A. Facts of the Case
1. A company which is a Government of India enterprise under
the Ministry of Steel, is an engineering, consultancy and contracting
organisation, offering a full range of services required for setting
up of projects from concept to commissioning including turnkey
execution. The company is a multi-disciplinary company having a
network of offices spread all over the country experienced in
handling consultancy assignments and Engineering, Procurement,
Construction and Commissioning (EPC) projects. As per the querist,
the company has played a significant role in the development and
expansion of Indian industry. The company is an ISO: 9001: 2000
company and it is registered with international financial institutions
like World Bank, Asian Development Bank, African Development
Bank and has technological tie-ups with the world leaders.
2. The company had been consistently following Accounting
Standard (AS) 15, ‘Accounting for Retirement Benefits in the
Financial Statements of Employers’ (issued 1995), up to the financial
year 2006-07. In addition to the normal retirement benefits like
provident fund, pension, gratuity, leave encashment, etc., the
company provides some additional benefits which, as per the
querist, are purely discretionary in nature, like the following:
(i) Hometown settlement on separation from the services
of the company
As per the prevailing practices/rules of the company,
employees are entitled to reimbursement of hometown
settlement expenses on separation from the services of
the company. Further, as per the rules of the company,
an employee is allowed to change his place of hometown
once in the service period. The company has its offices
and project sites at different places in the country and
any employee may be posted at any office at any time
during his service period. Depending upon the place of
posting at the time of separation, the declared hometown
of the employee, number of dependants of employee
and mode of travel (i.e., by train, air, etc.), the extent of
the employer’s liability varies from case to case.
(ii) Post-retirement medical facilities
As per the prevailing practices/rules of the company,
employees are entitled to get post-retirement medical
facilities as per their choice. The employees may opt
either to avail medical facilities at the company’s hospital
or to get a fixed amount per annum (presently Rs. 2400/
- per family) for this purpose. They are free to change
their option also. Depending upon the place of settlement
of the employee after separation and the option preferred
by the employee, the extent of the employer’s liability
varies from case to case.
(iii) Employee Family Benefit Scheme
Employee Family Benefit Scheme is a voluntary scheme.
On separation of an employee from the service of the
company on account of death or permanent total
disablement, his nominee/the employee, as the case may
be, on depositing with the company the entire amount of
provident fund and gratuity of the employee, would be
entitled to monthly payments equivalent to the last drawn
basic pay plus dearness allowance in respect of nonexecutive
employees and 1.15 times of only basic pay in
respect of executive employees as per the Scheme. Such
monthly payments shall continue till the normal date of
superannuation of the employee. The employee/nominee
shall deposit in lumpsum, the amounts of provident fund
and gratuity with the company, after the same are settled
by the employer, as per rules. In some cases, the
employees may have effected temporary/permanent
withdrawals from the provident fund or may like to retain
part of such funds to meet their family commitments. In
such cases, the monthly payment admissible will be
reduced in the same proportion which the shortfall in the
provident fund accumulation at the time of death of the
employee bears to the total of the gratuity and notional
provident fund which would have accrued, had the
withdrawal not been made. The notional provident fund
would consist of the employee’s own contribution over
the period of his service, interest accrued thereon and
the employer’s matching contribution with interest accrued
thereon, but will not include any voluntary contributions
made by the employee and the interest accrued thereon.
The notional provident fund would be worked out as if
there had not been any temporary/permanent withdrawal
over the period of his service. On the normal date of
superannuation of the employee, the monthly payments
under this Scheme would cease and the amount
deposited with the company under this Scheme would
be refunded to the depositor or his/her nominee, as the
case may be. Under the Scheme, no interest on the
provident fund and gratuity deposits will be admissible
for the period of deposit. The benefit under the Scheme
will be admissible from the date of separation of the
employee. The payment to the employee/nominee shall,
however, start from the date of deposit of the amount.
If the employee/nominee desires to permanently withdraw
the provident fund and gratuity amount deposited with
the company under the Scheme at any point of time, he/
she will be allowed to do so. In such cases, the employee/
nominee would cease to receive the benefit under the
Scheme from the date of withdrawal.
As per the querist, the company’s Employee Family
Benefit Scheme is an employee welfare scheme and not
a retirement benefit scheme.
3. The querist has informed that as per his understanding, AS
15 applies to those retirement benefits which are either in the
nature of defined contribution scheme or in the nature of defined
benefit scheme. AS 15 does not apply to those retirement benefits
for which the employer’s obligation cannot be reasonably estimated.
4. According to the querist, the company is following AS 15 and
all benefits under defined contribution schemes like provident fund,
pension, etc., and under defined benefit schemes like gratuity and
leave encashment, are strictly complied with as per the guidelines
of AS 15. The benefits like settlement of retired employees to their
hometown, post-retirement medical facilities and Employee Family
Benefit Scheme are discretionary on the part of the management
and undergo changes from time to time. They can be withdrawn/
modified/curtailed at any time. As per the querist, these benefits
cannot be strictly classified either into defined contribution scheme
or defined benefit scheme and the employer’s obligation cannot
be reasonably estimated. In view of this, expenses on account of
these facilities are accounted for on actual basis. This policy is
being followed by the company consistently over the years and is
also disclosed in the Notes to Accounts.
5. The querist has also informed that Accounting Standard (AS)
15, ‘Employee Benefits’ (revised 2005), is under implementation in
the company from the financial year 2007-08 and all the schemes
described above will be addressed properly and the necessary
accounting treatment would be followed in compliance with AS 15
(revised 2005).
B. Query
6. The querist has sought the opinion of the Expert Advisory
Committee on the issue as to whether the accounting treatment
followed by the company for the following retirement benefits
amounts to a deviation from AS 15 (issued 1995):
(i) Reimbursement of hometown settlement expenses on
retirement,
(ii) Post-retirement medical facilities, and
(iii) Employee Family Benefit Scheme.
C. Points considered by the Committee
7. The Committee notes that the query relates to accounting for
the three schemes (specified in paragraph 6 above) provided by
the company to its employees in addition to provident fund, pension,
etc. In respect of Employee Family Benefit Scheme, the Committee
also notes that the querist is of the view that such a scheme is a
welfare scheme and not a retirement benefit scheme. The
Committee disagrees with the querist and in this regard notes the
following definition of ‘retirement benefit schemes’ given in AS 15
(issued 1995):
“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.”
8. From the Facts of the Case, the Committee notes that the
benefits under the said Scheme are provided on the permanent
disability of the employee, which in effect are ‘benefits to employees
on leaving service’, or are provided in the event of the death of the
employee while in service to his dependants. As the said Scheme
is within the meaning of the above stated definition, the Committee
opines that Employee Family Benefit Scheme is a retirement benefit
scheme.
9. The Committee further notes paragraph 2 of AS 15 which
states as below:
“2. Retirement benefits usually consist of:
(a) Provident fund
(b) Superannuation/pension
(c) Gratuity
(d) Leave encashment benefit on retirement
(e) Post-retirement health and welfare schemes
(f) Other retirement benefits.
This Statement applies to retirement benefits in the form of
provident fund, superannuation/pension and gratuity provided
by an employer to employees, whether in pursuance of
requirements of any law or otherwise. It also applies to
retirement benefits in the form of leave encashment benefit,
health and welfare schemes and other retirement benefits, if
the predominant characteristics of these benefits are the same
as those of provident fund, superannuation/pension or gratuity
benefit, i.e. if such a retirement benefit is in the nature of
either a defined contribution scheme or a defined benefit
scheme as described in this Statement. This Statement does
not apply to those retirement benefits for which the employer’s
obligation cannot be reasonably estimated, e.g., ad hoc exgratia
payments made to employees on retirement.”
10. From the above, the Committee notes that AS 15 also applies
to those retirement benefits other than provident fund, pension,
gratuity, etc., provided that such benefits possess the characteristics
of a defined contribution scheme or a defined benefit scheme.
However, in the present case, the querist is of the view that the
additional retirement benefit schemes provided by the company
are neither of the nature of a defined contribution scheme nor of
the nature of a defined benefit scheme. In this context, the
Committee notes the definitions of ‘defined contribution schemes’
and ‘defined benefit schemes’ as per AS 15 given as under:
“Defined contribution schemes are retirement benefit schemes
under which amounts to be paid as retirement benefits are
determined by contributions to a fund together with earnings
thereon.”
“Defined benefit schemes are 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.”
11. The Committee notes that the definition of ‘defined benefit
schemes’ states that the retirement benefits are ‘usually’
determinable by reference to the employee’s earnings and/or years
of service. The Committee is of the view that the use of the word
‘usually’ in the definition, suggests that a scheme can be defined
in some other manner also.
12. In view of the above, and the Facts of the Case, the Committee
is of the view that reimbursement of hometown settlement expenses
on retirement, post retirement medical facilities, and Employee
Family Benefit Scheme are defined benefit schemes as in each of
the three schemes the company assumes the obligation to provide
agreed benefits to the employees as follows:
(i) In respect of hometown settlement retirement benefit,
the agreed benefit is the reimbursement of the expenses
incurred by the retiring employee on settlement to his/
her hometown.
(ii) In case of post-retirement medical facilities, the retiring
employees enjoy the benefit of medical facilities either
by way of availing the same at the company’s hospital or
by way of a fixed yearly amount. In this case, though the
benefit depends on the option exercised by the employee,
the basic agreed upon benefit is the provision of medical
facilities upon retirement. Thus, in this sense, the benefit
is defined.
(iii) With regard to the Employee Family Benefit Scheme,
the benefit is defined in terms of what the employee/
nominee is entitled to receive every month till the date of
the deemed retirement of the employee and on the date
of the deemed retirement. In this case, the amount of
the benefit to be received every month is based on
employee’s earnings.
13. The Committee further notes paragraphs 10 and 12 of AS 15
which state the following with regard to defined benefit schemes:
“10. Defined benefit schemes, especially those that promise
benefits related to remuneration at or near retirement, present
significant difficulties in the determination of periodic charge
to the statement of profit and loss. The extent of an employer’s
obligation under such schemes is usually uncertain and
requires estimation. In estimating the obligation, assumptions
may need to be made regarding future conditions and events
which are largely outside the employer’s control.”
“12. The cost of retirement benefits to an employer results
from receiving services from the employees who are entitled
to receive such benefits. Consequently, the cost of retirement
benefits is accounted for in the period during which these
services are rendered. Accounting for retirement benefit cost
only when employees retire or receive benefit payments (i.e.,
as per pay-as-you-go method) does not achieve the objective
of allocation of those costs to the periods in which the services
were rendered.”
14. From paragraph 10 of AS 15 reproduced above and the Facts
of the Case, the Committee notes that difficulties may arise in the
estimation of the amount of the additional retirement benefit
schemes provided by the company which are in the nature of
defined benefit schemes. The Committee further notes that in
accordance with the requirements of AS 15, the company’s
obligation exists towards providing the employees benefits in
exchange for the services rendered by them during the tenure of
their service and even though in the present case the retirement
benefit schemes are discretionary by the management which are
subject to changes/modifications, the company is required to provide
these benefits. Accordingly, as per paragraph 12 of AS 15, the
amount of the benefits should be allocated on a reasonable basis,
during the tenure of the service and should not be accounted for
on actual basis. Thus, the Committee is of the view that mere
difficulty in the estimation of the amount of retirement benefits
does not relieve the company from its responsibility of making
provision for such benefits, and as these benefits accrue to the
employees as a result of the services provided over their tenure,
the cost of such benefits to the company should also be spread
over their tenure on a reasonable basis by using actuarial methods.
15. The Committee further notes that as per paragraph 4.3 of the
‘Preface to the Statements of Accounting Standards’, accounting
standards are intended to apply only to material items. Accordingly,
the Committee is of the view that in case the amounts involved are
not material, the requirements of AS 15 would not be applicable.
Hence, in such a scenario, the company may account for the
additional retirement benefits in question differently, provided the
method followed is reasonable having regard to the facts and
circumstances of the case and is followed consistently.
D. Opinion
16. Based on the above, the Committee is of the opinion that the
accounting treatment followed by the company in respect of the
retirement benefit schemes stated in paragraph 6 above, is not in
accordance with the requirements of AS 15. These schemes are
defined benefit schemes and should be accounted for as per
paragraph 15 above, unless the amounts involved are not material.
1Opinion finalised by the Committee on 30.1.2008. |