Service less than 5 years Service of 5-10 years Service of 10 -15 years Service of 15 years & above
: 15 days
: 17 days
: 19 days
: 21 days
The maximum number of AL balance that can be carried forward as on 31st March is 250 days. AL is encashable during service upto 50%.
The question for consideration is should the company treat the above as short term employee benefit, or post retirement benefit or other long term employee benefits and whether the company will need to follow differential treatment for AL / SL since part of AL is encashable during service but SL is encashable only on retirement, though both can be availed fully during service.
☞ As Casual Leave (CL) is non-accumulating i.e. it can not be carried forward, they lapse during the current year if not used and do not entitle the employees to a cash payment for unused entitlement on leaving the company. The company recognises no liability or expense for CL which remains unutilised at year end, since they lapse and are not carried forward. Such will also be the case for maternity or paternity leave.
The AL and SL entitlement of the employees of the company can be carried forward for more than twelve months after the end of the period in which employees render the related service, which can be either availed or encashed, as the case may be. Therefore, the benefit arising to the employees on account of AL and SL falls within the category of “other long-term employee benefits”. Since the benefits are not payable after the completion of employment, the same cannot be termed as “Post employment benefits”.
The recognition and measurement of AL and SL should be on actuarial basis using the projected unit credit method. The standard contains detailed requirements in this regard in paragraphs 129 and 130. However, their measurement basis may be different which should be taken care of in the actuarial valuation.
Q.4 Highprofits Ltd. has a profit-sharing plan with its employees, whereby 3% of profits is paid to employees who remain with the company throughout the year and till the date of payment i.e. till 30th September. Such scheme is also extended to contract employees. Uptil now Highprofits Ltd. was debiting the expense in the year of payment. Will the position change after revised AS 15 comes into force, for the year ending 31st March 2008?
☞ As per AS 15 (revised), an enterprise should recognise the expected cost of Profit-sharing and bonus, when and only when;
(a) the enterprise has a present obligation to make such payments as a result of past events and
(b) a realiable estimate of the obligation can be made.
A present obligation exists, when, and only when, the enterprise has no realistic alternative but to make the payments.
Based on above, Highprofits Ltd., for the year ending 31st March 2008, will have to recognise a provision for profit-sharing payable to employees assuming (considering the probability factor that some employees may leave the company without receiving profit-sharing payments.
As per the standard, full-time, part-time, permanent, casual or temporary employees are also covered. Employees would also include whole-time directors or other Management Personnel. Since, persons taken through contract are termed and construed as employees of the company, Highprofits Ltd., will also have to provide for the profit sharing payable to such contract employees, assuming that some contract employees may leave without receiving profit-sharing payments. Thus, in case of contract employees, all employee benefits such as short-term employee benefits, post-employment benefits, other long-term employee benefits as well as termination benefits will have to be accounted on accrual basis as per requirement of AS 15 (revised) and not on payment basis.
Q.5 Spectrum Ltd.’s, Employees Provident Fund is administered and managed by Spectrum Ltd. However, the rate of interest on Provident Fund is linked with the rate payable on Government Provident Fund. Spectrum Ltd. has guaranteed to compensate for the deficiency in the form of additional contribution, should the interest return on investments be less than interest payable as declared by the government managed Provident Fund. Would such plan be considered as defined contribution or defined benefit and what would be the consequences on Spectrum Ltd., if the same is considered as defined benefit plan?
☞ Provident Fund is a Post-employment benefit. Post employment benefits are classified as either defined contribution plan or defined benefit plan. Under defined contribution plans, the enterprise’s obligation is limited to the amount that it agrees to contribute to the fund, as a consequence the actuarial risk and investment risk fall on the employee; whereas, under defined benefit plan, the enterprise’s obligation is to provide the agreed benefits and the actuarial risk and investment risk fall on the enterprise.
Thus, in case of Spectrum Ltd., though contributions in form of Provident Fund is defined i.e. a percentage of salary, the contribution it agrees to pay to meet the interest shortfall makes the plan a defined benefit plan in accordance with the requirements of paragraph 26(b) of the AS 15. Spectrum Ltd. needs to actuarially value the difference in interest earnings as a result of difference between guaranteed rate of interest and actual rate of interest being earned. The differential will relate to future term of existing liabilities on valuation date i.e. say 31st March, 2008
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