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Query No. 38
Subject:
Treatment of payments made under voluntary retirement scheme.[1]
A. Facts of the Case
1. A company introduced a voluntary retirement scheme for employees.
The scheme was in force for a period of 4 months.
The terms of the scheme provided that in addition to other terminal
benefits available like contributory provident fund, gratuity, full encashment
of leave, retired employees contributory health scheme coverage etc., the
employees seeking voluntary retirement will be paid a one-time lumpsum payment
equivalent to one and a half month’s salary for each completed year of service
or the monthly salary at the time of voluntary retirement multiplied by the
remaining number of months of service before normal date of retirement,
whichever is less.
2. Around 8,200 employees sought voluntary retirement under the scheme
entailing payment of around Rs. 350 crore which included payment towards lumpsum,
leave encashment and settlement allowance.
(Settlement allowance is paid to retired employees for journey to their
place of residence upon retirement.)
3. The querist has made a reference to an earlier opinion of the Expert
Advisory Committee issued on the same subject (No. 1.20 contained in Compendium
of Opinions, Volume X). The said
opinion relates to a query whose facts and circumstances, in the opinion of the
querist, are similar to those of the present case. According to the said
opinion, the termination benefits attributable to voluntary retirement scheme
can be treated as deferred revenue expenditure.
With regard to the period of write off of the deferred revenue
expenditure, the opinion states that the period of write off should be decided
by the management on a rational basis, e.g., the pay back period of such
expenditure which should be computed taking into account factors like present
scale of salary, future increments, tax benefits, saving on account of other
terminal benefits such as gratuity, cash equivalent of accumulated earned leave,
employers’ contribution to provident fund, etc.
It has also been opined that keeping in view the prudence concept of
accounting, such an expenditure should be written off as early as possible, say
a period of 3 to 5 years.
4. According to the querist, the pay back period to be considered in respect
of the lumpsum amount paid under voluntary retirement scheme works out to a
total of 3 years beginning from the second half of the year 1999-2000.
B. Queries
5. The opinion of the Expert Advisory Committee has been sought on the
following issues:
(a) Whether the amount to be taken into consideration for deferral purposes
should be only the portion attributable to the one-time lumpsum payment or
whether it should be with reference to the total payment of Rs. 350 crore, i.e.,
lumpsum payment, leave encashment and settlement allowance.
In the event of only the lumpsum payment qualifying for deferral,
whether, in working out the pay back period, the total payment is to be
considered or whether it should be restricted to the lumpsum payment only.
(b) Whether additional payment made by the company to the Gratuity Trust Fund
due to the voluntary retirement scheme can also be considered for deferral.
(c) Whether, for the purposes of deferral, fraction of a year can be
considered or whether deferral should be reckoned with reference to number of
complete years.
(d) Whether only direct tax benefits relating to pay out under the voluntary
retirement scheme are to be reckoned or whether tax benefits arising indirectly
therefrom are also to be considered.
(e) There is presently no stated accounting policy on deferred revenue
expenditure. In view of the fact
that it is now intended to defer the expenditure as stated above, whether there
is a need for such a policy to be stated. If
not, whether adequate disclosure of the treatment of such expenditure in
‘notes on accounts’ would be sufficient.
C. Points Considered by the Committee
6. The Committee notes that Accounting Standard (AS) 15, ‘Accounting for
Retirement Benefits in the Financial Statements of Employers’, prescribes the
accounting treatment of retirement benefits in the financial statements of
employers. The basic principle underlying AS 15 is that the cost of retirement
benefits to an employer results from receiving services from the employees who
are entitled to receive such benefits and consequently, the cost of retirement
benefits needs to be accounted for in the periods during which these services
are rendered. The standard,
accordingly, “does not apply to those retirement benefits for which the
employer’s obligation cannot be reasonably estimated, e.g., adhoc ex-gratia
payments made to employees on retirement” (paragraph 2 of AS 15).
7. The Committee notes that the voluntary retirement scheme to which the
queries pertain is an adhoc scheme applicable for a limited period of time and
not a continuing one. The Committee
is of the view that as the scheme is of an adhoc nature, a reasonable estimation
of obligation of the company in respect thereof cannot be made during the
periods in which the services are rendered by employees.
The Committee is, accordingly, of the view that AS 15 does not apply to
the scheme.
8. The Committee takes note of the earlier opinion issued by it on the
subject as referred to in paragraph 3 above.
The Committee further notes that the ‘Guidance Note on Audit of
Miscellaneous Expenditure Shown in Balance Sheet’ issued by the Institute of
Chartered Accountants of India states that “unless some benefit from the
expenditure can reasonably be expected to be received in future and unless the
amount of such benefit is reasonably determinable, there is no justification for
carrying forward the expenditure for being written-off in subsequent periods.
Also, the amount of expenditure to be carried forward should not exceed
the expected future revenue/other benefits related to the expenditure.” The Guidance Note further states that the auditor should
satisfy himself, inter alia, that the criteria which previously justified the
deferral of the expenditure continue to be met and the expected future
revenue/other benefits related to the expenditure continue to exceed the amount
of unamortized expenditure.
9. The Committee is of the view that if the facts and circumstances of the
present case are identical to those covered by the opinion referred to in
paragraph 3 above, deferral of the termination benefits attributable to the
voluntary retirement scheme would be in order.
However, for doing so, the following conditions laid down in the
‘Guidance Note on Audit of Miscellaneous Expenditure Shown in Balance Sheet’
should be satisfied:
(a) Some benefits from the expenditure should reasonably be expected to be
received in future.
(b) The amount of such benefits should be reasonably determinable.
(c) The above criteria should continue to be met during the period of
deferral of the expenditure.
(d) The amount of expenditure to be carried forward should not exceed the
expected future benefits related to the expenditure.
10. The Committee notes that the terminal benefits included in the amount of
Rs. 350 crore payable by the company on voluntary retirement can be classified
into two categories:
(a) Termination benefits to be paid irrespective of the voluntary retirement
scheme, i.e.,
(i) leave
encashment; and
(ii) settlement
allowance.
(b) Termination benefits payable solely due to the voluntary retirement
scheme, i.e., one-time lumpsum payment equivalent to one and a half month’s
salary for each completed year of service or the salary for the remaining period
of service, whichever is less.
11. Considering the nature of termination benefits referred to in paragraph
10(a) above, the Committee is of the view that the obligation of the company in
respect thereof can be reasonably estimated and therefore they need to be
provided for during the tenure of service of the employees, as required by AS
15. Their deferral would not be appropriate.
Thus, only the termination benefits payable solely due to the voluntary
retirement scheme as referred to in paragraph 10(b) above qualify for deferral.
It follows that the pay back period is also to be computed only in
respect of termination benefits referred to in paragraph 10(b).
12. AS 15 makes a distinction between funding of retirement benefits and
accounting therefore. Paragraphs 14
and 15 of the standard state the following in this regard.
“14. The objective of funding is to make available amounts to meet future
obligations for the payment of retirement benefits.
Funding is a financing procedure and in determining the periodical
amounts to be funded, the employer may be influenced by such factors as the
availability of money and tax considerations.”
“15. On the other hand, the objective of accounting for the cost of a
retirement benefit scheme is to ensure that the cost of benefits is allocated to
accounting periods on a systematic basis related to the receipt of the
employees’ services.”
13. The Committee is of the view that the additional payment made by the
company to the gratuity trust fund due to the voluntary retirement scheme
represents only a funding arrangement and does not by itself represent the cost
of providing retirement benefits. In
any case, the payment of gratuity is not attributable to the voluntary
retirement scheme and, therefore, does not qualify for deferral.
14. The Committee notes that the company has worked out the pay back period
as 3 years. (The Committee presumes
that the factors mentioned in the earlier opinion of the Committee referred to
in paragraph 3 above have been duly taken into consideration by the company in
working out the pay back period.) The
Committee is of the view that the payback period should be reckoned from the
date of commencement of the pay back.
15. The Committee notes that as per the earlier opinion of the Committee
referred to in paragraph 3 above, one of the considerations in determining the
pay back period is ‘tax benefits’. The
Committee is of the view that tax benefits to be considered for this purpose are
those that are attributable to the voluntary retirement scheme.
While some tax benefits may be directly attributable to the scheme,
others may be attributable only indirectly.
As far as the indirectly attributable tax benefits are concerned, the
Committee is of the view that the company may consider their inclusion or
exclusion in working out the pay back period in the context of their
materiality, complexities involved in making the necessary computations and the
reliability of such computations. Directly
attributable tax benefits, on the other hand, need to be considered in all
cases.
16. Accounting Standard (AS) 1, ‘Disclosure of Accounting Policies’
requires that all significant accounting policies adopted in the preparation and
presentation of financial statements should be disclosed (paragraph 24).
Accordingly, the Committee is of the view that in case the accounting
policy in respect of termination benefits payable on account of voluntary
retirement scheme constitutes a significant accounting policy in the context of
the facts and circumstances of the case, it should be disclosed in accordance
with AS 1.
D. Opinion
17. Based on the above, the Committee is of the following opinion on the
issues raised in paragraph 5 :
(a) The amount to be considered for deferral is only the one-time lumpsum
payment as referred to in paragraph 1. The
pay back period is also to be computed with reference to the one-time lumpsum
payment.
(b) The additional payment made by the company to Gratuity Trust Fund due to
the voluntary retirement scheme does not qualify for deferral.
It should be dealt with in accordance with AS 15.
(c) The pay back period should be reckoned from the date of commencement of
the pay back and should accordingly begin from the second half of the year
1999-2000.
(d) It is necessary to consider the directly attributable tax benefits in
determining the pay back period. As
far as the indirectly attributable tax benefits are concerned, the company may
consider their inclusion or exclusion in the context of their materiality,
complexities involved in making the necessary computations and the reliability
of such computations.
(e) The accounting policy relating to deferred revenue expenditure should be
disclosed if it is significant in the context of the facts and circumstances of
the company.
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