1.33 Query: Accounting for revision in pay scales with retrospective effect.
1. A public sector company, registered under the Companies Act, 1956, has adopted pay structure on the Industrial Dearness Allowance (IDA) pattern of public sector undertakings (PSU) as per the Bureau of Public Enterprises (BPE) guidelines. These pay scales are subject to revision every 5 years. The pay scales of the company’s non-executives are due for revision since 1.8.1987. In order to mitigate the financial loss to the employees, the company’s board of directors, in their meeting, approved the proposal for grant of ‘recoverable advance’ upto Rs. 15,000/- to all executives including the Chairman-cum-Managing Director and the Directors and upto Rs. 8,000/- to all non-executives, pending revision of their pay scales, effective from 1.1.1987 and 1.8.1987, respectively. Accordingly, ad hoc advance was disbursed to all employees during 1989-90 after taking an undertaking that in the event of any excess amount paid consequent upon revision of pay scales, the same will be recovered. Subsequently, second ad hoc payment of similar nature of recoverable advance was approved by the Board and was disbursed in the year 1990-91. It was clearly indicated in the Board’s agenda that this advance paid will be adjusted against arrears payable on revision of pay scales as may be decided and any excess payment made will be subject to recovery at the time of final salary revision. As on date, the revision of pay scales of non-executives is still pending with the Department of Public Enterprises (DPE), whereas pay scales of the executives were revised in the month of May 1991, with effect from 1.1.1987. The advances given to the executives were fully adjusted against the amounts due to them on revision of pay scales.
2. Keeping all the factors in view and the nature of the amount paid, these were shown as ‘recoverable advances’ in the respective years and are being brought forward in the subsequent years pending final adjustment on revision of pay scales of non-executives. The amount so far remaining unadjusted is Rs. 32.89 lakhs. This advance is to be adjusted against arrears for the period of years effective from 1.8.1987 and will be suitably adjusted in the year in which revision of pay scales takes place.
3. The querist has referred to the opinion expressed on February 12, 1988, by the Expert Advisory Committee on accounting treatment of interim relief advance of dearness allowance suggesting to treat that as an expenditure.* According to the querist the facts of that case were different because the nature of advance given by the company in the present case is entirely different from the interim relief advance of dearness allowance paid monthly.
4. The querist has sought the opinion of the Expert Advisory Committee on the following issues:
(a) Whether the accounting treatment and the relevant disclosure as a note to the accounts as given below is correct:
“Pending revision of scales of non-executives, no recovery has been made out of advance paid to non-executive employees”.
(b) If the accounting treatment being followed and/or disclosure as per (a) above is not correct what accounting treatment and disclosure should be adopted in this regard?
(c) Whether the advance given in earlier years, which is still outstanding, can be charged as an expense in the current financial year. If so, whether the expense is to be treated as a prior period expense or a current year expense?
(d) In the event of pay revision, can the amount of arrears be charged as an expense in the year in which such revision takes place or the amount has to be segregated over the past period of pay revision and is to be accounted as prior period expenditure?
Opinion January 20, 1993
1. The Committee is of the view that it is the accepted accounting practice that where, at the time of preparation of financial statements, (i) it is probable that at the date of financial statements events subsequent thereto will confirm that (after taking into account any probable recovery) an enterprise has incurred any liability as at that date; and (ii) a reasonable estimate of the amount at which such liability is likely to be settled can be made, the enterprise should provide for such liability by a charge in the profit and loss account.
2. The Committee is of the view that, by virtue of making payments to the executives, and from the other facts of the query, it is highly probable that the pay scales would be revised in respect of the accounting periods, in accordance with the guidelines of the Bureau of Public Enterprises (BPE). In view of this, the first condition mentioned in para 1(i) above is satisfied. With regard to the condition in para 1(ii) above, in the view of the Committee, an estimate of the resultant expense to the company in this regard, can be reasonably made on the basis of the past experience of the company, the criteria adopted by the BPE in the past, similar changes effected in other government enterprises etc. The Committee is, therefore, of the view that a provision for the liability in respect of revision of pay scales should be made in the accounts of the relevant year.
3. The Committee also notes that clause 3(ix) of Part II of Schedule VI to Companies Act, 1956, requires companies to disclose separately, in their profit and loss account-
“(a) The aggregate, if material, of any amounts set aside to provisions made for meeting specific liabilities, contingencies or commitments.
(b) ………”
4. The Committee notes paras 3.1 and 9 of Accounting Standard (AS) 5 on ‘Prior Period and Extraordinary Items and Changes in Accounting Policies’, issued by the Institute of Chartered Accountants of India, which read as follows:
“3.1 ‘Prior period items’ are material charges or credits which arise in the current period as a result of errors or omissions in the preparation of the financial statements of one or more prior periods.”
“9. Prior period items should be separately disclosed in the current statement of profit and loss together with their nature and amount in a manner that their impact on current profit or loss can be perceived.”
5. The Committee is of the view that a provision for the liability, in respect of the revision of the pay scales should have been made in the accounts of the relevant years, i.e., 1987-88 onwards. However, since no such provision has been created by the company, the provision for the past periods should be made in the current year’s profit and loss account as a prior period item. This should be disclosed as suggested in para 9 of the AS 5, as reproduced at para 4 above.
6. On the basis of the above, the Committee is of the following opinion in respect of the issues raised in para 4 of the query:
(a) No.
(b) The company should account for the liability arising on the revision in the pay scales of its employees, as suggested in para 2 above. The provision so created should be disclosed as per para 3 and 4 above.
(c) The estimated amount of the liability relating to earlier years should be charged in the current year’s profit and loss account as a prior period item. This should be disclosed as suggested in para 6 (b) above.
(d) Please refer to (b) and (c) above. ________________________________ * Published in Compendium of Opinions, Volume VIII, Page VIII-23 |