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A. Facts of the Case
1. A company was incorporated in the year 1976 as a wholly
owned Government of India enterprise under the administrative
control of Ministry of Power to plan, promote, investigate, survey,
design, construct, generate, operate and maintain hydro and thermal
power stations and to explore and utilise the power potential of
North-East in particular. The company is presently running three
hydro projects and two thermal projects in North-Eastern States
and catering to the demand of North-Eastern States only.
2. The company has adopted the following accounting policy for
leave travel concession (LTC) benefit provided to the employees:
“Expenditure on leave travel concession to employees is
recognised in the year of availment due to uncertainties in
accrual.”
3. LTC is admissible to employees and members of their families
once in a block of two years. In a block period, an employee has
the following options:
(i) Visit to home town
(ii) Visit to any place in India (Bharat Darshan)
(iii) Visit to any place in lieu of home town subject to the
maximum of distance as per his/her entitlement (which
varies from grade to grade)
(iv) Encashment of value of fare entitled in lieu of home
town LTC subject to the maximum of distance as
per his/her entitlement (which varies from grade to
grade)
(v) Payment of cash assistance in case of actual journey,
which varies from grade to grade.
(vi) Entitlement of LTC to children of the employees from
their place of study (if different from place of posting) to
place of posting of the employee once in a calendar
year.
Besides, as per LTC rules of the company, an employee is
allowed to carry forward the non-availment of LTC in a block
period to the next block of two years.
4. As per the querist, the above policy with respect to LTC has
been adopted since it is
(i) difficult to assess the frequency of LTC availment,
(ii) difficult to assess the option that would be exercised by
an employee,
(iii) difficult to provide for liability for a particular year as the
employee has the option to carry forward the nonavailment
to future block, and
(iv) uncertainty prevails over encashment/availment of LTC.
The querist has stated that the company is of the view that
considering the above options available to employees, it is difficult
to make a fair assessment of the liability in terms of Accounting
Standard (AS) 15, ‘Employee Benefits (revised 2005)’. As per the
querist, even if the company makes the valuation as per AS 15
(revised 2005), the provision will be far from reality.
B. Query
5. The querist has sought the opinion of the Expert Advisory
Committee on the following issues:
(i) Whether the accounting policy adopted by the company
is in compliance with the existing Accounting Standard
and in line with the standard accounting principles.
(ii) Whether it is mandatory to create provision for LTC in
the books of account after taking into account the
actuarial valuation as per AS 15 (revised).
C. Points considered by the Committee
6. The Committee is of the view that ‘accrual’ being one of the
fundamental accounting assumptions, the cost of providing benefits
to employees in return for the services rendered by them in an
accounting period should be accounted for in that period. The
underlying principles of AS 15 (revised 2005) are based on the
aforesaid principle. AS 15 recognises that the liability towards
employee benefits should be provided as and when the services
are rendered.
7. The Committee notes the following definition of ‘other longterm
employee benefits’ as contained in AS 15 (revised 2005):
“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.”
The Committee is of the view that the LTC benefits provided by
the company to its employees fall in the category of ‘other longterm
employee benefits’ as reproduced above, since the LTC benefit
can be availed in a block period of 2 years. 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.
8. The Committee is of the view that actuarial basis of valuation
takes into account various uncertainties and therefore the various
difficulties mentioned by the querist in paragraph 4 above would
be factored into the actuarial valuation of the amount of provision
required. Accordingly, the LTC benefits provided to the employees
should be provided for on the basis of actuarial valuation.
D. Opinion
9. On the basis of the above, the Committee is of the following
opinion on the issues raised by the querist in paragraph 5 above:
(i) No, the accounting policy adopted by the company is
not in compliance with the existing Accounting Standard
and the standard accounting principles.
(ii) Yes, it is mandatory to create provision for LTC benefits
in the books of account after taking into account the
actuarial valuation as per AS 15 (revised 2005).
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