Query No. 11  

Subject:

Inclusion of interest earned in the gratuity trust fund balance

for determination of contribution to be made during the year.1

A. Facts of the Case

1. A public sector corporation, whose entire paid up capital is held by the Government, has taken over certain areas on long term lease basis from the Forest Department and is paying lease rent at the rate fixed by the Government. The areas have been taken over to fulfil the following main objectives:

(a) To raise, maintain and harvest Eucalyptus on sustained yield basis for the production of pulpwood and firewood.

 

(b) To raise and maintain Cashew plantation for production of cashew nuts which is a foreign exchange earning commodity.

 

2. The existing manpower strength of the corporation is 517; of this, 503 are the staff of the corporation and 14 are on deputation from the Forest Department. The pay scales of the corporation are at par with Government scales. The corporation is covered under the Payment of Gratuity Act, 1972, Payment of Bonus Act, 1965, and Employees’ Provident Funds & Miscellaneous Provisions Act, 1952.

3. The corporation has formed a trust to manage the Gratuity Fund and settle gratuity on behalf of the corporation. The trust is being managed by the trustees constituting the Managing Director, General Manager and Chief Accounts Officer of the corporation. The corporation is contributing monies to the trust based on the claim made by the trust at the close of the year. The trust is assessing the gratuity liability based on the actuarial valuation every year. The amount contributed by the corporation to the trust is being invested and the interest earned on the investment is being added to the fund account. Every year the trust is preparing the accounts and based on the amount standing in the fund account at the close of the year, the trust is arriving at the amount to be contributed by the corporation on account of gratuity liability determined on the basis of actuarial valuation. Further, as per the decision taken by the Board of the corporation, the contribution to the trust is being made in a phased manner depending upon the financial position of the corporation. However, the corporation is making adequate provision in the accounts for the amount to be contributed to the trust every year and this fact is also being duly disclosed under the significant accounting policies in the accounts of the corporation. During the year 2001-02, the trust has claimed the contribution to be made by the corporation as follows:

The liability as per actuarial valuation as on 31.03.2002 : Rs.1,50,67,586

Balance in the fund account as on 31.03.2002 : Rs. 35,05,938

Balance to be contributed to the trust as on 31.03.2002 : Rs.1,15,61,648

 

To the above extent, the corporation has made due provision in its books of account and has also disclosed this fact in the significant accounting policies.

The break up of the fund account of the trust is as follows:

 

 Contribution made by the corporation upto Less: Settlement made towards Gratuity upto 31.03.2002 : Rs. 11.65 lakh

                                                                                                                                                             Rs. 28.35 lakh

Add: Interest earned on investment of trust funds upto 31.03.2002 : Rs. 6.70 lakh

Balance in the fund account as on 31.03.2002 : Rs. 35.05 lakh

4. The querist has drawn attention of the Committee to certain requirements of the trust deed and rules regarding contribution, which are given hereunder. The querist has also provided separately a copy of the trust deed and rules for the perusal of the Committee.

"Employer to make contribution

Trust Deed-Clause (b)

The Employer agrees to make the contribution to the Trustees as provided in the rules, the Trustees shall utilise the same for providing the benefits described in the rules.

Trust Rules-Clause-I (XIX)

Contribution means any sum credited by or on behalf of any employee out of his salary or by an employer out of his own moneys to the individual account of an employee but does not include any sum credited as interest.

Section-II

Contributions: Clause 5

(i) Annual Contribution

They shall be duly paid for each Member annually in advance on the Entry Date such contributions as hereinafter described. The contributions shall be paid throughout the future service of the Member until his Normal Retirement Date, unless determined under the Rules.

 

Provided however that if the balance to the credit of Surplus Account together with the sum payable under the provisions of the Rule is insufficient to make up the whole of the amount accrued and payable to the Member, the Employer shall pay to the Trustees such additional contribution as may be required to make up the deficiency in the gratuity payable to the Member.

(ii) Special Contribution

 

Subject always to any general or specific directions given by the Commissioner of Income Tax, the Employer may pay any sums to the trustees by way of special lumpsum contributions and upon paying such sums shall give instructions to the Trustees as to their allocation for the benefit of all or specified members or their dependants and the date as of which the said contributions may be appropriated. The contributions shall be paid by the Employer to secure the benefits vesting absolutely or contingently in the member in respect of the Member’s Service prior to the date of his admission to the Membership of the Scheme.

 

Provided that in any case the aggregate of the contributions payable by the Employer in respect of any Member in terms of paragraphs (i) and (ii) hereof shall not exceed 8 1/3% of the aggregate salary of the Member.

(iii) The expenses of administration of the Fund and the Scheme incurred by the Trustees shall be borne by the Trust."

5. The querist has informed that the office of the Accountant General, during their supplementary audit on the accounts of the corporation for the year 2001-02, have raised a point that the interest earned by the trust on investments should not have been reckoned for the purpose of arriving at the amount of contribution to be made by the corporation. The corporation has contended that the trust is managing the fund on behalf of the corporation and the fund is being applied for settlement of the gratuity liability. The corporation has further contended that the interest earned is also being used for settlement of gratuity liability and not distributed for any other purpose. The corporation has cited the respective clauses on this in the trust deed and rules.

B . Query

6. The querist has sought the opinion of the Expert Advisory Committee as to whether the interest earned on investments by the trust would be considered in arriving at the contribution to be made to the trust by the corporation.

C. Points considered by the Committee.

7. The Committee notes paragraphs 13 to 15 of Accounting Standard (AS) 15, ‘Accounting for Retirement Benefits in the Financial Statements of Employers’, issued by the Institute of Chartered Accountants of India, as reproduced below:

"13. When there is a separate retirement benefit fund, it is sometimes assumed that the amount paid by an employer to the fund during an accounting period provides an appropriate charge to the statement of profit and loss. While, in many cases, the amount funded may provide  a reasonable approximation of the amount to be charged to the statement of profit and loss, there is a vital distinction between the periodic funding of retirement benefits and the allocation of the cost of providing these benefits.

 

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."

8. The Committee notes from the above that the objective of funding is to make available amounts to meet future obligations for the payment of gratuity. Thus, the amount to be contributed in a particular year would depend upon the amount presently available in the fund. The amount of the fund presently available will necessarily include the interest earned on investments made out of the fund.

9. With regard to the accounting for gratuity liability, the Committee is of the view, based on paragraphs 13 to 15 of AS 15 reproduced above, that the charge to the profit and loss account on account of gratuity liability represents the accrued cost on account of gratuity liability for the year, which may not necessarily be equal to the amount contributed during the year to the fund as per paragraph 8 above. The Committee notes from paragraph 3 of the facts of the case that the corporation in question is making contribution to the trust fund in a phased manner depending upon its financial position. However, the provision for accrued gratuity liability is being made adequately in the books of account of the corporation. The Committee presumes that the said provision is being made appropriately in accordance with the requirements of AS 15.

10. On the basis of the above, the Committee is of the opinion on the issue raised by the querist in paragraph 6 above that the amount to be contributed by the corporation to the trust in a particular year would depend upon the amount available in the trust fund; and the amount of the fund available will necessarily include the interest earned on investments made by the trust.

1 Opinion finalised by the Committee on 28.5.2003.