A. Facts of the Case
1. A bank, incorporated under an Act of Parliament, has the
main business of providing banking and financial services to its
customers/account holders. As on 31.03.2007, the bank had over
9500 branches spread over entire India and a staff strength of
1.85 lakh employees.
2. The bank has been accounting for retirement benefits provided
to its employees in the financial statements in accordance with its
principal accounting policy as stated hereunder:
“Retirement Benefits
Contributions payable to the Bank’s Provident Fund Trust in
terms of its Provident Fund Scheme are charged to profit and
loss account on accrual basis.
Liability for gratuity, pension and leave encashment (which
are defined benefits) is determined on the basis of actuarial
valuations carried out at the year end and the incremental
liability is provided for by charging to the profit and loss
account.”
3. The querist has stated that the Accounting Standard (AS) 15,
‘Employee Benefits’ (revised 2005), issued by the Institute of
Chartered Accountants of India (ICAI), comes into effect in respect
of accounting periods commencing on or after 7th December, 2006.
Accordingly, the bank would value and disclose the employee
benefits provided to its employees in accordance with AS 15
(revised 2005).
4. The bank employees are entitled to sick leave as per the
following terms:
“An officer shall be eligible for 30 days of sick leave for each
completed year of service subject to a maximum of 18 months
during the entire service. Such leave can be accumulated
upto 540 days during the entire service and may be availed of
only on production of medical certificate by a medical
practitioner acceptable to the bank or, at the bank’s discretion,
nominated by it at its cost. In respect of the period of sick
leave, an officer shall be eligible to receive one half of the full
emoluments. In the first year of service, an employee will be
granted sick leave on pro-rata basis. Where an officer has
put in a service of 24 years, he shall be eligible to additional
sick leave at the rate of one month for each year of service in
excess of 24 years subject to a maximum of 3 months of
additional sick leave.”
5. The querist has drawn attention of the Committee to
paragraphs 13, 14 and 15 of AS 15 and Issue 5 of the ‘ASB
Guidance on Implementing AS 15, Employee Benefits (revised
2005)’ issued by the Accounting Standards Board of ICAI.
Paragraph 15 of AS 15 has been reproduced by the querist as
below:
“15. The method specified in the previous paragraph measures
the obligation at the amount of the additional payments that
are expected to arise solely from the fact that the benefit
accumulates. In many cases, an enterprise may not need to
make detailed computations to estimate that there is no
material obligation for unused compensated absences. For
example, a leave obligation is likely to be material only if there
is a formal or informal understanding that unused leave may
be taken as paid vacation.” (Emphasis supplied by the querist.)
6. The querist has further drawn attention of the Committee to
the following paragraphs of FASB Statement No. 43, Accounting
for Compensated Absences, issued by the Financial Accounting
Standards Board, USA:
“6. An employer shall accrue a liability for employees’
compensation for future absences if all of the following
conditions are met:
a. The employer’s obligation relating to employees’
rights to receive compensation for future absences
is attributable to employees’ services already
rendered,
b. The obligation relates to rights that vest or
accumulate,
c. Payment of the compensation is probable, and
d. The amount can be reasonably estimated.
If an employer meets conditions (a), (b), and (c) and does not
accrue a liability because condition (d) is not met, that fact
shall be disclosed.”
“7. Notwithstanding the conditions specified in paragraph 6,
an employer is not required to accrue a liability for nonvesting
accumulating rights to receive sick pay benefits (that is,
compensation for an employee’s absence due to illness) for
the reasons stated in paragraph 15.” (Emphasis supplied by
the querist.)
The querist has also drawn the attention of the Committee to
the Summary of Consideration of Comments on Exposure Draft of
FASB Statement No. 43 which states in paragraph 15 as below:
“15. Notwithstanding the Board’s conclusion that accrual of a
liability for the probable payment of accumulated unused sick
days is appropriate under the liability definition in the elements
Exposure Draft, the Board was influenced by respondents’
comments that the amounts involved generally would not be
large enough to justify the cost of computing the probable
payments for nonvesting accumulating sick pay benefits. The
Board concluded that accrual should not be required for an
obligation related to employees’ accumulating rights to receive
compensation for future absences that are contingent on the
absences being caused by an employee’s future illness
because, in the Board’s judgment, the lower degree of reliability
of estimates of future sick pay and the cost of making and
evaluating those estimates do not justify a requirement for
such accrual. Furthermore, the Board believes that the
probable payments for accumulating sick pay benefits rarely
would be material unless they vest or are otherwise normally
paid without an illness-related absence (as discussed in the
following paragraph), in which cases the benefits would not
be dependent on an employee’s future illness and the criteria
of paragraph 6 would apply. On the other hand, this Statement
does not prohibit an employer from accruing a liability for
such nonvesting accumulating sick pay benefits, providing the
criteria of paragraph 6 are met.”
7. As per the querist, the sick leave is a non-vesting compensated
absence which could be carried forward and could be used in
future period if the current period’s entitlement has not been fully
availed. However, the bank does not incur any extra expenditure
when the employee avails of carried forward sick leave at a future
date beyond the salary and allowances payable to the employee
for the period of his absence.
8. The querist has stated that as per Issue 5 of ASB Guidance
on Implementing AS 15, Employee Benefits (revised 2005), where
the rules of an enterprise allow such leave to be carried forward
up to the time of retirement, a liability should be recorded for the
cost of the entitlement which should be estimated having regard to
the probability of the employee availing the sick leave in future
periods. According to the querist, the bank does not have the
database for earlier years pertaining to the sick leave availed by
the employees. Collection of such information for all the 1.85 lakh
employees of the bank working in 9500+ branches spread over
entire India, is costly and time consuming exercise. Accordingly,
the costs involved in making and evaluating these estimates would
not justify the requirement of providing for the cost of accumulating
sick leave.
9. As per the querist, the liability is to be computed taking into
consideration the probability of the employee falling sick. This
involves estimation and is contingent on the happening of a future
event (employee falling sick). It is a probable liability where reliable
estimates cannot be made. Accordingly, it should only be disclosed
as a contingent liability and should be recognised as an expense
when it is actually incurred.
10. As stated in paragraph 4 above, the employees are eligible
for 30 days of half pay sick leave for each year of completed
service upto a maximum of 18 months/540 days of sick leave. The
employees who have completed 24 years of service, are eligible to
sick leave at the rate of 1 month for each year of service in excess
of 24 years subject to a maximum of 3 months of additional sick
leave. Accordingly, the employees could be divided into two groups,
one for whom sick leave continues to fall due/accrue and the other
group for whom sick leave has ceased to accrue.
11. The querist has reproduced the definition of the term ‘Shortterm
employee benefits’, as per AS 15 (revised 2005) as under:
“Short-term employee benefits are employee benefits
(other than termination benefits) which fall due wholly
within twelve months after the end of the period in which
the employees render the related service.”
However, according to the querist, as per Issue 3 of the ASB
Guidance on Implementing AS 15, Employee Benefits (revised
2005),
“Whilst it is necessary to consider the earned leave which
“falls due”, the pattern of actual utilisation/encashment by
employees, although reflective of the behavioural pattern of
employees, does determine the status of the benefit, i.e., whether
‘short-term’ or ‘long-term’. The value of short-term benefits should
be determined without discounting and if the benefit is determined
as long-term, it would be recognised and measured as “Other
long-term benefits” in accordance with paragraph 129 of the
Standard.” According to the Guidance both the ‘fallen due’ as well
as ‘expected to occur’ criterions have to be considered to determine
whether the benefit is a short-term or long-term benefit. As per the
querist, in the case of the bank, as the employees have not fully
availed sick leave and have accumulated the same, the same
appears to be the case of Long-Term Employee Benefit. However,
AS 15 (revised 2005) defines ‘Other long-term employee benefits’
as “employee benefits (other than post-employment benefits
and termination benefits) which do not fall due wholly within
twelve months after the end of the period in which the
employees render the related service”, but the employees in
the case of the bank are entitled to ‘sick leave’ immediately after
rendering proportionate period of service.
12. Further, as per the ASB Guidance on Implementing AS 15,
Employee Benefits (revised 2005), Issue 5, where the rules of an
enterprise allow such leave to be carried forward up to the time of
retirement, a liability should be recorded for the cost of the
entitlement which should be estimated having regard to the
probability of the employee availing the sick leave in future periods
(emphasis supplied by the querist). According to the querist, the
guidance considers the question of sick leave allowed to be carried
forward up to the time of retirement in the light of paragraphs 14
and 15 contained in AS 15 which pertain to ‘short-term employee
benefits’. Further the guidance requires the liability to be recorded
for the cost of entitlement and not on a discounted basis. Therefore,
the same could also be treated as a short-term employee benefit.
B. Query
13. The querist has sought the opinion of the Expert Advisory
Committee on the following issues:
(i) Whether in view of paragraphs 7, 8 and 9 above, the
bank is obliged to recognise any liability towards the
‘unused sick leave’.
(ii) If yes, whether the bank is required to recognise the
same as ‘short-term employee benefit’ or ‘long-term
employee benefit’ especially after considering the facts
stated in paragraphs 10, 11 and 12 above.
C. Points considered by the Committee
14. The Committee, while answering this query, has restricted
itself to the issues raised in paragraph 13 above and has not
touched upon any other issue arising from the Facts of the Case,
such as, the liability on account of provident fund scheme, gratuity,
pension and leave entitlement/encashment other than sick leave.
15. The Committee notes the definition of the term ‘short-term
employee benefits’ as contained in AS 15 (revised 2005) which is
reproduced below:
“Short-term employee benefits are employee benefits
(other than termination benefits) which fall due wholly
within twelve months after the end of the period in which
the employees render the related service.”
16. The Committee also notes that paragraph 8 of AS 15 (revised
2005) provides as below:
“8. Short-term employee benefits include items such as:
…
(b) short-term compensated absences (such as paid
annual leave) where the absences are expected to
occur within twelve months after the end of the
period in which the employees render the related
employee service;
…”
17. On the basis of the above, the Committee is of the view that
short-term employee benefits include only those compensated
absences which accrue to the employees and are expected to be
availed (or encashed, as the case may be) within twelve months
after the end of the period in which the employees render the
related service. Thus, those compensated absences which can be
and are also expected to be carried forward for any further period
cannot be termed as ‘short-term employee benefits’. In this context,
the Committee also notes the definition of the term ‘Other longterm
employee benefits’ as contained in AS 15 (revised 2005)
which is reproduced below:
“Other long-term employee benefits are employee benefits
(other than post-employment benefits and termination
benefits) which do not fall due wholly within twelve
months after the end of the period in which the employees
render the related service.”
18. The Committee is of the view that where it is expected that
the employees will avail the whole of the benefit accruing to them
on account of sick leave within the twelve months after the end of
the period in which the employees render the related service, the
same would fall within the category of ‘short-term employee
benefits’. However, the Committee notes from the Facts of the
Case that the sick leave entitlement of the employees of the bank
can be carried forward for more than twelve months after the end
of the period in which employees render the related service. Further,
the querist has stated in paragraph 11 of the Facts of the Case
that the employees have not fully availed the sick leave and have
accumulated the same. Therefore, the Committee is of the view
that the benefit on account of sick leave does not fall within the
category of ‘short-term employee benefits’. Rather, the entire benefit
on account of sick leave should be treated as ‘other long-term
employee benefits’.
19. With respect to the recognition and measurement of other
long-term employee benefits, the Committee notes that AS 15
(revised 2005) provides that the same should be measured on
actuarial basis using the Projected Unit Credit Method. The
Standard contains detailed requirements in this regard in
paragraphs 129 and 130.
20. The Committee notes that paragraphs 13, 14 and 15 of AS
15 (revised 2005) to which attention has been drawn by the querist,
relate to short-term compensated absences. Thus, before these
paragraphs become applicable, the benefit has to fall in the category
of ‘short-term employee benefit’, which is not the case in respect
of the bank as stated in paragraph 18 above. The Committee also
notes that the bank would incur extra expenditure when the
employee avails of carried forward sick leave at a future date, in
the form of the salary and allowances paid for the period he
remains on leave even though no equivalent services are rendered
for that period by the employee. The Committee further notes that
the Accounting Standards formulated by the Accounting Standards
Board of the Institute of Chartered Accountants of India are based
on the International Accounting Standards (IASs)/International
Financial Reporting Standards (IFRSs) issued by the International
Accounting Standards Board. Accordingly, the accounting
treatments contained in the Accounting Standards prescribed by
any other body are not applicable.
D. Opinion
21. On the basis of the above, the Committee is of the following
opinion on the issues raised by the querist in paragraph 13 above:
(i) The bank is obliged to recognise liability towards the
unused sick leave.
(ii) The bank is required to recognise the liability towards
unused sick leave as ‘other long-term employee benefits’.
1Opinion finalised by the Committee on 13.11.2007.
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