Query No. 5

Subject:          

  Accounting treatment of deferred entitlement of LTC/LLTC.1

A.  Facts  of  the  Case

1. A public sector company, having a turnover of over Rs. 16,000 crore, has about 1.5 lakh employees. The company has four integrated steel plants and a subsidiary with a capacity of producing over 12 million tonnes of crude steel and has three special steel plants and a ferro-alloys subsidiary company. The company has iron ore and fluxes mines and a marketing network spread across  the  country.   The  accounts  of the  individual  plants  and  units are prepared and audited by the respective branch auditors and consolidated at the corporate level.  The accounts of the company are also subject to audit under section 619 of the Companies Act, 1956.

2.  As per the rules of the company, employees and their family members are  entitled  for  leave  travel  concession  to  the  extent  and  subject  to  the conditions given below:

        (i)  Reimbursement of actual cost of travel by entitled class from the headquarters to home-town and back once in a block of two calendar years [Leave Travel Concession (LTC)].

        (ii)   Reimbursement of actual cost of travel by entitled class from the headquarters to any place in India and back [Liberalised Leave Travel Concession (LLTC)] once in a block of four calendar years in lieu of one of the two concessions available under the rule (i) above in a block of four calendar years.

According to the querist, an employee can thus, avail leave travel concession twice in a block of four years – once for travelling to his home-town only (LTC) and another for journey to any place in India including his home-town (LLTC), subject to actual performance of such journey.

3. The concession is admissible to an employee when proceeding on leave for a period of not less than six days inclusive of weekly off and any other holiday(s).

4. An employee availing LTC/LLTC is required to submit a certificate to the effect that the employee and the entitled family members have duly performed the journey(s) and the expenditure claimed has been incurred.

5. The scheme/rules do not permit availment/encashment of LTC/LLTC without performing journey(s), e.g., if for any reason, a person does not perform the journey during the specified block years, then his right to avail LTC/LLTC for that period would be automatically forfeited. This entitlement would not be carried forward, unless the company at its instance and discretion extends the period for availment.

6.  As the company’s position in terms of profitability and liquidity has been under great stress, the company deferred upto 31.3.2002, the availment of LTC due for the calendar year blocks of 1998 and 1999, 2000 and 2001, and 2002 and 2003, except in case of superannuating employees.

7.  As per the consistent accounting practice followed by the company, the LTC/LLTC claims are accounted for only when liability for the same arises.  According to the querist, the liability arises only when the journeys are actually performed by the employees. Accordingly, no liability is provided for on the basis of mere entitlement of employees to make the journeys.

8. The Comptroller and Auditor General of India (C&AG), while reviewing the accounts of the company, commented on the non-provision for estimated liability towards deferred LTC/LLTC as below:

        “The company vide its circular no. PER/PP/4006 dated 9th  March, 2000, deferred LTC/LLTC for the block years 1998-99 and 2000-01 uptill 31.3.2002 except in case of superannuating employees. Subsequently, on 6th  June, 2000, it has been clarified that unavailed LTC/LLTC for the block years 1998-99 and 2000-01 will be allowed to be carried forward beyond one calendar year till the ban on LTC/LLTC is in force.

It is, thus, clear that the facility of LTC/LLTC has only been deferred and not withdrawn and the company has an obligation towards LTC/ LLTC, payable when the period of deferment lapses.  Based on the accrual method of accounting, the liability of the company towards LTC/LLTC for the block years 1998-99 and 2000-01 exists on the date of balance sheet, which should have been provided for.

Non-provision of liability on accrual basis towards LTC/LLTC for the   block years 1998-99 and 2000-01 has resulted in understatement of employees remuneration and benefits and understatement of loss by Rs. 60.70 crore (as worked out below):

                                                                                                Rs. in crore

Actual payment of Travel Concession for Block years

1994-97                                                                                           249.74

Less: For reduction in manpower (15%)                                            37.46

                                                                                                        212.28

Add: Increase in fare                                                                         31.84

                                                                                                        244.12

Less: Payment made during 1997-98 to 2000-01                              183.42

Amount of liability                                                                               60.70”

9.  The company replied to the comments of C&AG that LTC/LLTC liability accrues only when journeys have been approved/performed.  In respect of journeys not approved/performed, no liability accrues for such un-availed LTC/LLTC.  This accounting treatment has been consistently followed and hence there is no under provision of liability.

B . Query

10. The querist has sought the opinion of the Expert Advisory Committee as to whether any liability accrues on account of deferred entitlement towards LTC/LLTC though no expenditure has been incurred on performance of journeys.

C.  Points  considered  by  the  Committee

11. The Committee notes section 209(3) of the Companies Act, 1956, which provides as follows:

    “For the purposes of sub-sections (1) and (2), proper books of account shall not be deemed to be kept with respect to the matters specified therein, -

    (b)  if such books are not kept on accrual basis and according to the double entry system of accounting.”

12. The  Committee  notes  that  as  per  Accounting  Standard  (AS)  1, ‘Disclosure of Accounting Policies’, ‘accrual’ is one of the fundamental accounting assumptions that underlie the preparation and presentation of financial  statements.  The  Committee  notes  from  paragraph  90  of  the ‘Framework for the Preparation and Presentation of Financial Statements’, issued by the Institute of Chartered Accountants of India, that under accrual system of accounting, a “liability is recognised in the balance sheet when it is probable that an outflow of resources embodying economic benefits will result from the settlement of a present obligation and the amount at which the settlement will take place can be measured reliably...”

13. The Committee notes from the above that a  ‘liability’ is essentially a present obligation relating to the events or transactions which have already happened in the past.  The Committee is, accordingly, of the view that the obligation of an employer towards compensation payable to its employees becomes the liability of the employer, for accounting purposes, when services are rendered by the employees concerned.   The Committee is also of the view that accrual of such a liability is not necessary if the obligation of the employer lapses, i.e., employees can not carry forward their earned rights to one or more periods subsequent to the periods in which they are earned. The Committee notes from the facts of the case that the facility of LTC/ LLTC has only been deferred and not withdrawn and the company has an obligation towards LTC/LLTC payable when the period of deferment lapses.

D. Opinion

14. On the basis of the above, the Committee is of the opinion that the liability accrues on account of deferred entitlement towards LTC/LLTC in the period in which the employees concerned render their services even though no expenditure has been incurred on performance of journeys and, accordingly, should be provided for during the relevant period on estimation basis.

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1Opinion finalised by the Committee on 26.3.2002.