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A. Facts of the Case
1. A company in textile sector has about 40 manufacturing units under its control. As per the leave rules of the company, officers, technical staff and administrative staff are eligible for sick leave. The workmen are not eligible for sick leave. The Sick Leave Rules for officers and staff are as under:
(a) Half-pay leave: Each employee’s leave account is credited by 20 days half-pay leave for each calendar year.
(b) Commuted leave: Half-pay leave can be commuted into full-pay leave upto 180 days, on production of medical certificate.
The said credit of leaves can be carried forward till the employee’s service with the company. Sick leave is not encashable.
2. The manufacturing units are working 24 hours in 3 shifts. Hence, if a person is on leave, a substitute is provided in the production department by engaging for an extra time/ by giving compensatory leave. In the case of administrative office if a person is on leave, no substitute is provided.
3. In addition to sick leave, the employees are entitled to earned leave at the rate of 30 days per year which can be carried forward up to a maximum of 300 days. Encashment of earned leave is limited to a maximum of 90 days in a calendar year out of encashable earned leave. At the time of retirement, all the earned leaves standing to the credit of the employee, up to a maximum of 300 days, are encashed.
4. The querist has stated that the company is having the policy of making provision for leave salary benefits including sick leave benefits on the basis of actuarial valuation of the leave which stood to the credit of employees at the year-end as it is a long term obligation for the company. As per the querist, the government auditors are, however, of a different view that it is not necessary to provide for sick leave since it is not encashable.
B. Query
5. The querist has sought the opinion of the Expert Advisory Committee on the following issues:
(i) Whether or not, sick leave, which is not encashable, is required to be provided for on actuarial basis as per Accounting Standard (AS) 15, ‘Employee Benefits’ (revised 2005).
(ii) If it is to be provided for, in case of engagement of a substitute,
(a) whether the employees have to be divided into categories for working units where substitutes are provided and administrative office where no substitute is provided.
(b) considering the difficulty in dividing the employees into different categories on the basis of engaging substitutes, whether there can be any other basis of providing for sick leave benefits.
C. Points considered by the Committee
6. The Committee, while answering the query, has considered only the issues raised in paragraph 5 above and has not touched upon any other issue that may arise from the Facts of the Case, such as, accounting treatment for earned leave benefits, etc.
7. The Committee notes the definition of the term ‘short-term employee benefits’ as given in paragraph 7 of Accounting Standard (AS) 15, ‘Employee Benefits’ (revised 2005) 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.”
8. 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;
…”
9. From 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.”
10. The Committee notes from the Facts of the Case that the company is treating the sick leave benefit as a long-term benefit. From this it appears that the sick leave entitlement of the employees of the company is not expected to wholly occur within twelve months after the end of the period in which employees render the related service. Therefore, the benefit arising to the employees on account of sick leave falls within the category of ‘other long-term employee benefits’.
11. 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 recognised in the period in which the employee renders the service and measured on actuarial basis using the Projected Unit Credit Method. The Standard contains detailed requirements in this regard in paragraphs 129 and 130.
12. In the view of the Committee, the cost incurred for getting the services of a substitute during the period the employee availed sick leave, whether in the form of extra payment or in the form of compensatory leave is of no relevance for the measurement of provision for sick leave, since the provision for sick leave is measured in terms of the salary or wages payable to the employee for the period during which he does not render any services to the employer.
D. Opinion
13. 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) The 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 even if it is not encashable.
(ii)(a)&(b) Engagement of a substitute during the period an employee avails of sick leave, has no relevance for the measurement of provision for sick leave as explained in paragraph 12 above. The issues in paragraph 5(ii)(a) & (b) above, therefore, do not arise.
1Opinion finalised by the Committee on 24.08.2009
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