Query No. 26 Subject: A. Facts of the Case
1. A government company established under the Companies Act, 1956, is engaged in operation and maintenance of a fleet of helicopters. The company allows two types of leaves to its employees - earned leave and half-pay leave.
2. The earned leave accrues on the basis of period of service and can be accumulated upto a maximum of 240 days. It can not be availed on more than six occasions in a particular year. The employees are paid full pay on availment of these leaves. During the period of service, 75 percent of the accumulated earned leave is encashable and the balance is unencashable. However, at the time of retirement, 100 percent of the accumulated leave is encashable upto the ceiling of 240 days. Accordingly, provision for liability towards outstanding balance of accumulated earned leave in employees’ account is made by the company in compliance with Accounting Standard (AS) 15, ‘Accounting for Retirement Benefits in the Financial Statements of Employers’.
3. The half-pay leave also accrues on the basis of period of service and can be accumulated upto a maximum of 240 days. The employees are paid half of basic pay but all allowances are paid in full on the availment of these leaves. It can be availed of by an employee on various grounds including medical. The half-pay leave is wholly unencashable. It does not form part of the terminal benefits of an employee and can be availed of only during the service period and not on retirement. The half-pay leave can also be commuted into full-pay leave on medical grounds. When commuted, two half-pay leaves are considered as equivalent to one full-pay leave. The total commuted leave admissible during the entire service period of the employee can not exceed 240 days. The company does not provide for any liability in respect of accumulated half-pay leave, as according to the querist, it does not fall under the purview of AS 15. The querist has argued that there may often be a significant uncertainty as to whether the leave would be actually availed of in part or in full. Under such circumstances it may not be possible to make a reasonable estimate of the employer’s obligation in respect of accumulated unencashable half-pay leave. In the case of the company it would be of contingent nature rather than in the form of accrued liability. Therefore, the company does not provide for the year-end liability in respect of the half-pay leave accumulations.
4. The government auditors observed that the company has not made any provision in respect of accumulated half-pay leave of the employees. They are of the opinion that it can be reasonably established that the employees would avail of such leave before their retirement for which they would be paid salary/wages as per their entitlement and hence it is appropriate to make provision in respect of half-pay leave.
B. Queries
5. The querist has sought the opinion of the Expert Advisory Committee on the following issues:
(a) Whether wholly unencashable half-pay leave which can not be availed of on retirement as per the company rules, falls within the purview of AS 15 and if yes, whether a provision is required therefor.
(b) If the answer to (a) above is in the negative, whether the company should provide for the accumulated liability for wholly unencashable half-pay leave as opined by the government auditors.
(c) Notwithstanding (a) and (b) above, whether there is any requirement for specific disclosure under AS 15 in respect of the half-pay leave as per the company rules.
C. Points considered by the Committee
6. The Committee notes that AS 15 deals with accounting for retirement benefits in the financial statements of employers. The term ‘Retirement Benefit Scheme’ has been defined in AS 15 as below:
“Retirement benefit schemes are arrangements to provide provident fund, superannuation or pension, gratuity, or other benefits to employees on leaving service or retiring or, after an employee's death, to his or her dependants.”
Since the unencashable half-pay leave can be availed of at any time during the period of service and not on retirement, the Committee is of the view that it is not a retirement benefit and is, accordingly, not covered by AS 15.
7. The Committee is of the view that accrual being one of the fundamental accounting assumptions, the cost of providing benefits to employees in return for the services rendered by them in an accounting period should be accounted for in that period. The underlying principles of AS 15 are also based on the aforesaid principle. The Committee is of the view that since the leave entitlement to employees is in consideration for the services rendered by them, from the view-point of the employer, the cost of receiving an employee’s services for a year comprises not only the salaries and wages payable for the year but also the estimated cost of leave to which an employee is entitled.
8. The Committee is of the view that from an accounting angle, the nature of unencashable leave is similar to that of the encashable earned leave insofar as both entitle an employee to receive salaries and wages for the period during which he does not render any services to the employer. Thus, in the case of accumulated unencashable leave, if the extent to which the leave will be availed of can reasonably be estimated on some rational basis, e.g., past experience of the company, and if a reasonable estimate of the amount of salaries/wages payable to them for the period of leave can be made, say, on actuarial basis, it would be appropriate to make a provision therefor in the books of account subject to the considerations of materiality. The provision so created should be adjusted at the time the employee actually avails the leave.
9. 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). The manner of treatment of accumulated unencashable half-pay leave constitutes an accounting policy and would, therefore, need to be disclosed in accordance with AS 1, if it is considered as a significant accounting policy considering the materiality.
D. Opinion
10. On the basis of the above, the Committee is of the following opinion on the issues raised in paragraph 5:
(a) The unencashable half-pay leave under the facts and circumstances explained above does not fall within the purview of AS 15.
(b) Keeping in view the accounting principles it is appropriate to make a provision in respect of accumulated unencashable half-pay leave in accordance with paragraph 8 above.
(c) Since AS 15 does not apply to the present case, the question of any disclosure under that standard does not arise. However, a disclosure in accordance with paragraph 9 above may be considered.
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