A. Facts of the Case
1. A company is a premier professional electronics company
under the Ministry of Defence, Government of India, having its
shares listed on the major stock exchanges in India. The turnover
of the company for the financial year 2005-06 is Rs. 3,536 crore.
2. The querist has stated that the employees of the company
are entitled to three types of leave: annual leave (AL), sick leave
(SL) and casual leave (CL). Casual leave is credited to employees
in April and can be utilised during the financial year. No carry-over
of the casual leave is permitted, and hence, according to the
querist, is not being considered for the purpose of valuation under
Accounting Standard (AS) 15 (revised 2005), ‘Employee Benefits’,
issued by the Institute of Chartered Accountants of India (ICAI).
3. SL is credited at the rate of 20 days (half-pay) on the first day
of April to all employees. AL is credited based on the number of
years of service, as follows:
Service less than 6 years 22 days
Service of 6 – 12 years 24 days
Service of 12 – 18 years 27 days
Service above 18 years 30 days
The credit is given in two instalments, 50% on 1st April and the
balance on 1st October.
4. Employees are allowed to carry forward the unutilised leave
relating to both annual and sick leave. The maximum number of
AL balance that can be carried forward as on 31st March is 300
days. There is no limit to the number of days of sick leave that can
be carried forward. While AL is encashable during service, SL is
not. The employees are entitled to encash the entire balance of
AL subject to retaining one-year’s entitlement. On retirement,
including voluntary retirement (not on resignation), balance of SL,
subject to a maximum of 300 days (150 days full pay) can be
encashed.
5. The querist has stated that under the pre-revised AS 15,
‘Accounting for Retirement Benefits in the Financial Statements of
Employers’, the company ascertained the liability relating to AL
and SL on an actuarial basis, and the incremental liability was
debited to the profit and loss account. No funding is done towards
this provision. The revised AS 15 defines short-term employee
benefits as “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” (paragraph 7). As mentioned above, the employees of the company
are entitled to avail the entire leave (AL / SL) balance to their
credit. Hence, the company is of the opinion that provision needs
to be made for the entire balance at the credit of the employee
(emphasis supplied by the querist).
6. AS 15 (revised 2005) also brings out that short-term employee
benefits, inter alia, include “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” (paragraph 8(b))
(emphasis supplied by the querist).
7. The querist, vide his subsequent letter, informed the Committee
that the company has started implementing the provisions of AS
15 (revised 2005) from 1/4/2006 and the quarterly results have
been prepared following AS 15 (revised 2005). The querist has
further mentioned that even though the Council of the Institute has
decided to postpone the effective date of AS 15 (revised 2005) to
accounting years commencing on or after 7/12/2006, since the
earlier application of the proposed Accounting Standard by
enterprises is always encouraged, the company may like to continue
to follow AS 15 (revised 2005) from 1st April, 2006 onwards.
B. Query
8. The querist has sought the opinion of the Expert Advisory
Committee on the following issues:
(i) Whether the company should treat the leave benefits as
short-term employee benefits and debit the profit and
loss account with the entire amount of leave credited to
the employees account during the year (as mentioned
earlier) since encashment / availment is possible in line
with paragraph 7 of AS 15 (revised 2005) or the company
needs to continue the actuarial valuation of leave balances
as on 31st March and provide for the incremental liability,
since in practice all the employees do not encash / avail
the leave.
(ii) Whether the company will need to follow differential
treatment for AL / SL, since AL is encashable during
service, but SL is encashable only on retirement, though both can be availed fully during service (emphasis
supplied by the querist).
C. Points considered by the Committee
9. The Committee, while answering this query, has restricted
itself to the issues raised in paragraph 8 above and has not touched
upon any other issue arising from the Facts of the Case, such as
accounting treatment that should have been provided from the
angle of pre-revised AS 15, transitional provisions, treatment of
casual leaves, etc.
10. The Committee notes that the definition of the term ‘shortterm
employee benefits’ as reproduced in paragraph 5 above states
as 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.”
11. 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;
12. 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 long
term 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.”
13. The Committee notes from the Facts of the Case that the AL
and SL entitlement of the employees of the company can be
carried forward for more than twelve months after the end of the
period in which employees render the related service, which can
be either availed or encashed, as the case may be. Therefore, the
benefit arising to the employees on account of AL and SL falls
within the category of ‘other long-term employee benefits’. However,
in case the past trend indicates that the employees will settle the
benefit accruing to them on account of AL and SL 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, this does not seem to
be the case in the case of the company.
14. 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 Method. The Standard
contains detailed requirements in this regard in paragraphs 129
and 130.
15. The Committee is further of the view that whether the leaves
are encashed or availed, both are considered as employee benefits
within the provisions of AS 15 (revised 2005). Therefore, the
provisions of the said Standard would apply in both the cases.
However, their measurement basis may be different, which would
be taken care of in the actuarial valuation of the employee benefits.
D. Opinion
16. On the basis of the above, the Committee is of the following
opinion on the issues raised by the querist in paragraph 8 above:
(i) The annual leave and sick leave benefit should be
treated as ‘other long-term employee benefits’ in
accordance with the provisions of AS 15 (revised 2005)
and should be provided for on actuarial basis as
explained in paragraph 14 above.
(ii) Since AL and SL, both fall within the category of ‘other
long-term employee benefits’, the treatment would be
the same for both kinds of leaves. However, their
measurement basis may be different which would be
taken care of in the actuarial valuation.
1 Opinion finalised by the Committee on 14.5.2007.
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