1.22 Query: Accrual of leave travel concession (LTC) payable.
1. A public sector company, having a turnover of over Rs.3600 crores, has about 72000 employees. The company has manufacturing units all over India, producing various power generation equipments and executing turnkey projects in India and abroad. The accounts of the individual divisions are audited by the respective branch auditors and consolidated at the corporate level. The accounts of the company are also subject to audit under section 619 of the Companies Act, 1956.
2. According to the querist, as per the rules of the company, leave travel concession claim from an employee could be either in the form of availment of the facility or encashment in-lieu of availment. The salient features of the leave travel concession facility given by the company to its employees are as follows:
(i) Leave travel concession is admissible to all employees and members of their families once in a block of two years commencing from 1974-75, subject to production and verification of cash receipts for journeys performed.
(ii) An employee is entitled to claim full reimbursement of actual cost of travel from the Headquarters to Home Town and back for himself and the members of his family limited to the total fare for each of them by the class to which the employee is entitled to travel by rail as per T.A. Rules, but not exceeding that of First Class except in the cases where specifically provided otherwise in these rules.
(iii) An employee is entitled to claim full reimbursement of actual cost of travel for himself and the members of his family from the Head-quarters to any place in India by the shortest route restricted to a distance of 1500 kilometers each way, limited to the total fare for each of them by the class to which the employee is entitled to travel by rail as per T.A. Rules, but not exceeding that of First Class except in the cases where specifically provided otherwise in these rules.
(iv) An employee may be allowed reimbursement of LTC for two block years together at a time, provided no LTC is availed for one block of two years. However, in cases where an employee, after availing of LTC by clubbing two blocks leaves the services of the company before completing a minimum of one year of service in the second block, he will be required to refund the amount of LTC over and above his entitlement for one block at the time of onward journey.
(v) Members of the family not accompanying family/employee will not be entitled to carry forward the concession to the next block.
(vi) Encashment of LTC is allowed in respect of the employee, spouse and dependent children who are otherwise eligible for LTC facility subject to a maximum of four full rail tickets by the entitled class, not exceeding First Class. The encashment facility under this scheme will be available only once for one LTC block of 2 years in a period of 4 years commencing 1982-1985, further period of 4 years being 1986-1989 and 1990-93 and so on. During the said period of 4 years, the employees will also be entitled to avail the LTC facility for the 1st bock of two years.
(vii) The ‘carry-forward’ facility for actual availment of LTC will also be applicable to encashment under this scheme for the relevant block of 2 years opted for encashment.
(viii) Encashment of LTC facility under this scheme will be in lieu of the total entitlement of all members of family (including the employee) for availing the LTC of the relevant block of 2 years being encashed, and as such the encashment will extinguish the claim of the employee and members of the family including dependent parents to avail of the facility in respect of that block. Even if one member of the family or employee avails LTC, encashment will not be permitted for other members for that block of 2 years.
3. The querist has stated that as per the current practice, the expenditure on account of LTC facility is recognised in the accounts in the year in which LTC facility is availed/encashed. However, no separate disclosure is made by the company in the Statement of Accounting Policies, regarding the policy followed for accounting of LTC facility.
4. As per the querist, future liabilities on account of the scheme and such other contracts are also very much uncertain due to the following reasons:
(i) Inconsistency of employee behaviour regarding availment/encashment, the expenditure to the company being different in each case.
(ii) Fluctuating family size due to marriages/births/deaths that can alter the entitlement per employee.
5. The querist is of the view that if future estimated liabilities are to be recognised in the accounts of the company, the consequent accounting practice in respect of other similar obligations such as annual maintenance contracts, service contracts and consultancy contracts, where the company might have future liability (and hence, unascertained) on account of the unexpired contract period as at the end of any financial year, may have to be examined. In such cases, in the view of the querist, this issue would also need to be clarified in the light of the “Going Concern” principle.
6. The querist has sought the opinion of the Expert Advisory Committee on the following issues:
(a) Whether it is necessary to state in the company’s accounting policy that LTC is accounted for on cash basis, i.e., it is accounted for when an employee actually utilises the same.
(b) If (a) above is not followed, whether the encashable portion of LTC is to be quantified and provided for in the accounts? or
(c) if (a) above is not followed and no provision is required to be made, how it should be disclosed in the accounts, i.e., either as a contingent liability or as a note to the accounts.
Opinion March 7, 1995
1. The present query relates to the matter of accounting for LTC. The accounting for other matters stated by the querist in para 5 are not necessarily governed by the opinion expressed by the Committee on this query; it would depend upon facts and circumstances of each case.
2. The Committee notes that section 209(3) of the Companies Act, 1956, requires, inter alia, as follows:
“For the purposes of sub-section (1) and (2), proper books of account shall not be deemed to be kept with respect to the matters specified therein, - ……..
(ii) if such books are not kept on accrual basis and according to the double entry system of accounting.”
3. The Committee notes that under accrual system of accounting, “A liability is recognised in the balance sheet when it is probable that an out-flow of resources embodying economic benefits will result from the settlement of a present obligation and the amount at which the settlement will take place can be measured reliably.”*
4. The Committee notes from the above that a ‘liability’ is essentially a present obligation relating to the events or transactions which have already happened in the past. The Committee is accordingly of the view that obligations of an employer towards compensation payable to its employees would become the liability of the employer, for accounting purposes, only when such obligation relates to employees’ services already rendered, i.e., when it is not contingent on an employee’s future services. The Committee is also of the view that accrual of such a liability would not be necessary if the obligation of employer lapses, i.e., employees can not carry forward their earned rights to one or more periods subsequent to that in which they are earned or encash the same. The Committee is of the view that LTC benefits should also be accounted for accordingly on accrual basis.
5. The Committee also notes that para 27 of Accounting Standard (AS) 1 on ‘Disclosure of Accounting Policies’, issued by the Institute of Chartered Accountants of India, requires as follows:
“If the fundamental accounting assumptions, viz., Going Concern, Consistency and Accrual are followed in financial statement specific disclosure is not required. If a fundamental accounting assumption is not followed, the fact should be disclosed.”
6.On the basis of the above, the Committee is of the following opinion in respect of the issues raised at para 6 of the query:
(a) In case the LTC benefits are not accounted for on accrual basis, the fact should be disclosed.
(b) Provision for LTC benefits including encashable portion should be made as suggested in para 4 above.
(c) Please see (b) above. ____________________________ * Para 91 of ‘Framework for Preparation and Presentation of Financial Statements’, issued by the International Accounting Standards Committee (IASC)
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