1.33 Query: Disclosure of provision for leave encashment benefit.
1. A company was incorporated on 30.3.1983 under the Companies Act, 1956. The company is a specialised consultancy organisation, wholly owned by the Government of India, under the administrative control of the Ministry of Health & Family Welfare.
2. The querist has stated that as on 31st March, 1996, the company had 70 employees on its rolls.
3. The querist has stated that the company has provided accrued liability on account of leave encashment credit to its employees account (entitled to avail partly and encash partly every year, or on retirement) as on 31.3.1996 and shown under the head “Other Liabilities”. The amount for the year 1995-96 has been charged to profit and loss account and included under the head “Employees remuneration & benefits” with a disclosure that it includes leave encashment. The querist has stated that the above practice ahs been consistently followed in the past also.
4. The querist ahs stated that the requirement of Accounting Standard (AS) 15 on ‘Accounting for Retirement Benefits in the Financial Statements of Employers’ is that: “Retirement benefits are properly accounted for and appropriate disclosures in respect thereof are made in the financial statements of employer”.
5. According to the querist, AS 15 states in para 15 that “Retirement benefit costs are sometimes disclosed separately for statutory compliance. In other cases, they are considered to be an element of employee remuneration and their separate disclosure is not usually made.”
6. Part I of Schedule VI to the Companies Act, 1956, states that provision is to be made for provident fund scheme, insurance, pensions and similar staff welfare scheme.
7. The querist has desired the opinion of the Expert Advisory Committee on the following issues:
(i) Whether leave encashment benefit is treated as a statutory retirement benefit like provident fund, gratuity etc., or not.
(ii) Whether the act of the company showing the accrued liabilities towards leave encashment of its employees every year under the head ‘Other Liabilities’ is correct or this liability towards leave encashment is to be shown under the head ‘Provisions’.
Opinion February 17, 1997
1. The Committee notes that the employees are entitled to encash their accrued leave not only on retirement, but also during the course of service. Accordingly, apart from this being a retirement benefit, it is also an additional benefit to the employees.
2. The Committee notes Part II of Schedule VI to the Companies Act, 1956 which, inter alia, states as below:
“3. The profit and loss account shall set out the various items relating to the income and expenditure of the company arranged under the most convenient heads and in particular, shall disclose the following information in respect of the period covered by the account.…………
(x) Expenditure incurred on each of the following items:……...
f(3) Workmen and staff welfare expenses to the extent not adjusted from any previous provision or reserve”
3.The Committee also notes Part III of Schedule VI to the Companies Act, 1956, which defines the term, ‘provision’ as below:
“B. Provisions
(12) For Insurance, pension and similar staff benefit schemes.”
4. The Committee also notes Part III of Schedule VI to the Companies Act, 1956, which defines the term, ‘provision’ as below:
“(a) the expression ‘provision’ shall, subject to sub-clause (2) of this clause, mean any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets, or retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy.”
5. The Committee is of the view that accrued liability towards leave encashment is a known liability of which only the amount cannot be determined with substantial accuracy. Therefore, this should be treated as a provision and shown under the head ‘Provisions’ rather than under ‘Other liabilities’.
6. Based on the above, the Committee is of the following opinion on issues raised at para 7 of the query:
(i) (a) The leave encashment benefit is payable as a contractual obligation to the employees. It is, thus, not a benefit payable under a separate statute, such as, provident fund, gratuity etc.
(b) AS 15 requires separate disclosure of costs of retirement benefits where the relevant law requires a separate disclosure in the financial statements. Schedule VI to the Companies Act, 1956, does not require a separate disclosure of leave encashment benefit.
Thus, the amount accrued in this regard can be shown as a part of the workmen and staff welfare expenses to the extent not adjusted in the provision in this regard, as per the requirements of Part I of Schedule VI to the Companies Act, 1956, reproduced in para 2 above.
(ii) Accumulated accrued liability towards leave encashment of the employees at the year-end should be shown as a provision in the balance-sheet. ________________________________
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