Query No. 4 A. Facts of the Case 1. A Government of India company (hereinafter referred to as ‘the holding company’) is engaged in the construction and operation of thermal power plants in the country. The holding company has also diversified into hydro power generation, coal mining and oil & gas exploration, etc. The holding company is registered under the Companies Act, 1956 and, being an electricity generating company, is governed by the provisions of the Electricity Act, 2003. The holding company prepares its annual financial statements as per the provisions of the Companies Act, 1956. The holding company is also listed with the Bombay Stock Exchange and the National Stock Exchange. 2. The holding company is having five subsidiary companies. There are no employees on the rolls of the subsidiary companies. All the personnel of the subsidiary companies are employees on the rolls of the holding company and are under deputation to the subsidiary companies on secondment basis. The employees on deputation to the subsidiary companies can be repatriated to the holding company at any time.
3. (i) The benefits provided by the holding company to its employees include:
(ii) The employees’ benefits indicated at serial number (a) and (b) above (viz., provident fund and gratuity) are funded by the holding company and are managed by separate trusts. The plan assets in respect of the funded schemes are not bifurcated between employees of holding company and those seconded to the subsidiaries. In respect of employees’ benefits indicated at serial number (c), (d), (f) and (g) above, provisions are created based on the actuarial valuation and are maintained in the books of the holding company. There are no earmarked investments against these provisions. (iii) The pension scheme at (e) above is under implementation which will be a defined contribution scheme as per the Guidelines issued by the Department of Public Enterprises (DPE), Government of India (GOI). DPE is the nodal agency for determination of the pay-scales and other benefits payable to employees of Central Public Sector Enterprises (CPSEs). As per the DPE Guidelines, the total of PF, gratuity, PRMF and pension contribution shall be limited to 30% of basic pay plus dearness allowance (DA). (iv) All the employee benefit schemes are functioning for the total employees and not separately for the holding company and its subsidiaries. (v) In respect of employees on secondment from the holding company, liability of the subsidiaries is limited only to the extent of periodical/yearly charge debited to them by the holding company. Responsibility for the payment of such benefits due to the employees viz., leave, long service award, gratuity (through the trust), post retirement medical facility, farewell gift, settlement allowance, etc. continues to be of the holding company. (vi) The holding company makes disclosures as per Accounting Standard (AS) 15, ‘Employee Benefits’ (revised 2005) in its financial statements for the various defined benefit schemes.
4. The querist has stated that till the financial year 2011-12, the actuarial valuation of employee benefits was carried out for the company as a whole and year-end liability was determined by the actuary for each of the subsidiary, considering the current service cost plus increase/decrease in total defined benefit obligation arising on account of other reasons e.g., actuarial gains and losses. Based on above, the proportionate share of expense was recovered from the subsidiaries.
5. The issue of disclosures to be made in the financial statements of the subsidiary company for defined benefit plans was previously referred to the Expert Advisory Committee (EAC) for its opinion. The EAC in its opinion stated that “It is assumed that amount allocated is derived considering current service cost plus increase or decrease in total defined benefit obligation arising on account of other reasons like the actuarial gains and losses on entire obligation (irrespective of whether the obligation relates to period during which employee was with service with subsidiary or not). This indicates that there is a contractual agreement or stated policy based on which the proportionate share of expenses is being allocated to the subsidiary company. Further, since there is a common scheme for the employees of the holding company and the subsidiary company, keeping in view the Facts of the Case, it appears to the Committee that in substance, the holding company is running a group administration plan. The Committee is further of the view that the existence of such contractual agreement or stated policy through which the current service costs and obligations of defined benefit plans for employees of subsidiary company are being allocated to it clearly provides a basis for allocating the assets and obligation of the plan too” and accordingly, the EAC opined that the subsidiaries are required to make disclosures as per paragraphs 119 and 120 of AS 15. (Emphasis supplied by the querist.)
6. During the year 2012-13, the holding company reviewed the basis of allocation of employee’s benefits to the subsidiaries considering the provisions of DPE Guidelines applicable to CPSEs w. e. f. 1st January, 2007. These Guidelines provide that the CPSEs are allowed to pay 30% of basic pay and dearness allowance (DA) as superannuation benefits which may include PF, gratuity, pension and post retirement medical facility. Accordingly, it was decided to debit the subsidiaries by an amount equal to 30% of basic pay and DA of the employees seconded to the subsidiaries towards the superannuation benefits and at a fixed percentage of basic pay and DA in respect of other employee benefits such as leave and other retirement benefits. These changes were made retrospectively from 1st January, 2007, i.e., from the date of applicability of the DPE Guidelines.
7. The querist has also stated that under the revised methodology implemented during the year 2012-13, the cost of employee benefits debited to the subsidiaries was not based on actuarial valuation as was being considered till the year 2011-12. Accordingly, no actuarial assumptions were used while determining the amount of contribution to be made by the subsidiaries to the holding company for the employees’ benefits.
8. Consequent to the above change, following disclosures were made by the subsidiary companies in their financial statements for the year 2012-13:
9. The statutory auditor of one of the subsidiary companies has given a qualification in his report on the accounts for the year 2012-13 as under:
10. The company does not agree with the observation of the statutory auditors on the accounts for the financial year 2012-13 considering the following:
As stated above, the subsidiary company pays a fixed percentage of salary as contribution towards various employee benefit plans to the holding company. Taking inference from the above-mentioned paragraphs of AS 15, the payment of fixed amount on a predetermined basis, agreed between the holding and subsidiary companies, in substance, is the settlement of the employee benefit obligation, rather than an investment to meet the obligation. Accordingly, the subsidiary no longer has an asset or a liability towards the employee benefits. Therefore, it is appropriate that the subsidiary treats such payments as contributions to a defined contribution plan.
B. Query11. In the above background, the querist has sought the opinion of the Expert Advisory Committee on the following issues:
C. Points considered by the Committee12. The Committee notes that the basic issue raised in the query relates to disclosure requirements in the books of the subsidiary companies with regard to various employee benefit plans in respect of employees sent on deputation to it by the holding company for which, as per the querist, the holding company is making adequate disclosures as per the requirements of AS 15. The Committee has, therefore, considered only this issue and has not considered any other issue that may arise from the Facts of the Case, such as, classification of various employee benefit plans as defined benefit or defined contribution plan, accounting in the books of the holding company, accounting for impact of change in the plan due to retrospective change in the methodology of charging the amount of employee benefits from the subsidiary companies, etc. Further, the opinion expressed hereinafter is only from accounting perspective and not from the legal perspective, such as, interpretation of various enactments, such, as DPE Guidelines, etc. since as per Rule 2 of its Advisory Service Rules, the Committee is prohibited from such legal interpretation.
13. With regard to the disclosure requirements in the books of subsidiary company in respect of employee benefit plans for employees sent on deputation to subsidiary companies, which are administered by the parent company, the Committee is of the view that the first and foremost issue to be examined is whether these plans which the employees deputed to subsidiary companies are entitled to are defined contribution plans or defined benefit plans for the subsidiary company. In this regard, the Committee notes the following paragraphs of AS 15, notified under the Rules, which provide as follows:
From the above, the Committee notes that in case of defined contribution plans, the obligation of an enterprise is to pay fixed contribution to another entity and has no obligation to pay further contribution if there are no sufficient assets to pay all employee benefits relating to employee service in the current and prior periods, which means that actuarial risk and investment risk are not borne by the enterprise paying fixed contribution. Further, the Committee notes that as per the requirements of paragraphs 34 and 35 of AS 15, if there is no contractual agreement or stated policy for sharing risks between the individual group enterprises in respect of defined benefit plan, the net defined benefit cost is recognised in the books of the sponsoring employer and the other group enterprises recognise only their contribution payable for the period.
14. The Committee notes from the Facts of the Case that all the employees of the subsidiary companies are on the rolls of the parent company and have been sent on deputation to the subsidiary companies on secondment basis. The parent company is providing various benefits to its employees as listed in paragraph 3 above and all the employee benefit schemes are functioning for the total employees and not separately for the holding company and its subsidiaries. Thus, there is a group administration plan where holding company is the sponsoring employer. Further, the Committee notes that as per the DPE Guidelines, the total of superannuation benefits which consist of provident fund, gratuity, pension and PRMF shall be limited to 30% of basic pay plus DA. The Committee also notes that in the financial year 2012-13, the parent company has revised its methodology of collecting the share of subsidiary companies on account of employee benefits in respect of deputed employees to a fixed contribution of 30% of basic pay plus DA, retrospectively from 1st January, 2007. Further, it has been stated that in respect of employees on secondment, liability of the subsidiaries is limited only to the extent of periodical/yearly charge debited to them, which is not based on current service cost plus increase or decrease in total defined benefit obligation on account of other reasons like actuarial gains and losses on entire obligation (paragraphs 3 (v) and 10 (d)(iii) above). From this, the Committee is of the view that although the company is charging maximum amount as per the DPE Guidelines from the subsidiary company on account of afore-mentioned employee benefits, the risks of defined benefit plans are not being shared between the holding company and the subsidiary company, rather only a fixed contribution which is based on the percentage of aggregate of basic pay and DA is being charged from the subsidiary. Therefore, the subsidiary company should recognise only the contribution paid by it in its financial statements, as per the requirements of above-reproduced paragraphs of AS 15 as the same is a defined contribution plan. Accordingly, the question of disclosure as per paragraphs 119 and 120 of AS 15, which is applicable in respect of defined benefit schemes does not arise. Since nature of plan has changed from defined benefit plan to defined contribution plan for the subsidiary company, nature and the impact of such change in plan should also be given in the notes to accounts of the subsidiary company. With regard to the existing disclosures made by the subsidiary company in its financial statements, the Committee wishes to point out that the subsidiary company should provide a clear description of the charge being made by the holding company from it. Subsidiary company should not state that the liabilities for employee benefits are accounted for on the basis of ‘allocation’ by the holding company as being currently used for its fixed contribution (to the holding company) in its significant accounting policy. 15. On the basis of the above, the Committee is of the following opinion on the issues raised in paragraph 11 above:
________________________________ [1]Opinion finalised by the Committee on 11.4.2014. |