CHAPTER a

6
LIABILITIES BASED
ACCOUNTING
STANDARDS
UNIT 1: ACCOUNTING STANDARD 15
EMPLOYEE BENEFITS

LEARNING OUTCOMES

After studying this unit, you will be able to

 Define ‘Employee benefits’, ‘Short-term employee benefits’, ‘Post-
employment benefits’ and other related terms used in the Standard
 Enumerate various types of employee benefits
 Recognise and measure Short-term Employee Benefits, Short-term
Compensated Absences and Profit-sharing and Bonus Plans along
with the accounting thereof
 Classify the post-employment benefits into defined contribution plans
and defined benefit plans
 Examine the various aspects inherent in these post-employment benefit
plans and recognize and measure the obligations under these plans
 Apply the actuarial valuation methods and assumptions while valuing
the obligations under Defined benefit plans
 Calculate the actuarial gains and losses on such plans
 Recognise gains or losses on the curtailment or settlement of a
defined benefit plan
 Recognise and measure other long-term benefit and termination benefits
 Understand the disclosure requirement of these employee benefits
and comply with the same.
 6.2 ADVANCED ACCOUNTING
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1.1v INTRODUCTION
The Accounting Standard 15 - ‘Employee Benefits’ (AS 15), generally deals with all
forms of employee benefits all forms of consideration given by an enterprise in
exchange for services rendered by employees The objective of this Standard is to
prescribe the accounting treatment and disclosure for employee benefits in the
books of employer except employee share-based payments. It does not deal with
accounting and reporting by employee benefit plans.

Formal
Plan/Agreement

Employee Legislative
Benefits Requirement

Informal Practices

The Standard addresses only the accounting of employee benefits by employers.

The Standard makes four things very clear at the outset:
(i) the Standard is applicable to benefits provided to all types of employees
(whether full-time, part-time, or casual staff);
(ii) employee benefits can be paid in cash or in kind;
(iii) employee benefits include benefits provided to employees and their
dependents (spouses, children and others); and
(iv) payment can be made directly to employees, their dependent or to any
other party (e.g., legal heirs, nominees, insurance companies, trust etc.).
The Standard is based on the premise that the costs associated with employees-
benefits should be matched with the timing of their service. This requires
assessment of the anticipated costs and their timing in future and aligning those
costs over the period of their service. For example, a bonus payable to an
employee for a long-term service, should ideally be spread over the period of his
service and the expectations that the employee is expected to complete that
service. Likewise, pension payable to an employee must be recognized as a cost
during the service period itself, irrespective of the fact that the pension is payable
after the service is completed.
 6.3
LIABILITIES BASED ACCOUNTING STANDARDS
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Illustration 1 v
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What are the kinds of employees covered in the revised AS 15 and whether a formal
employer employee relationship is necessary or not, for benefits to be covered under
the Standard?
Solution
The Standard does not define the term “employee”. Paragraph 6 of the Standard
states that ‘an employee may provide services to an enterprise on a full time, part
time, permanent, casual or temporary basis and the term would also include the
whole-time directors and other management personnel. The Standard is
applicable to all forms of employer employee relationships. There is no
requirement for a formal employer employee relationship. Several factors need to
be considered to determine the nature of relationship.

Generally, ‘outsourcing contracts’ may not meet the definition of employer -

employee relationship. However, such contracts need to be carefully examined to
distinguish between a “contract of service” and a “contract for services”. A
‘contract for services’ implies a contract for rendering services, e.g., professional
or technical services which is subject to limited direction and control whereas a
‘contract of service’ implies a relationship of an employer and employee, and the
person is obliged to obey orders in the work to be performed and as to its mode
and manner of performance.
Illustration 2
Whether an enterprise is required to provide for employee benefits arising from
informal practices?
Solution
Paragraph 3(c) of the Standard defines employee benefits to include those
informal practices that give rise to an obligation where the enterprise has no
realistic alternative but to pay employee benefits. The historical pattern of
granting such benefits, the expectation created and the impact on the
relationship with employees in the event such benefit is withdrawn should be
considered in determining whether the informal practice gives rise to a benefit
covered by the Standard. For example, where an employer has a practice of
 6.4 ADVANCED ACCOUNTING
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making a lumpsum payment on occasion of a festival or regularly grants advances
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against informal benefits to employees it would be necessary to provide for such
benefits.

Careful judgement should be applied in assessing whether an obligation has

arisen particularly in instances where an enterprise's practice is to provide
improvements only during the collective bargaining process and not during any
informal process. If the employer has not set a pattern of benefits that can be
projected reliably to give rise to an obligation there is no requirement to provide
for the benefits.

However, if the practice established by an employer was that of a consistent

benefit granted either as part of union negotiations or otherwise that clearly
established a pattern (e.g., a cost of living adjustment or fixed rupee increase), it
could be concluded that an obligation exists and that those additional benefits
should be included in the measurement of the benefit obligation.

Employee benefits include:

(a) Short-term employee benefits (e.g., wages, salaries, paid annual leave and
sick leave, profit sharing bonuses etc. (payable within 12 months of the
year-end) and non-monetary benefits for current employees.

(b) Post-employment benefits (e.g., gratuity, pension, provident fund, post-

employment medical care etc.).

(c) long-term employee benefits (e.g., long-service leave, long-term disability

benefits, bonuses not wholly payable within 12 months of the year end etc.),
and

(d) termination benefits (e.g. VRS payments)

The Standard lays down recognition and measurement criteria and disclosure
requirements for the above four types of employee benefits separately.
 6.5
LIABILITIES BASED ACCOUNTING STANDARDS
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Short Term Post Terminal
Employee Long Term
Benefits Employment Benefits
Benefits Benefits

Salary, Wages Sabbatical Retrenchment

Gratuity
Leave

Social Security Voluntary

Contributions Long Service Pension Retirement
Awards
Annual Paid
leaves Long Term Medical Care
Disability
Medical, Benefit
Housing, Car

1.2 APPLICABILITY
The Standard applies from April 1, 2006 in its entirety for all Level 1 enterprises.
Certain exemptions are given to other than Level 1 enterprises, depending upon
whether they employ 50 or more employees. This Standard is applicable
predominantly for Level 1 enterprises and applied to other entities with certain
relaxations.

1.3 MEANING OF THE TERM “EMPLOYEE

BENEFITS”
The term employee is not defined under the standard AS 15 does not define who
is an ‘employee’, but states in that "an employee may provide services to an entity
on a full-time, part-time, permanent, casual or temporary basis. For the purpose
of this Standard, employees include directors and other management personnel".
This suggests that the intention was for the term ‘employee’ to apply more widely
than simply to persons with a contract of employment as ‘casual’ and ‘temporary’
staff may frequently not have such contracts.
 6.6 ADVANCED ACCOUNTING
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The following indicators may suggest an employee relationship may be more
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likely to exist, and may help in making individual judgements:

• A contract of employment exists;

• Individuals are considered employees for legal/tax/social security purposes;
• There is a large amount of oversight and direction by the employer and
necessary tools, equipment and materials are provided by the employer;
• Services are performed at a location specified by the employer;
Services provided through an entity are in substance services provided by a
specific individual, indications of which could be that the entity:
• Has no other clients;
• Has served the employer for a long period;

• Faces little or no financial risk;

• Requires the explicit permissions of the employer to concurrently undertake
additional employment elsewhere.

1.4 SHORT-TERM EMPLOYEE BENEFITS

• Short-term employee benefits (other than termination benefits) are payable
within twelve months after the end of the period in which the service is
rendered.
• Accounting for these benefits is generally straightforward because no
actuarial assumptions are required to measure the obligation or cost.

• Short-term employee benefits are broadly classified into four categories:

(i) regular period benefits (e.g., wages, salaries);
(ii) short-term compensated absences (e.g., paid annual leave, maternity
leave, sick leave etc.);
(iii) profit sharing and bonuses payable within twelve months after the
end of the period in which employee render the related services and

(iv) non-monetary benefits (e.g., medical care, housing, cars etc.)

 6.7
LIABILITIES BASED ACCOUNTING STANDARDS
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All Short term
Employee v
Vesting
Benefits
Accumulating
Short term
Short Term Paid
Employee Non-vesting
Abscences
Benefits Non-
accumulating
Profit-sharing
and Bonus Plans

1.4.1 All Short-term Employee Benefits

• The Standard lays down some general recognition criteria for all short-term
employee benefits. There are further requirements in respect of short-term
compensated absences and profit sharing and bonus plans.
• The general criteria is that an enterprise should recognize as an expense
(unless another accounting standard permits a different treatment) the
undiscounted amount of all short-term employee benefits attributable to
services that been already rendered in the period.

• Any difference between the amount of expenses so recognized and cash

payments made during the period should be treated as a liability or
prepayment (asset) as appropriate.
Illustration 3
Entity XY is required to pay salary of ` 2 crore for the year 20X1-X2. It actually paid
a salary of ` 1.90 crore up to 31 st March 20X2, and balance in April 20X2.
Determine the actual costs to be recognized in the year 20X1-X2 and any amounts
to be shown through balance sheet.
Solution
Total expense for the year (20X1-X2) ` 2 crore
Amount to be shown under liability (unpaid) ` 2 crore – 1.90 `crore
= ` 10 lakhs
 6.8 ADVANCED ACCOUNTING
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1.4.2 Short-term Compensated Absences
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Entitlement to compensated absences falls into two categories:
(a) Accumulating

 Accumulating compensated absences are those that are carried

forward and can be used in future periods if the current period’s
entitlement is not used in full.
 Accumulating compensated absences may be
(i) Vesting
It implies that employees are entitled to a cash payment for
unused entitlement on leaving the enterprise
(ii) Non-vesting
It implies that when employees are not entitled to a cash
payment for unused entitlement on leaving. An obligation arises
as employees render service that increases their entitlement to
future compensated absences.
 The expected cost of accumulating compensated absences should be
recognized when employees render the service that increase their
entitlement to future compensated absences.
 ‘An enterprise should measure the expected cost of accumulating
compensated absences as the additional amount that the enterprise
expects to pay as a result of the unused entitlement that has
accumulated at the balance sheet date’.
 No distinction should be made between vesting and non-vesting
entitlements. However, in measuring non-vesting entitlements, the
possibility of employees leaving the enterprise before receiving them
should be taken into account.
Example
An enterprise has 100 employees, who are each entitled to five working days
of leave for each year. Unused leave may be carried forward for one calendar
year. The leave is taken first out of the current year’s entitlement and then out
 6.9
LIABILITIES BASED ACCOUNTING STANDARDS
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of any balance brought forward from the previous year (a LIFO basis). At 31vst
December, 20X4, the average unused entitlement is two days per employee. v
The enterprise expects, based on past experience which is expected to
continue, that 92 employees will take no more than five days of leave in 20X5
and that the remaining eight employees will take an average of six and a half
days each.
The enterprise expects that it will pay an additional 12 days of pay as a result
of the unused entitlement that has accumulated at 31 st December, 20X4 (one
and a half days each, for eight employees). Therefore, the enterprise
recognises a liability, as at 31 st December, 20X4, equal to 12 days of pay.
(b) Non-accumulating

 Non-accumulating compensated absences (e.g., maternity leave) do

not carry forward and are not directly linked to the services rendered
by employees in the past. Therefore, an enterprise recognizes no
liability or expense until the time of the absence.
 In other words, the cost of non-accumulating absences should be
recognized as and when they arise.
Exception
Small and Medium-sized Company and Micro, Small and Medium-sized
Enterprises (Levels IV, III and II non-corporate entities) may not comply with short
term absences to the extent they deal with recognition and measurement of
absences which are non-vesting (i.e., short-term accumulating compensated
absences in respect of which employees are not entitled to cash payment of
unused entitlement on leaving).

1.4.3 Profit-sharing and Bonus Plans

Recognition of expenses for profit sharing and bonus plans would depend on
fulfillment of conditions mentioned the Standard. The conditions are:

(a) Enterprise has a present obligation to make such payments as a result of

past events; and
(b) Reliable estimate of the obligation can be made.
 6.10 ADVANCED ACCOUNTING
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The second condition can be satisfied only when the profit sharing and bonus
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plans contained a formula for determining the amount of benefit. The enterprise
should recognize the expected cost of profit sharing and bonus payments in the
financial statements.
Example
A profit-sharing plan requires an enterprise to pay a specified proportion of its net
profit for the year to employees who serve throughout the year. If no employees
leave during the year, the total profit-sharing payments for the year will be 3% of
net profit. The enterprise estimates that staff turnover will reduce the payments to
2.5% of net profit.
The enterprise recognises a liability and an expense of 2.5% of net profit.
Illustration 4
Whether an entitlement to earned leave which can be carried forward to future
periods is a short -term employee benefit or a long-term employee benefit.
Solution
Paragraph 7.2 of the Standard defines ‘Short-term’ benefits as 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.
Paragraph 8(b) of the Standard illustrates the term ‘Short -term benefits’ to
include “short term compensated absences (such as paid annual leave) where the
absences are expected to occur within twelve months after the end of the period
in which the employees render the related employee service”.
Paragraph 7.2 of the Standard uses “falls due” as the basis, paragraph 8(b) of the
Standard uses “expected to occur” as the basis to illustrate classification of short
term compensated absences. A reading of paragraph 8(b) together with
paragraph 7.2 would imply that the classification of short -term compensated
absences should be only when absences have “fallen due” and are also “expected
to occur”. In other words, where employees are entitled to earned leave which can
be carried forward to future periods, the benefit would be a ‘short-term benefit’
provided the employee is entitled to either encash or utilise the benefit during
the twelve months after the end of the period when the employee became
entitled to the leave and is also expected to utilise the leave.
 6.11
LIABILITIES BASED ACCOUNTING STANDARDS
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Where there are restrictions on encashment and/or availment, clearly the v
compensated absence has not fallen due and the benefit of compensated v
absences is more likely to be a long-term benefit. For example, where an
employee has 100 days of earned leave which he is entitled to an unlimited carry
forward, but the rules of the enterprise allow him to encash/utilise only 30 days
during the next twelve months, the benefit would be considered as a ‘long-term’
benefit. In some situations, where there is no restriction but the absence is not
expected to wholly occur in the next twelve months, the benefit should be
considered as ‘long-term’. For example, where an employee has 400 days carry
forward earned leave and the past pattern indicates that the employees are
unlikely to avail / encash the entire carry forward during the next twelve months,
the benefit would not be ‘short-term’.
Whilst it is necessary to consider the earned leave which “falls due”, the pattern of
actual utilisation/encashment by employees, although reflective of the
behavioural pattern of employees, does determine the status of the benefit, i.e.,
whether ‘short-term’ or ‘long-term’. The value of short-term benefits should be
determined without discounting and if the benefit is determined as long-term, it
would be recognised and measured as “Other long-term benefits” in accordance
with paragraph 129 of the Standard.
The categorisation in ‘short-term’ or ‘long-term’ employee benefits should be
done on the basis of the overall behavioural pattern of all the employees of the
enterprise and not on individual basis.
Illustration 5
In case an enterprise allows unutilised employee benefits, e.g., medical care, leave
travel, etc., to be carried forward, whether it is required to recognise a provision in
respect of carried forward benefits.
Solution
A provision should be recognised for all benefits (conditional or unconditional)
which an employee becomes entitled to as a result of rendering of the service and
should be recorded as part of the cost of service rendered during the period in
which the service was rendered which resulted the entitlement. In estimating the
cost of such benefit the probability of the employee availing such benefit should
be considered.
 6.12 ADVANCED ACCOUNTING
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1.5v POST EMPLOYMENT BENEFITS: DEFINED
CONTRIBUTION VS DEFINED BENEFITS
Multi-
employer

State Plan

Non-
Controlled

Insured
Funded
DCP
(Mostly)

Trust/legal
Controlled Entity

The accounting treatment and disclosures required for a post-employment

benefit plan depend upon whether it is a defined contribution or a defined
benefit plan. In addition to addressing defined contribution and defined benefit
plans generally, the Standard also gives guidance as to how its requirements
should be applied to insured benefits, multi-employment benefit plans.
1. Defined contribution plans (DCP) are post-employment benefit plans under
which an enterprise pays fixed contributions into a separate fund and will
have no obligation to pay further contributions. Under defined contribution
plans, actuarial risk (that benefits will be less than expected) and investment
risk (that assets invested will be insufficient to meet expected benefits) fall on
the employee. A common example of Defined Contribution plans is Provident
Fund.
2. Defined benefit plans are post-employment benefit plans other than
defined contribution plans. In defined benefits plans, the actuarial and
investment risk fall on the employer.
 6.13
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In defined contribution plans, the contribution is charged to income statement,
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whereas in defined benefit plans, detailed actuarial calculation is performed to
determine the charge.

1.6 IS THE GRATUITY SCHEME A DEFINED

CONTRIBUTION OR DEFINED BENEFIT
SCHEME?
An enterprise may pay insurance premiums to fund a post-employment benefit
plan. The enterprise should treat such a plan as a defined contribution plan unless
the enterprise will have an obligation to either:
(a) pay the employee benefits directly when they fall due; or
(b) pay further amounts if the insurer does not pay all future employee benefits
relating to employee service in the current and prior periods.
On the asset side, a question arises as to whether the funds under the scheme as
certified by LIC would be treated as plan assets or reimbursement rights. The
distinction is important (though both are measured on fair valuation basis)
because plan assets are reduced from the defined benefit obligation and the net
amount is disclosed in the balance sheet, whereas, in the case of reimbursement
rights, the defined benefit obligation and the reimbursement rights are shown
separately as liability and asset on the balance sheet. This would have the impact
of making the balance sheet heavy both on the asset side as well as the liabilities
side.

1.7 ACCOUNTING TREATMENT

In the Balance Sheet of the enterprise, ‘the amount recognized as a defined
benefit liability should be the net total of the following amounts:

(a) the present value of the defined benefit obligation at the balance sheet
date;
(b) minus any past service cost not yet recognized;

(c) minus the fair value at the balance sheet date of plan assets (if any) out of
which the obligations are to be settled directly.’
 6.14 ADVANCED ACCOUNTING
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In case where fair value of plan assets is high, it may so happen that the net
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amount under defined benefit liability turns negative (giving rise to net assets).
AS 15 states that the enterprise, in such a situation, should measure the resulting
asset at the lower of:
(i) the amount so determined; and

(ii) the present value of any economic benefits available in the form of refunds
from the plan or reductions in future contributions to the plan.
The recognition of expenses relating to defined benefits in the Statement of Profit
and Loss is stated in Para 61 of the Standard. The Standard identifies seven
components of defined employee benefit costs:
(a) current service cost;

(b) interest cost;

(c) the expected return on any plan assets (and on any reimbursement rights);
(d) actuarial gains and losses (to the extent they are recognized);
(e) past service cost (to the extent they are recognized);
(f) the effect of any curtailments or settlements; and
(g) the extent to which the negative net amount of defined benefit liability
exceeds the amount mentioned in Para 59(b) of the Standard.
A settlement occurs when an employer enters into a transaction that eliminates all
further legal or constructive obligations for part or whole of the benefits provided
under a defined benefit plan. For example, the commuted portion of pension. A
curtailment occurs when an employer either commits to reduce the number of
employees covered by a plan or reduces the benefits under a plan. The gains or
losses on the settlement or curtailment of a defined benefit plan should be
recognized when the settlement or curtailment occurs.

1.8 DISCLOSURES
Where there is uncertainty about the number of employees who will accept an
offer of termination benefits, a contingent liability exists.
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LIABILITIES BASED ACCOUNTING STANDARDS
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As required by AS 29, "Provisions, Contingent Liabilities and Contingent Assets"
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an enterprise discloses information about the contingent liability unless the
possibility of an outflow in settlement is remote.

As required by AS 5, "Net Profit or Loss for the Period, Prior Period items and
Changes in Accounting Policies" an enterprise discloses the nature and amount of
an expense if it is of such size, nature or incidence that its disclosure is relevant to
explain the performance of the enterprise for the period.

Termination benefits may result in an expense needing disclosure in order to

comply with this requirement.

Where required by AS 18, "Related Party Disclosures", an enterprise discloses

information about termination benefits for key management personnel.

When drafting AS 15 (revised), the Standard setters felt that merely on the basis
of a detailed formal plan, it would not be appropriate to recognise a provision
since a liability cannot be considered to be crystallized at this stage. AS 15
requires more certainty for recognition of termination cost, for example, if the
employee has sign up for the termination scheme.

1.9 ACTUARIAL ASSUMPTIONS

The actuarial assumptions should be unbiased and mutually compatible. They are
an enterprise’s best estimates of the variables that will determine the ultimate
cost of providing post-employment benefits. They should be neither imprudent
nor excessively conservative, and should reflect the economic relationships
between factors such as inflation, rates of salary increase, return on plan assets
and discount rates.
AS 15 explains that actuarial assumptions comprise:
(a) demographic assumptions about the future characteristics of current and
former employees (and their dependents) who are eligible for benefits.
Demographic assumptions deal with matters such as:
(i) mortality, both during and after employment;

(ii) rates of employee turnover, disability and early retirement;

 6.16 ADVANCED ACCOUNTING
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(iii) the proportion of plan members with dependents who will be eligible
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for benefits;

(iv) claim rates under medical plans; and

(b) financial assumptions, dealing with items such as:
(i) the discount rate

(ii) future salary and benefit levels

(iii) in the case of medical benefits, future medical costs, including, where
material, the cost of administering claims and benefit payments and

(iv) the expected rate of return on plan assets.

Financial assumptions: Financial assumptions should be based on market
expectation at the balance sheet date for the period over which the post-
employment benefit obligations will be settled. Discount rates and other financial
assumptions should not be inflation-adjusted unless such measures are more
reliable (e.g. where benefits are index-linked)

1.10 ACTUARIAL GAINS AND LOSSES

Actuarial gains and losses comprise:
• experience adjustments (the effects of difference between the previous
actuarial assumptions and what has actually occurred); and
• the effects of changes in actuarial assumptions.
Actuarial gains and losses should be recognized immediately in the statement of
profit and loss as income or expense.
Illustration 6
Omega Limited belongs to the engineering industry. The company received an
actuarial valuation for the first time for its pension scheme which revealed a surplus
of ` 6 lakhs. It wants to spread the same over the next 2 years by reducing the
annual contribution to ` 2 lakhs instead of ` 5 lakhs. The average remaining life of
the employees is estimated to be 6 years. You are required to advise the company
on the following items from the viewpoint of finalization of accounts, taking note of
the mandatory accounting standards.
 6.17
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Solution v
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According to AS 15 (Revised 2005) ‘Employee Benefits’, actuarial gains and losses
should be recognized immediately in the statement of profit and loss as income
or expense. Therefore, surplus amount of ` 6 lakhs is required to be credited to
the profit and loss statement of the current year.
Illustration 7
As on 1 st April, 20X1 the fair value of plan assets was ` 1,00,000 in respect of a
pension plan of Zeleous Ltd. On 30 th September, 20X1 the plan paid out benefits of
` 19,000 and received inward contributions of ` 49,000. On 31 st March, 20X2 the
fair value of plan assets was ` 1,50,000 and present value of the defined benefit
obligation was ` 1,47,920. Actuarial losses on the obligations for the year 20X1-
20X2 were ` 600.
On 1st April, 20X1, the company made the following estimates, based on its market
studies, understanding and prevailing prices.

Interest & dividend income, after tax payable by the fund 9.25
Realised and unrealised gains on plan assets (after tax) 2.00
Fund administrative costs (1.00)
Expected Rate of Return 10.25

You are required to find the expected and actual returns on plan assets.
Solution
Computation of Expected and Actual Returns on Plan Assets

`
Return on ` 1,00,000 held for 12 months at 10.25% 10,250

Return on ` 30,000 (49,000-19,000) held for six months at 5%

(equivalent to 10.25% annually, compounded every six
1,500
months)

Expected return on plan assets for 20X1-20X2 11,750

 6.18 ADVANCED ACCOUNTING
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Fair value of plan assets as on 31 March, 20X2 1,50,000
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Less: Fair value of plan assets as on 1 April,20X1
1,00,000
Contributions received 49,000 (1,49,000)
1,000

Add: Benefits paid 19,000

Actual return on plan assets 20,000

Alternatively, the above question may be solved without giving compound effect
to rate of return.
Illustration 8
Rock Star Ltd. discontinues a business segment. Under the agreement with
employee’s union, the employees of the discontinued segment will earn no further
benefit. This is a curtailment without settlement, because employees will continue
to receive benefits for services rendered before discontinuance of the business
segment. Curtailment reduces the gross obligation for various reasons including
change in actuarial assumptions made before curtailment. If the benefits are
determined based on the last pay drawn by employees, the gross obligation reduces
after the curtailment because the last pay earlier assumed is no longer valid.
Rock Star Ltd. estimates the share of unamortized service cost that relates to the
part of the obligation at ` 18 (10% of ` 180). Calculate the gain from curtailment
and liability after curtailment to be recognised in the balance sheet of Rock Star
Ltd. on the basis of given information:

(a) Immediately before the curtailment, gross obligation is estimated at ` 6,000

based on current actuarial assumption.
(b) The fair value of plan assets on the date is estimated at ` 5,100.

(c) The unamortized past service cost is ` 180.

(d) Curtailment reduces the obligation by ` 600, which is 10% of the gross
obligation.
 6.19
LIABILITIES BASED ACCOUNTING STANDARDS
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Solution v
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Gain from curtailment is estimated as under:

`
Reduction in gross obligation 600

Less: Proportion of unamortised past service cost (18)

Gain from curtailment 582

The liability to be recognised after curtailment in the balance sheet is estimated

as under:

`
Reduced gross obligation (90% of ` 6,000) 5,400
Less: Fair value of plan assets (5,100)
300

Less: Unamortised past service cost (90% of ` 180) (162)

Liability to be recognised in the balance sheet 138

Illustration 9
An employee Roshan has joined a company XYZ Ltd. in the year 20X1. The annual
emoluments of Roshan as decided is ` 14,90,210. The company also has a policy of
giving a lump sum payment of 25% of the last drawn annual salary of the
employee for each completed year of service if the employee retires after
completing minimum 5 years of service. The salary of the Roshan is expected to
grow @ 10% per annum.
The company has inducted Roshan in the beginning of the year and it is expected
that he will complete the minimum five year term before retiring. Thus he will get
5 yearly increment.
What is the amount the company should charge in its Profit and Loss account every
year as cost for the Defined Benefit obligation? Also calculate the current service
cost and the interest cost to be charged per year assuming a discount rate of 8%.
(P.V factor for 8% - 0.735, 0.794, 0.857, 0.926, 1)
 6.20 ADVANCED ACCOUNTING
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Solutionv
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Calculation of Defined Benefit Obligation (DBO)

Expected last drawn salary = ` 14,90,210 x 110% x 110% x 110% x 110% x 110%
= ` 24,00,000
Defined Benefit Obligation (DBO) = ` 24,00,000 x 25% x 5 = ` 30,00,000

Amount of ` 6,00,000 will be charged to Profit and Loss Account of the company
every year as cost for Defined Benefit Obligation.
Calculation of Current Service Cost

Year Equal apportioned amount of Discounting @ Current service cost

DBO [i.e. ` 30,00,000/5 years] 8% PV factor
(Present Value)

a b c d=bxc
1 6,00,000 0.735 (4 Years) 4,41,000
2 6,00,000 0.794 (3 Years) 4,76,400
3 6,00,000 0.857 (2 Years) 5,14,200
4 6,00,000 0.926 (1 Year) 5,55,600
5 6,00,000 1 (0 Year) 6,00,000

Calculation of Interest Cost to be charged per year

Year Opening Interest Current Closing balance

balance cost service
cost

a b c = b x 8% d e=b+c+d

1 0 0 4,41,000 4,41,000
2 4,41,000 35,280 4,76,400 9,52,680
3 9,52,680 76,214 5,14,200 15,43,094
4 15,43,094 1,23,447 5,55,600 22,22,141
5 22,22,141 1,77,859* 6,00,000 30,00,000
*Due to approximations used in calculation, this figure is adjusted accordingly.
 6.21
LIABILITIES BASED ACCOUNTING STANDARDS
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1.11 OTHER LONG TERM EMPLOYEE BENEFITS v

Other long-term employee benefits include, for example:

(a) long-term compensated absences such as long-service or sabbatical leave;
(b) jubilee or other long-service benefits;
(c) long-term disability benefits;
(d) profit-sharing and bonuses payable twelve months or more after the end of
the period in which the employees render the related services and
(e) deferred compensation paid twelve months or more after the end of the
period in which it is earned.

1.12 TERMINATION BENEFITS

Termination Benefits are employee benefits payable as a result of either an
enterprise’s decision to terminate an employee’s employment before the normal
retirement date or an employee’s decision to accept voluntary redundancy in
exchange for those benefits (e.g., payments under VRS). Termination benefits are
recognized by an enterprise as a liability and an expense only when the enterprise
has
(i) a detailed formal plan for the termination which is duly approved, and
(ii) a reliable estimate can be made of the amount of the obligation.
Where the termination benefits fall due within twelve months after the balance
sheet date, an undiscounted amount of such benefits should be recognized as
liability in the balance sheet with a corresponding charge to Profit & Loss
Account. However, when the termination benefits fall due more than twelve
months after the balance sheet date, such benefits should be discounted using an
appropriate discount rate. Where an offer has been made to encourage voluntary
redundancy, the termination benefits should be measured by reference to the
number of employees expected to accept the offer. Where there is uncertainty
with regard to the number of employees who will accept an offer of voluntary
redundancy, a contingent liability exists and should be so disclosed as per AS 29
‘Provisions, Contingent Liabilities and Contingent Assets’.
Reference: The students are advised to refer the full text of AS 15
“Employee Benefits” (Revised 2005).
 6.22 ADVANCED ACCOUNTING
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TEST YOUR KNOWLEDGE
MCQs
1. Gratuity and Pension would be examples of:

(a) Short-term employee benefits

(b) Long-term employee benefits
(c) Post-employment benefits.
(d) None of the above.
2. Non-accumulating compensating absence is commonly referred to as:
(a) Earned Leave
(b) Sick Leave
(c) Casual leave
(d) All of the above

3. The plans that are established by legislation to cover all enterprises and are
operated by Governments include:
(a) Multi-Employer plans

(b) State plans

(c) Insured Benefits
(d) Employee benefit plan

4. Best estimates of the variable to determine the eventual cost of post-

employment benefits is referred to as:
(a) Employer’s contribution

(b) Actuarial assumptions

(c) Cost to Company
(d) Employee’s contribution
5. Actuarial gains / losses should be:
(a) Recognised through reserves
 6.23
LIABILITIES BASED ACCOUNTING STANDARDS
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(b) Charged over the expected life of employees v
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(c) Charged immediately to Profit and Loss Statement

(d) Do not charged to Profit and Loss Statement

Theoretical Questions
6. What are the types of Employees benefits and what is the objective of
Introduction of this Standard i.e. AS 15?
Practical Questions
7. A company has a scheme for payment of settlement allowance to retiring
employees. Under the scheme, retiring employees are entitled to
reimbursement of certain travel expenses for class they are entitled to as per
company rule and to a lump-sum payment to cover expenses on food and
stay during the travel. Alternatively, employees can claim a lump sum
amount equal to one month pay last drawn.
The company’s contentions in this matter are:
(i) Settlement allowance does not depend upon the length of service of
employee. It is restricted to employee’s eligibility under the Travel rule
of the company or where option for lump-sum payment is exercised,
equal to the last pay drawn.
(ii) Since it is not related to the length of service of the employees, it is
accounted for on claim basis.

State whether the contentions of the company are correct as per relevant
Accounting Standard. Give reasons in support of your answer.
8. The following data apply to ‘X’ Ltd. defined benefit pension plan for the year
ended 31.03.20X2 calculate the actual return on plan assets:

- Benefits paid 2,00,000

- Employer contribution 2,80,000

- Fair market value of plan assets on 31.03.20X2 11,40,000
- Fair market value of plan assets as on 31.03.20X1 8,00,000
 6.24 ADVANCED ACCOUNTING
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9. v
The fair value of plan assets of Anupam Ltd. was ` 2,00,000 in respect of
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employee benefit pension plan as on 1 st April, 20X1. On 30 th September, 20X1
the plan paid out benefits of ` 25,000 and received inward contributions of
` 55,000. On 31 st March, 20X2 the fair value of plan assets was ` 3,00,000.
On 1st April, 20X1 the company made the following estimates, based on its
market studies and prevailing prices.

Interest and dividend income (after tax) payable by fund 10.25

Realized gains on plan assets (after tax) 3.00
Fund administrative costs (3.00)

Expected rate of return 10.25

Calculate the expected and actual returns on plan assets as on 31 st March,

20X2, as per AS 15.

ANSWERS/SOLUTIONS
MCQs
1. (c) 2. (c) 3. (b) 4. (b) 5. (c)

Theoretical Questions
6. There are four types of employee benefits according to AS 15 (Revised
2005). They are:

(a) short-term employee benefits, such as wages, salaries and social

security contributions (e.g., contribution to an insurance company by
an employer to pay for medical care of its employees), paid annual
leave, profit-sharing and bonuses (if payable within twelve months of
the end of the period) and non-monetary benefits (such as medical
care, housing, cars and free or subsidised goods or services) for
current employees;

(b) post-employment benefits such as gratuity, pension, other retirement

benefits, post-employment life insurance and post-employment
medical care;
 6.25
LIABILITIES BASED ACCOUNTING STANDARDS
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(c) other long-term employee benefits, including long-service leave or v
sabbatical leave, jubilee or other long-service benefits, long-termv
disability benefits and, if they are not payable wholly within twelve
months after the end of the period, profit-sharing, bonuses and
deferred compensation; and

(d) termination benefits.

Because each category identified in (a) to (d) above has different
characteristics, this Statement establishes separate requirements for
each category.
The objective of AS 15 is to prescribe the accounting and disclosure for
employee benefits. The statement requires an enterprise to recognise:

(a) a liability when an employee has provided service in exchange for

employee benefits to be paid in the future; and
(b) an expense when the enterprise consumes the economic benefit
arising from service provided by an employee in exchange for
employee benefits.
Practical Questions
7. The present case falls under the category of defined benefit scheme under
Para 49 of AS 15 (Revised) “Employee Benefits”. The said para encompasses
cases where payment promised to be made to an employee at or near
retirement presents significant difficulties in the determination of periodic
charge to the statement of profit and loss. The contention of the Company
that the settlement allowance will be accounted for on claim basis is not
correct even if company’s obligation under the scheme is uncertain and
requires estimation. In estimating the obligation, assumptions may need to
be made regarding future conditions and events, which are largely outside
the company’s control. Thus,
(1) Settlement allowance payable by the company is a defined retirement
benefit, covered by AS 15 (Revised).
(2) A provision should be made every year in the accounts for the
accruing liability on account of settlement allowance. The amount of
provision should be calculated according to actuarial valuation.
 6.26 ADVANCED ACCOUNTING
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(3) Where, however, the amount of provision so determined is not
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material, the company can follow some other method of accounting
for settlement allowances.
8.

Fair value of plan assets on 31.3.20X1 8,00,000

Add: Employer contribution 2,80,000

Less: Benefits paid (2,00,000)

(A) 8,80,000

Fair market value of plan assets at 11,40,000

31.3.20X2 (B)

Actual return on plan assets 2,60,000

(B-A)

9. Computation of Expected Returns on Plan Assets as on 31 st March, 20X2, as

per AS 15

Return on opening value of plan assets of ` 2,00,000 (held 20,500

for the year) @ 10.25%

Add: Return on net gain of ` 30,000 (i.e. ` 55,000 –

` 25,000) during the year i.e. held for six months @ 5% 1,500
(equivalent to 10.25% annually, compounded every six
months)

Expected return on plan assets as on 31 st March, 20X2 22,000

 6.27
LIABILITIES BASED ACCOUNTING STANDARDS
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Computation of Actual Returns on Plan Assets as on 31st March, 20X2, v
as per AS 15 v

` `
Fair value of Plan Assets as on 31 st March, 20X2 3,00,000

Less: Fair value of Plan Assets as on (2,00,000)

1st April, 20X1
Add: Contribution received as on 55,000 (2,55,000)
th
30 September, 20X1

45,000
Add: Benefits paid as on 30 th September, 20X1 25,000

Actual returns on Plan Assets as on 70,000

31st March, 20X2