Query No. 28 Subject: Accounting treatment of post-retirement medical benefit scheme.[1] 2. Till 2004-05, the corporation had been accounting for the expenses made on ‘PRMS’ scheme on ‘pay-as-you-go’ basis. Accounting Standard (AS) 15 (revised 2005), ‘Employee Benefits’[2]. was issued by the Institute of Chartered Accountants of India in the year 2005, which became mandatory for implementation w.e.f. 1st April, 2006. As a pro-active step to implement AS 15 (revised 2005), the corporation, before finalising its accounts for the year 2005-06, had gone in for actuarial valuation of PRMS benefits as required by that Standard. The liability on account of PRMS benefits for the period up to 31st March, 2006 was valued by the actuary. The current year cost was charged to revenue and for the resultant past period cost valued at Rs. 8,814 lakh for the period up to 31st March, 2005, the corporation did not distinguish between the vested and non-vested benefits and decided to amortise the same over a period of five years w.e.f. 2005-06 and 1/5th of the amount of past period cost of Rs. 1,763 lakh was amortised in that year. 3. The above accounting treatment made was referred to the Expert Advisory Committee by the corporation vide its letter dated 23.01.2007. The opinion of the Committee was communicated to the corporation vide letter dated 16.08.2007, in which the Committee had opined that the past period cost amounting to Rs. 8,814 lakh should be charged as a prior period item in the books of account. (The opinion of the Committee has been published in the Compendium of Opinions, Volume XXVII, Query No.17). 4. The querist has stated that at the time of seeking opinion from the Committee, the corporation did not have the break-up of the past service cost for vested and non-vested benefits for which different accounting treatments have been envisaged in AS 15 (revised 2005). Therefore, as per the querist, the opinion received from the Committee could not be followed. After having the break-up of past period cost into vested and non-vested benefits, the corporation reviewed the accounting treatment to be made while finalising the accounts for the year 2007-08 as per AS 15 (revised 2005). The following accounting treatment was made by bifurcating the past period cost into vested and non-vested benefits for which necessary disclosure was made in the Notes to Accounts for the year 2007-08 as under: (The querist has furnished a copy of annual accounts for the year 2007-08 for the perusal of the Committee).
The above accounting treatment was accepted by the statutory auditors and no comments were issued by the Comptroller and Auditor General (C& AG) Office on this. 5. As there was also an improvement in PRMS for reimbursement of hospitalisation expenses from Rs. 1.00 lakh to Rs. 1.25 lakh w.e.f. 1.4.2008 and the resultant past period cost was Rs. 1,085.42 lakh as on 31.03.2008, similar accounting treatment was made for past period cost based on its bifurcation into vested and non-vested benefits and the following disclosure was made in the Notes to Accounts for the year 2007-08:
6. As per the querist, the above accounting treatment of past period cost based on benefits being vested as well as non-vested was made keeping in view the provisions of paragraph 94 of AS 15 (revised 2005), which reads as below:
7. As can be seen from the above provision in paragraph 94 of AS 15 (revised 2005), the Standard provides for amortisation of non-vested past service cost over the average period until the benefits become vested. As per the querist, this has been followed by the corporation for accounting of past service cost of PRMS w.e.f. 2005-06 to 2011-12. The corporation is of the view that the accounting treatment given in the accounts for the past period cost of PRMS by bifurcation of the same into vested and non-vested benefits and charging the vested benefit in the same year as it arose and the non-vested benefit being amortised over the average period of left over period of service is in line with AS 15 (revised 2005). 8. As per the querist, the accounting treatment of amortisation of amount of past period cost of non-vested benefits over the average left over period of service of the employee has been followed up to the year 2011-12 and as on 31.3.2012, Rs. 2,463.88 lakh remains unamortised. 9. The C&AG Audit, while conducting its supplementary audit of the corporation for the year 2011-12, observed that the opinion of the Committee given on 16.08.2007 has not been followed by the corporation. Based on the contention of the corporation that (i) at the time of seeking the said opinion from the Committee, the corporation did not have break-up of the vested and non-vested benefits of past period cost, (ii) early implementation of Accounting Standard is encouraged, and (iii) the accounting treatment has been in line with AS 15 (revised 2005), the C&AG Office suggested that the opinion of the Committee be sought on whether the balance amount of unamortised expenditure on account of PRMS as on 31st March, 2012 amounting to Rs. 2,463.88 lakh should be charged to revenue as prior period expenditure in the year 2012-13 or the same can continue to be amortised over the balance period of service of the employees, as being done by the corporation. 10. When the issue was referred to the Committee in 2007, the corporation could not furnish the details of vested and non-vested benefits of the past period cost. At that time, AS 15 (revised 2005) had just been introduced and there was no clarity to the corporation with regard to its bifurcation into vested and non-vested benefits. 11. The querist has separately clarified the following:
B. Query 12. The querist has sought the opinion of the Expert Advisory Committee on the following issues:
C. Points considered by the Committee 13. The Committee notes that the basic issues raised by the querist relate to implementation of AS 15 (revised 2005), ‘Employee Benefits’, from the year 2005-06 and the treatment of unamortised past service cost of non-vested benefit relating to PRMS as on 31.03.2012. The Committee has, therefore, considered only these issues and has not examined any other issue that may be contained in the Facts of the Case, such as, accounting for contribution made by employees, whether the effect of increase in benefits with effect from 01.04.2008 should have been accounted for in the year 2008-09 or in the year 2007-08 as mentioned in the annual accounts for 2007-08, accounting for mediclaim policy taken against PRMS, etc. The Committee also wishes to point out that while the Facts of the Case provide the information about the improvements/changes in the employee benefits under PRMS only for the period 2004-05 and 2007-08, and their related figures, there may be several factors which may affect the period of amortisation of the past service cost and the unamortised portion as on 31.03.2012, such as, introduction of, and changes in, the PRMS benefit prior or post the above stated period, amount of benefits remaining unvested and average vesting period prevailing on the date(s) of introduction/changes in the benefit, etc. From the Facts of the Case, it is not clear as to whether the stated amounts of ‘past service cost’, the ‘non-vested portion’ thereof and ‘unamortised’ portion thereof have been computed as per the principles of AS 15 or not. Accordingly, the Committee has provided only the accounting principles involved and has not verified the correctness of the various amounts. Further, the Committee notes that the querist has stated that AS 15 (revised 2005) was implemented by the corporation in the year 2005-06 itself and there was a typographical error in mentioning the implementation date of AS 15 in the annual accounts for that year (see paragraph 11 above). However, the earlier opinion (published in Compendium of Opinions, Volume XXVII, Query No. 17) in respect of the same querist was based on the premise that AS 15 (issued 1995), ‘Accounting for Retirement Benefits in the Financial Statements of Employers’ (hereinafter referred to as ‘AS 15 (pre-revised)’) was relevant for the year 2005-06. Hence, the Committee has not examined the issues in the light of its earlier opinion. Further, the Committee reiterates its views expressed in its earlier opinion that ‘pay-as-you-go’ method is not permitted even under AS 15 (pre-revised) and that under AS 15 (pre-revised), entire past service cost should be charged to profit and loss account[3]. Further, the Committee wishes to point out that the term ‘past service cost’ is the term used in AS 15 (revised 2005) whereas the querist has used the terms ‘past period cost’ and ‘past service cost’ interchangeably at some places. The term ‘past period cost’ means cost pertaining to past periods, whether accounted or, by mistake, omitted to be accounted for in the past periods, whereas ‘past service cost’ has a different meaning (see paragraph 15 below). Further, the Committee presumes that there is no occasion where a defined benefit asset arises. 14. As regards early application of AS 15 (revised 2005), the Committee notes that AS 15 (revised 2005) was initially published in March 2005 issue of the Institute’s Journal, ‘The Chartered Accountant’, with the following paragraph on applicability:
The Committee notes from the above that the stated paragraph does not state any implementation date for AS 15 (revised 2005) and that nowhere it was stated that its early adoption was encouraged. Subsequently, the Standard was again published with limited revision in March 2006 issue of the Institute’s Journal, and was applicable in respect of accounting periods commencing on or after 1st April, 2006. However, in that issue also, nowhere earlier application of the Standard was encouraged. Later on, applicability of AS 15 (revised) was deferred to accounting periods commencing on or after December 7, 2006 (instead of April 1, 2006) by virtue of the Announcement of the Institute regarding “Deferrment of Applicability of Accounting Standard (AS) 15, Employee Benefits (revised 2005), published in March 2007 issue of the Journal, which states as follows:
Thus, from the above, the Committee notes that the early application of the Standard was possible only from the accounting year 2006-07 and not from 2005-06. The Committee also notes from the notice of the annual general meeting for the year 2005-06 that the financial statements of 2005-06 were adopted by the company on September 28, 2006, by which date, as discussed above, none of the pronouncements of the Institute relating to AS 15 (revised, 2005), contained recommendation of its early adoption. In fact, the early adoption of the revised Standard resulted into non-compliance of the then existing AS 15 (issued 1995). Accordingly, the Committee is of the view that in the extant case, the company could have implemented AS 15 (revised 2005) in the year 2006-07 and not in 2005-06. 15. From the Facts of the Case, it is clear that PRMS is a post-employment defined benefit plan. The Committee first analyses the terms ‘past service cost’, ‘non-vested past service cost’ and ‘unrecognised past service cost’ (also known as ‘unamortised past service cost’). The terms ‘past service cost’ and ‘vested employee benefits’ are defined in paragraphs 7.20 and 7.10 of AS 15 (revised 2005) respectively, as follows:
Thus, past service cost arises only (i) in the period in which new defined benefits are introduced or changes are made to existing defined benefits, and (ii) if service prior to their introduction or changes, as the case may be, results into incurrence of a liability or change in a liability. Thus, it is not necessary that the vested portion of past service cost should relate only to retired employees. It can also relate to existing employees provided they have become entitled to those benefits on account of their past service etc. The Committee is further of the view that as per paragraph 94 of AS 15 (revised 2005) quoted by the querist in paragraph 6 above, non-vested past service cost should be recognised as an expense (i.e., amortised) over the average period until the benefits become vested. The portion of the non-vested past service cost which is yet to be recognised as an expense is known as ‘unrecognised past service cost’ or ‘unamortised past service cost’. 16. The Committee presumes that, in the extant case, the various amounts of ‘past service cost’, the ‘non-vested portion’ thereof and ‘unamortised’ portion thereof have been computed in accordance with the understanding of those terms as explained in paragraph 15 above. The Committee further notes the following transitional provisions of AS 15 (revised 2005) which existed at the time of implementation of that Standard by the corporation[4]:
The Committee notes from the above that the corporation could have implemented AS 15 (revised 2005) in 2006-07. While implementing the same, the above quoted transitional provisions of that Standard should have been followed. Hence, AS 15 (revised 2005) should have been applied retrospectively at the time of transition to the Standard. Therefore, non-vested past service cost arising even prior to the date of transition should have been identified and that portion of the said cost which should be amortised after the transition to AS 15 (revised 2005) (‘unrecognised past service cost’ or ‘unamortised past service cost’) should have been determined. This is evident from the ‘Example Illustrating Paragraphs 144 and 145’ given in AS 15 (revised 2005) itself. For the purpose of applying the transitional provisions, item (c) of paragraph 144 of AS 15 (revised 2005) (i.e., ‘unrecognised’/ ‘unamortised’ amount) should be understood as amount that would remain unrecognised/unamortised on the date of transition, had AS 15 (revised 2005) been applied retrospectively. [Under AS 15 (pre-revised), amortisation of past service cost was not permitted]. 17. Accordingly, the net amount of the liability on the date of transition should have been determined by deducting the sum of the fair value of plan assets, if any, on the date of transition to AS 15 (revised 2005) and that part of the non-vested past service cost arising on various dates prior to the date of transition from the present value of defined benefit obligation as on the date of transition determined in accordance with AS 15 (revised 2005). The difference between (i) the net amount so arrived at and (ii) the amount that should have been recognised as per AS 15 (pre-revised) as on the date of transition, net of any related tax expense (saving) should have been adjusted against the opening balance of revenue reserves and surplus on the date of transition, i.e., in the year 2006-07. Thereafter, (i) unamortised past service cost deducted from the present value of the defined benefit obligation as on the date of transition should have been amortised in subsequent periods in accordance with paragraph 94 of AS 15 (revised 2005), quoted by the querist in paragraph 6 above ; and (ii) the non-vested portion of past service cost, which arose in respect of increase in benefits with effect from 01.04.2008, should also have been amortised in accordance with paragraph 94 of AS 15 (revised 2005). 18. The Committee notes that the corporation has not followed AS 15 (pre-revised) up to 2004-05, since, ‘pay-as-you-go’ method was not permitted in that Standard. In fact, it should have followed AS 15 (pre-revised) upto the year 2005-06. It has also not followed the transitional provisions as mentioned in paragraph 16 above for implementing AS 15 (revised 2005). Further, the unamortised amount is shown as deferred revenue expenditure in the balance sheet (as seen from the copy of annual accounts for the year 2007-08 furnished by the querist), whereas it should have been adjusted against the present value of the defined benefit obligation for presentation in the balance sheet. The Committee further notes that the adjustment against reserves and surplus as per transitional provisions of AS 15 (revised 2005) is permissible only to the extent of difference between transitional liability (as per paragraph 144 of AS 15 (revised)) as on the date of transition to AS 15, i.e., in the year 2006-07 and the liability that would have been recognised at the same date, as per pre-revised AS 15. Accordingly, in order to rectify the errors of earlier years, the corporation, should ascertain the net liability as at the beginning of the current year (i.e., year for which books of account are not yet closed), had AS 15 (revised 2005) been retrospectively applied, as discussed above. The difference, if any, between that amount and net liability as per current year’s opening balance sheet (i.e., amount shown as liability less fair value of plan assets, if any and if not already deducted from the liability less amount shown as deferred revenue expenditure in respect of PRMS), net of tax effect, if any, and to the extent such difference is not adjusted against reserves and surplus as permitted by paragraph 145 of AS 15 (revised), as discussed above, should be recognised in the statement of profit and loss for the current year as a ‘prior period item’ in accordance with AS 5, ‘Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies’, notified under the ‘Rules’. D. Opinion 20. On the basis of the above, the Committee is of the following opinion on the issues raised by the querist in paragraph 12 above:
_______ [1]Opinion finalised by the Committee on 15.11.2013. [2]Subsequently, AS 15 (revised 2005), was notified as AS 15, ‘Employee Benefits’ under the Companies (Accounting Standards) Rules, 2006, with some changes relevant for Small and Medium-Sized Companies. [3]As per Revised Schedule VI, the profit and loss account is now referred to as ‘Statement of profit and loss’. [4]The transitional provisions were subsequently amended
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