1.24 Query: Booking of liability for payments under a voluntary retirement scheme. 1. A Ltd., a Super Star Trading House under the administrative control of Ministry of Commerce, has been exporting minerals like iron ore, manganese ore, chrome ore; gems and jewellery; agro products like rice, wheat, soya meal etc.; and has also been importing metals, fertilisers, strategic industrial raw materials, gold etc.
2. The process of liberalisation initiated 5 years ago by the government has resulted in decanalisation of a number of export and import items dealt by the company resulting in reduced number of activities. Time and again, Ministry of Commerce and Department of Public Enterprises have been stressing upon the need to reduce the excessive manpower employed in the public sector so as to reduce the overall overhead expenditure and increase profitability. As a result, the company started a voluntary retirement scheme (VRS) for its officers/staff in the month of February 1997, whereby, all employees upto and including the level of Dy. General Managers were eligible to seek VRS which was kept open till the closing hours of 31st March, 1997 and the decision to accept or reject the applications by the management was to be taken on/after 2nd April, 1997. The relieving of the employees was to be carried on in a phased manner starting from 15th April, 1997, till 15th June, 1997, taking into account the views conveyed by the Regional Heads with regard to administrative/operational difficulties in relieving employees in one stroke. Regional Heads were asked to decide the actual date of voluntary retirement as per the following guidelines:
(a) All employees in the staff cadre, excepting those at (c) below, to be relieved on or before 15th April, 1997.
(b) All officers, excepting those as at (c) below, to be relieved on or before 30th April, 1997, and
(c) Officers and staff in the finance and accounts cadre associated with closing of accounts to be relieved, w.e.f., 15th June, 1997. However, finance and accounts cadre officials not associated with closing of accounts to be relieved on 15th/ 30th April, 1997, as at (a) and (b) above. Director (Finance) should be consulted for the purpose.
As a result of the scheme, out of the 3200 employees on the roll of the company as on 31st March, 1997, 230 employees opted for the VRS and 222 of these applications were accepted. However, the relieving of these employees was regulated in phased manner as per the management guidelines mentioned above.
4. The company’s statutory auditors are insisting for provision of the liability for VRS payments in the accounts for the year 1996-97. The management has taken a view that the offer by employees for making VRS applications was open till the closing hours of 31st March, 1997, whereas the acceptance of the offer and its implementation was extended to 1997-98 (up to 15th June, 1997) by the management and since the offer is not complete unless acceptance is made, no liability accrues as on 31 st March, 1997.
5. The querist has sought the opinion of the Expert Advisory Committee of the Institute of Chartered Accountants of India as to whether liabilities for VRS benefits like ex-gratia, rehabilitation grant etc., have to be created in the year 1996-97, i.e., as the applications were invited up to 31st March, 1997 or in 1997-98 when the employees, whose applications were accepted by the management, are actually relieved from the services of the company.
Opinion September 23, 1997
1. The Committee notes paras 3.1, 3.2, 10 and 13 of Accounting Standard (AS) 4 (Revised) on ‘Contingencies and Events Occurring After the Balance Sheet Date’, which are reproduced below:
“3.1 A contingency is a condition or situation, the ultimate outcome of which, gain or loss, will be known or determined only on the occurrence, or non-occurrence, of one or more uncertain future events.
3.2 Events occurring after the balance sheet date are those significant events, both favourable and unfavourable, that occur between the balance sheet date and the date on which the financial statements are approved by the Board of Directors in the case of a company, and, by the corresponding approving authority in the case of any other entity.
Two types of events can be identified as:
(a) those which provide further evidence of conditions that existed at the balance sheet date; and
(b) those which are indicative of conditions that arose subsequent to the balance sheet date.
10. The amount of a contingent loss should be provided for by a charge in the statement of profit and loss if:
(a) it is probable that future events will confirm that, after taking into account any related probable recovery, an asset has been impaired or a liability has been incurred as at the balance sheet date, and
(b) a reasonable estimate of the amount of the resulting loss can be made.
13. Assets and liabilities should be adjusted for events occurring after the balance sheet date that provide additional evidence to assist the estimation of amounts relating to conditions existing at the balance sheet date or that indicate that the fundamental accounting assumption of going concern (i.e., the continuance of existence or substratum of the enterprise) is not appropriate.”
2. The Committee is of the view that a condition existed on the balance sheet date (31st March, 1997) regarding the liability towards the Voluntary Retirement Scheme (VRS) since the management started the VRS in the month of February, 1997 and 230 employees opted for the VRS as on 31st March, 1997. The Committee is further of the view that since it was probable that future events will confirm that a liability has been incurred on the balance sheet date and that the amount could be estimated on reasonable basis, a provision for payments under the VRS would be required to be made for an appropriate amount for the aforesaid number of employees who submitted their application. Further, it appears from the facts of the query that the management of the company accepted the applications of 222 employees before the finalisation of accounts, whereby, the conditions existing on the balance sheet date got confirmed. In view of this, a provision for amounts payable under VRS would be required to be adjusted as per para 13 of AS 4 and a final provision for the amount payable for 222 employees should be made.
3. On the basis of the above, the Committee is of the opinion that a provision for VRS benefits like ex-gratia, rehabilitation grant etc., should be created in the year 1996-97. ______________________
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