Query No. 39

Subject:     

Accounting for post-retirement medical benefits extended to employees.^[1]

A. Facts of the Case

1. A company has a ‘Retired Employees Contributory Health Scheme’.  As per the terms of the scheme, any retired employee of the company can be admitted to the benefits of the scheme subject to conditions laid down in this behalf.  The principal features of the scheme are as below :

(a)  The scheme is intended to extend medical cover to the retired employees of the company and their spouses, and to spouses of employees who die while in service.

(b) An employee has to apply for registration for availing the benefits of the scheme.  Upon registration, a medical card is issued which is valid for the period for which the prescribed contribution has been made.

(c) The contribution required to be made by employees in the executive and non-executive grades is Rs. 15 and Rs. 10 per month respectively for places where the company hospitals are available and Rs. 20 and Rs. 15 per month respectively for places where company’s hospitals are not available. The contribution is payable annually in advance.  The employees also have an option to make a one-time lumpsum contribution of Rs. 1,300 and Rs. 900 for executive and non-executive grade employees respectively for places where company’s hospitals are available, and Rs. 1,800 and Rs. 1,300 respectively for other places.

(d) The beneficiaries are entitled to medical attendance and treatment as indoor patients in any of the company’s hospitals irrespective of the station where they get themselves registered.  If there are no company hospitals or facilities could not be availed of in any of the company’s hospitals, the expenditure incurred on hospitalisation is reimbursable on submission of bills, subject to the conditions laid down in this behalf.

(e) The beneficiaries are also entitled to medical attendance and treatment in company’s hospitals/dispensaries as out-patients.  They are also entitled to treatment from other empanelled doctors, including specialists to whom they are specially referred by the company doctors.  The medicines prescribed by the outside doctors in such cases are supplied to the beneficiaries from the company’s hospitals/dispensaries; no reimbursement is allowed for purchase of medicines or payment for diagnostic tests, etc.

2. In respect of the above post-retirement medical benefits, the accounting policy being followed by the company consistently over the years is as under:

“Post-retirement medical benefits are accounted for based on eligible claims.”

In accordance with the above policy, medical expenditure incurred by the company on retired employees is accounted for under the respective expense head.  No insurance policy such as ‘mediclaim’ has been taken by the company for the purpose.  There also does not exist any trust funded by the company to meet the medical expenditure in respect of retired employees.

3. The total number of employees in the company is approximately 54,000.  On the basis of the age profile of employees in service as on date, the pattern of retirement between the years 2000 and 2005 is expected to be as under:

4. Past data relating to the number of retired employees and expenditure incurred by the company on them under the scheme is as below:

B. Query

5. The querist has sought the opinion of the Expert Advisory Committee as to whether the accounting policy of the company for post-retirement medical benefits is in order in terms of the provisions of Accounting Standard (AS) 15, ‘Accounting for Retirement Benefits in the Financial Statements of Employers’, issued by the Institute of Chartered Accountants of India.

C. Points Considered by the Committee

6. The Committee notes that AS 15 defines ‘defined benefit schemes’ as “retirement benefit schemes under which amounts to be paid as retirement benefits are determinable usually by reference to employee’s earnings and/or years of service” (paragraph 3).

7. The Committee notes that there are two differing viewpoints about the exact connotation of the above definition.  One view is that, in order to qualify as a ‘defined benefit scheme’, a retirement benefit scheme should be such that the amount of benefits to which an employee would be entitled on retirement should necessarily be based on the employee’s earnings and/or years of service.  The other viewpoint is that the use of the word ‘usually’ in the said definition signifies that the amount of retirement benefits under a defined benefit scheme can also be determinable with reference to some other basis.

8. The Committee is of the view that the fact whether a particular retirement benefit scheme is in the nature of a defined benefit scheme or not does not affect the fundamental principle underlying the accounting treatment of cost of providing the retirement benefits.  Paragraph 12 of AS 15 clearly states 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.  It is also stated that accounting for retirement benefit costs only when employees retire or receive benefit payments does not achieve the objective of allocation of those costs to the periods in which the services were rendered.

9. The Committee is, accordingly, of the view that it is necessary to make a provision for post-retirement medical benefits during the tenure of service of employees if the amounts involved are material.

10. The Committee is also of the view that materiality for the above purpose needs to be ascertained with reference to the amount of provision that is required to be made taking into account such factors as the proportion of employees likely to join the scheme, their life expectancy, the average annual expenditure expected to be incurred on the employees under the scheme etc., and not with reference to the actual expenditure being incurred currently on retired employees.

D. Opinion

11. Based on the above, the Committee is of the opinion that the existing practice of the company for accounting for post-retirement medical benefits is not in consonance with the principles enunciated in AS 15.  Such benefits should be provided for over the tenure of service of employees if the amounts involved are material.

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[1]Opinion finalised by the Committee on 14.1.2000