Standard 15: Employee Benefits

Standard 15: Employee Benefits · Complied AI

(b)

non-accumulating.

13 Accumulating compensated absences are those that are carried forward and can be used in future periods if the current period’s entitlement is not used in full. Accumulating compensated absences may be either vesting (in other words, employees are entitled to a cash payment for unused entitlement on leaving the enterprise) or non-vesting (when employees are not entitled to a cash payment for unused entitlement on leaving). An obligation arises as employees render service that increases their entitlement to future compensated absences. The obligation exists, and is recognised, even if the compensated absences are non-vesting, although the possibility that employees may leave before they use an accumulated non-vesting entitlement affects the measurement of that obligation.

14. An enterprise should measure the expected cost of accumulating compensated absences as the additional amount that the enterprise expects to pay as a result of the unused entitlement that has accumulated at the balance sheet date.

15 The method specified in the previous paragraph measures the obligation at the amount of the additional payments that are expected to arise solely from the fact that the benefit accumulates. In many cases, an enterprise may not need to make detailed computations to estimate that there is no material obligation for unused compensated absences. For example, a leave obligation is likely to be material only if there is a formal or informal understanding that unused leave may be taken as paid vacation.

Example Illustrating Paragraphs 14 and 15

An enterprise has 100 employees, who are each entitled to five working days of leave for each year. Unused leave may be carried forward for one calendar year. The leave is taken first out of the current year’s entitlement and then out of any balance brought forward from the previous year (a LIFO basis). At 31 December 20X4, the average unused entitlement is two days per employee. The enterprise expects, based on past experience which is expected to continue, that 92 employees will take no more than five days of leave in 20X5 and that the remaining eight employees will take an average of six and a half days each.

The enterprise expects that it will pay an additional 12 days of pay as a result of the unused entitlement that has accumulated at 31 December 20X4 (one and a half days each, for eight employees). Therefore, the enterprise recognises a liability, as at 31 December 20X4, equal to 12 days of pay.

16 Non-accumulating compensated absences do not carry forward: they lapse if the current period’s entitlement is not used in full and do not entitle employees to a cash payment for unused entitlement on leaving the enterprise. This is commonly the case for maternity or paternity leave. An enterprise recognises no liability or expense until the time of the absence, because employee service does not increase the amount of the benefit.

Proviso

Provided that a Small and Medium-sized Company and Micro, Small and Medium-sized non-company entity, as defined in Appendix 1 to this Compendium, may not comply with paragraphs 11 to 16 of the Standard to the extent they deal with recognition and measurement of short-term accumulating compensated absences which are non-vesting (i.e., short-term accumulating compensated absences in respect of which employees are not entitled to cash payment of unused entitlement on leaving).

Profit-sharing and Bonus Plans

17 An enterprise should recognise the expected cost of profit-sharing and bonus payments under paragraph 10 when, and only when:

(b)

the plan exposes the participating enterprises to actuarial risks associated with the current and former employees of other enterprises, with the result that there is no consistent and reliable basis for allocating the obligation, plan assets and cost to individual enterprises participating in the plan.

In those cases, an enterprise accounts for the plan as if it were a defined contribution plan and discloses the additional information required by paragraph 30 .

33 Multi-employer plans are distinct from group administration plans. A group administration plan is merely an aggregation of single employer plans combined to allow participating employers to pool their assets for investment purposes and reduce investment management and administration costs, but the claims of different employers are segregated for the sole benefit of their own employees. Group administration plans pose no particular accounting problems because information is readily available to treat them in the same way as any other single employer plan and because such plans do not expose the participating enterprises to actuarial risks associated with the current and former employees of other enterprises. The definitions in this Standard require an enterprise to classify a group administration plan as a defined contribution plan or a defined benefit plan in accordance with the terms of the plan (including any obligation that goes beyond the formal terms).

34 Defined benefit plans that share risks between various enterprises under common control, for example, a parent and its subsidiaries, are not multi- employer plans.

35 In respect of such a plan, if there is a contractual agreement or stated policy for charging the net defined benefit cost for the plan as a whole to individual group enterprises, the enterprise recognises, in its separate financial statements, the net defined benefit cost so charged. If there is no such agreement or policy, the net defined benefit cost is recognised in the separate financial statements of the group enterprise that is legally the sponsoring employer for the plan. The other group enterprises recognise, in their separate financial statements, a cost equal to their contribution payable for the period.

36 AS 29, Provisions, Contingent Liabilities and Contingent Assets requires an enterprise to recognise, or disclose information about, certain contingent liabilities. In the context of a multi-employer plan, a contingent liability may arise from, for example:

(b)

any responsibility under the terms of a plan to finance any shortfall in the plan if other enterprises cease to participate.

State Plans

37 An enterprise should account for a state plan in the same way as for a multi-employer plan (see paragraphs 29 and 30 ).

38 State plans are established by legislation to cover all enterprises (or all enterprises in a particular category, for example, a specific industry) and are operated by national or local government or by another body (for example, an autonomous agency created specifically for this purpose) which is not subject to control or influence by the reporting enterprise. Some plans established by an enterprise provide both compulsory benefits which substitute for benefits that would otherwise be covered under a state plan and additional voluntary benefits. Such plans are not state plans.

39 State plans are characterised as defined benefit or defined contribution in nature based on the enterprise’s obligation under the plan. Many state plans are funded in a manner such that contributions are set at a level that is expected to be sufficient to pay the required benefits falling due in the same period; future benefits earned during the current period will be paid out of future contributions. Nevertheless, in most state plans, the enterprise has no obligation to pay those future benefits: its only obligation is to pay the contributions as they fall due and if the enterprise ceases to employ members of the state plan, it will have no obligation to pay the benefits earned by such employees in previous years. For this reason, state plans are normally defined contribution plans. However, in the rare cases when a state plan is a defined benefit plan, an enterprise applies the treatment prescribed in paragraphs 29 and 30.

Insured Benefits

40 An enterprise may pay insurance premiums to fund a post- employment benefit plan. The enterprise should treat such a plan as a defined contribution plan unless the enterprise will have (either directly, or indirectly through the plan) an obligation to either:

(b)

as an expense, unless another Accounting Standard requires or permits the inclusion of the contribution in the cost of an asset (see, for example, AS 10, Property, Plant and Equipment ).

46 Where contributions to a defined contribution plan do not fall due wholly within twelve months after the end of the period in which the employees render the related service, they should be discounted using the discount rate specified in paragraph 78 .

Proviso

Provided that a Small and Medium-sized Company and a Micro, Small and Medium-sized non-company entity, as defined in Appendix 1 to this Compendium, may not discount contributions that fall due more than 12 months after the balance sheet date.

Disclosure

47 An enterprise should disclose the amount recognised as an expense for defined contribution plans.

48 Where required by AS 18, Related Party Disclosures an enterprise discloses information about contributions to defined contribution plans for key management personnel.

Post-employment Benefits: Defined Benefit Plans

49 Accounting for defined benefit plans is complex because actuarial assumptions are required to measure the obligation and the expense and there is a possibility of actuarial gains and losses. Moreover, the obligations are measured on a discounted basis because they may be settled many years after the employees render the related service. While the Standard requires that it is the responsibility of the reporting enterprise to measure the obligations under the defined benefit plans, it is recognised that for doing so the enterprise would normally use the services of a qualified actuary.

Recognition and Measurement 3

50 Defined benefit plans may be unfunded, or they may be wholly or partly funded by contributions by an enterprise, and sometimes its employees, into an entity, or fund, that is legally separate from the reporting enterprise and from which the employee benefits are paid. The payment of funded benefits when they fall due depends not only on the financial position and the investment performance of the fund but also on an enterprise’s ability to make good any shortfall in the fund’s assets. Therefore, the enterprise is, in substance, underwriting the actuarial and investment risks associated with the plan. Consequently, the expense recognised for a defined benefit plan is not necessarily the amount of the contribution due for the period.

51 Accounting by an enterprise for defined benefit plans involves the following steps:

(160)

Present value of available future refunds and reductions in future contributions

Limit under paragraph 59 (b)

Rs. 90 is less than Rs. 160. Therefore, the enterprise recognises an asset of Rs. 90 and discloses that the limit reduced the carrying amount of the asset by Rs. 70 (see paragraph 120(f)(ii)).

Statement of Profit and Loss

61 An enterprise should recognise the net total of the following amounts in the statement of profit and loss, except to the extent that another Accounting Standard requires or permits their inclusion in the cost of an asset:

(a)

current service cost (see paragraphs 64 - 91 );

(b)

interest cost (see paragraph 82 );

(c)

the expected return on any plan assets (see paragraphs 107 - 109 ) and on any reimbursement rights (see paragraph 103);

(d)

actuarial gains and losses (see paragraphs 92 - 93 );

(e)

past service cost to the extent that paragraph 94 requires an enterprise to recognise it;

(f)

the effect of any curtailments or settlements (see paragraphs 110 and 111 ); and

(g)

the effect of the limit in paragraph 59 (b) , i.e., the extent to which the amount determined under paragraph 55 (if negative) exceeds the amount determined under paragraph 59 (b) .

62 Other Accounting Standards require the inclusion of certain employee benefit costs within the cost of assets such as tangible fixed assets (see AS 10, Property, Plant and Equipment ). Any post-employment benefit costs included in the cost of such assets include the appropriate proportion of the components listed in paragraph 61.

Illustration

63 Illustration I attached to the Standard illustrates describing the components of the amounts recognised in the balance sheet and statement of profit and loss in respect of defined benefit plans.

Recognition and Measurement: Present Value of Defined Benefit Obligations and Current Service Cost

64 The ultimate cost of a defined benefit plan may be influenced by many variables, such as final salaries, employee turnover and mortality, medical cost trends and, for a funded plan, the investment earnings on the plan assets. The ultimate cost of the plan is uncertain and this uncertainty is likely to persist over a long period of time. In order to measure the present value of the post- employment benefit obligations and the related current service cost, it is necessary to:

(a)

apply an actuarial valuation method (see paragraphs 65 - 67 );

(b)

attribute benefit to periods of service (see paragraphs 68 - 72 ); and

(c)

make actuarial assumptions (see paragraphs 73 - 91 ).

Actuarial Valuation Method

65 . An enterprise should use the Projected Unit Credit Method to determine the present value of its defined benefit obligations and the related current service cost and, where applicable, past service cost.

66 The Projected Unit Credit Method (sometimes known as the accrued benefit method pro-rated on service or as the benefit/years of service method) considers each period of service as giving rise to an additional unit of benefit entitlement (see paragraphs 68-72) and measures each unit separately to build up the final obligation (see paragraphs 73-91).

67 An enterprise discounts the whole of a post-employment benefit obligation, even if part of the obligation falls due within twelve months of the balance sheet date.

Example Illustrating Paragraph 66

A lump sum benefit, equal to 1% of final salary for each year of service, is payable on termination of service. The salary in year 1 is Rs. 10,000 and is assumed to increase at 7% (compound) each year resulting in Rs. 13,100 at the end of year 5. The discount rate used is 10% per annum. The following table shows how the obligation builds up for an employee who is expected to leave at the end of year 5, assuming that there are no changes in actuarial assumptions. For simplicity, this example ignores the additional adjustment needed to reflect the probability that the employee may leave the enterprise at an earlier or later date.

(Amount in Rs.)

Year

Benefit attributed to:

- prior years

131

262

393

524

(a)

the date when service by the employee first leads to benefits under the plan (whether or not the benefits are conditional on further service); until

(b)

the date when further service by the employee will lead to no material amount of further benefits under the plan, other than from further salary increases.

69 The Projected Unit Credit Method requires an enterprise to attribute benefit to the current period (in order to determine current service cost) and the current and prior periods (in order to determine the present value of defined benefit obligations). An enterprise attributes benefit to periods in which the obligation to provide post-employment benefits arises. That obligation arises as employees render services in return for post-employment benefits which an enterprise expects to pay in future reporting periods. Actuarial techniques allow an enterprise to measure that obligation with sufficient reliability to justify recognition of a liability.

Examples Illustrating Paragraph 69

1 A defined benefit plan provides a lump-sum benefit of Rs. 100 payable on retirement for each year of service.

A benefit of Rs. 100 is attributed to each year. The current service cost is the present value of Rs. 100. The present value of the defined benefit obligation is the present value of Rs. 100, multiplied by the number of years of service up to the balance sheet date.

If the benefit is payable immediately when the employee leaves the enterprise, the current service cost and the present value of the defined benefit obligation reflect the date at which the employee is expected to leave. Thus, because of the effect of discounting, they are less than the amounts that would be determined if the employee left at the balance sheet date.

2 A plan provides a monthly pension of 0.2% of final salary for each year of service. The pension is payable from the age of 60.

Benefit equal to the present value, at the expected retirement date, of a monthly pension of 0.2% of the estimated final salary payable from the expected retirement date until the expected date of death is attributed to each year of service. The current service cost is the present value of that benefit. The present value of the defined benefit obligation is the present value of monthly pension payments of 0.2% of final salary, multiplied by the number of years of service up to the balance sheet date. The current service cost and the present value of the defined benefit obligation are discounted because pension payments begin at the age of 60.

70 . Employee service gives rise to an obligation under a defined benefit plan even if the benefits are conditional on future employment (in other words they are not vested). Employee service before the vesting date gives rise to an obligation because, at each successive balance sheet date, the amount of future service that an employee will have to render before becoming entitled to the benefit is reduced. In measuring its defined benefit obligation, an enterprise considers the probability that some employees may not satisfy any vesting requirements. Similarly, although certain post- employment benefits, for example, post-employment medical benefits, become payable only if a specified event occurs when an employee is no longer employed, an obligation is created when the employee renders service that will provide entitlement to the benefit if the specified event occurs. The probability that the specified event will occur affects the measurement of the obligation, but does not determine whether the obligation exists.

(a)

for the purpose of paragraph 68(b) , salary increases do not lead to further benefits, even though the amount of the benefits is dependent on final salary; and

(b)

the amount of benefit attributed to each period is a constant proportion of the salary to which the benefit is linked.

Example Illustrating Paragraph 72

Employees are entitled to a benefit of 3% of final salary for each year of service before the age of 55.

Benefit of 3% of estimated final salary is attributed to each year up to the age of 55. This is the date when further service by the employee will lead to no material amount of further benefits under the plan. No benefit is attributed to service after that age.

Actuarial Assumptions

73 . Actuarial assumptions comprising demographic assumptions and financial assumptions should be unbiased and mutually compatible. Financial assumptions should be based on market expectations, at the balance sheet date, for the period over which the obligations are to be settled.

74 Actuarial assumptions are an enterprise’s best estimates of the variables that will determine the ultimate cost of providing post-employment benefits. Actuarial assumptions comprise:

(a)

demographic assumptions about the future characteristics of current and former employees (and their dependants) who are eligible for benefits. Demographic assumptions deal with matters such as:

(i)

mortality, both during and after employment;

(ii)

rates of employee turnover, disability and early retirement;

(iii)

the proportion of plan members with dependants who will be eligible for benefits; and

(iv)

claim rates under medical plans; and

(b)

financial assumptions, dealing with items such as:

(i)

the discount rate (see paragraphs 78 - 82 );

(ii)

future salary and benefit levels (see paragraphs 83-87);

(iii)

in the case of medical benefits, future medical costs, including, where material, the cost of administering claims and benefit payments (see paragraphs 88 - 91 ); and

(iv)

the expected rate of return on plan assets (see paragraphs 107 - 109 ).

75 Actuarial assumptions are unbiased if they are neither imprudent nor excessively conservative.

76 Actuarial assumptions are mutually compatible if they reflect the economic relationships between factors such as inflation, rates of salary increase, the return on plan assets and discount rates. For example, all assumptions which depend on a particular inflation level (such as assumptions about interest rates and salary and benefit increases) in any given future period assume the same inflation level in that period.

77 An enterprise determines the discount rate and other financial assumptions in nominal (stated) terms, unless estimates in real (inflation- adjusted) terms are more reliable, for example, where the benefit is index- linked and there is a deep market in index-linked bonds of the same currency and term.

Actuarial Assumptions: Discount Rate

78 . The rate used to discount post-employment benefit obligations (both funded and unfunded) should be determined by reference to market yields at the balance sheet date on government bonds. The currency and term of the government bonds should be consistent with the currency and estimated term of the post-employment benefit obligations.

79 One actuarial assumption which has a material effect is the discount rate. The discount rate reflects the time value of money but not the actuarial or investment risk. Furthermore, the discount rate does not reflect the enterprise- specific credit risk borne by the enterprise’s creditors, nor does it reflect the risk that future experience may differ from actuarial assumptions.

80 The discount rate reflects the estimated timing of benefit payments. In practice, an enterprise often achieves this by applying a single weighted average discount rate that reflects the estimated timing and amount of benefit payments and the currency in which the benefits are to be paid.

(a)

estimated future salary increases;

(b)

the benefits set out in the terms of the plan (or resulting from any obligation that goes beyond those terms) at the balance sheet date; and

(c)

estimated future changes in the level of any state benefits that affect the benefits payable under a defined benefit plan, if, and only if, either:

(i)

those changes were enacted before the balance sheet date; or

(ii)

past history, or other reliable evidence, indicates that those state benefits will change in some predictable manner, for example, in line with future changes in general price levels or general salary levels.

84 Estimates of future salary increases take account of inflation, seniority, promotion and other relevant factors, such as supply and demand in the employment market.

85 If the formal terms of a plan (or an obligation that goes beyond those terms) require an enterprise to change benefits in future periods, the measurement of the obligation reflects those changes. This is the case when, for example:

(a)

the enterprise has a past history of increasing benefits, for example, to mitigate the effects of inflation, and there is no indication that this practice will change in the future;

(b)

actuarial gains have already been recognised in the financial statements and the enterprise is obliged, by either the formal terms of a plan (or an obligation that goes beyond those terms) or legislation, to use any surplus in the plan for the benefit of plan participants (see paragraph 96 (c)).

86 Actuarial assumptions do not reflect future benefit changes that are not set out in the formal terms of the plan (or an obligation that goes beyond those terms) at the balance sheet date. Such changes will result in:

(a)

past service cost, to the extent that they change benefits for service before the change; and

(b)

current service cost for periods after the change, to the extent that they change benefits for service after the change.

87 Some post-employment benefits are linked to variables such as the level of state retirement benefits or state medical care. The measurement of such benefits reflects expected changes in such variables, based on past history and other reliable evidence.

88 . Assumptions about medical costs should take account of estimated future changes in the cost of medical services, resulting from both inflation and specific changes in medical costs.

89 Measurement of post-employment medical benefits requires assumptions about the level and frequency of future claims and the cost of meeting those claims. An enterprise estimates future medical costs on the basis of historical data about the enterprise’s own experience, supplemented where necessary by historical data from other enterprises, insurance companies, medical providers or other sources. Estimates of future medical costs consider the effect of technological advances, changes in health care utilisation or delivery patterns and changes in the health status of plan participants.

90 The level and frequency of claims is particularly sensitive to the age, health status and sex of employees (and their dependants) and may be sensitive to other factors such as geographical location. Therefore, historical data is adjusted to the extent that the demographic mix of the population differs from that of the population used as a basis for the historical data. It is also adjusted where there is reliable evidence that historical trends will not continue.

91 Some post-employment health care plans require employees to contribute to the medical costs covered by the plan. Estimates of future medical costs take account of any such contributions, based on the terms of the plan at the balance sheet date (or based on any obligation that goes beyond those terms). Changes in those employee contributions result in past service cost or, where applicable, curtailments. The cost of meeting claims may be reduced by benefits from state or other medical providers (see paragraphs 83(c) and 87 ).

Actuarial Gains and Losses

92 . Actuarial gains and losses should be recognised immediately in the statement of profit and loss as income or expense (see paragraph 61 ).

92A . Paragraph 145(b) (iii) explains the need to consider any unrecognised part of the transitional liability in accounting for subsequent actuarial gains.

(a)

unexpectedly high or low rates of employee turnover, early retirement or mortality or of increases in salaries, benefits (if the terms of a plan provide for inflationary benefit increases) or medical costs;

(b)

the effect of changes in estimates of future employee turnover, early retirement or mortality or of increases in salaries, benefits (if the terms of a plan provide for inflationary benefit increases) or medical costs;

(c)

the effect of changes in the discount rate; and

(d)

differences between the actual return on plan assets and the expected return on plan assets (see paragraphs 107 - 109 ).

Past Service Cost

94 . In measuring its defined benefit liability under paragraph 55 , an enterprise should recognise past service cost as an expense on a straight- line basis over the average period until the benefits become vested. To the extent that the benefits are already vested immediately following the introduction of, or changes to, a defined benefit plan, an enterprise should recognise past service cost immediately.

95 Past service cost arises when an enterprise introduces a defined benefit plan or changes the benefits payable under an existing defined benefit plan. Such changes are in return for employee service over the period until the benefits concerned are vested. Therefore, past service cost is recognised over that period, regardless of the fact that the cost refers to employee service in previous periods. Past service cost is measured as the change in the liability resulting from the amendment (see paragraph 65 ).

Example Illustrating Paragraph 95

An enterprise operates a pension plan that provides a pension of 2% of final salary for each year of service. The benefits become vested after five years of service. On 1 January 20X5 the enterprise improves the pension to 2.5% of final salary for each year of service starting from 1 January 20X1. At the date of the improvement, the present value of the additional benefits for service from 1 January 20X1 to 1 January 20X5 is as follows:

Employees with more than five year's service at 1/1/X5

Rs.150

Employees with less than five year's service at 1/1/X5 (average period until vesting: three years)

Rs. 120

Rs. 270

The enterprise recognises Rs. 150 immediately because those benefits are already vested. The enterprise recognises Rs. 120 on a straight-line basis over three years from 1 January 20X5.

96 Past service cost excludes:

(a)

the effect of differences between actual and previously assumed salary increases on the obligation to pay benefits for service in prior years (there is no past service cost because actuarial assumptions allow for projected salaries);

(b)

under and over estimates of discretionary pension increases where an enterprise has an obligation to grant such increases (there is no past service cost because actuarial assumptions allow for such increases);

(c)

estimates of benefit improvements that result from actuarial gains that have already been recognised in the financial statements if the enterprise is obliged, by either the formal terms of a plan (or an obligation that goes beyond those terms) or legislation, to use any surplus in the plan for the benefit of plan participants, even if the benefit increase has not yet been formally awarded (the resulting increase in the obligation is an actuarial loss and not past service cost, see paragraph 85(b));

(d)

the increase in vested benefits (not on account of new or improved benefits) when employees complete vesting requirements (there is no past service cost because the estimated cost of benefits was recognised as current service cost as the service was rendered); and

(e)

the effect of plan amendments that reduce benefits for future service (a curtailment).

97 An enterprise establishes the amortisation schedule for past service cost when the benefits are introduced or changed. It would be impracticable to maintain the detailed records needed to identify and implement subsequent changes in that amortisation schedule. Moreover, the effect is likely to be material only where there is a curtailment or settlement. Therefore, an enterprise amends the amortisation schedule for past service cost only if there is a curtailment or settlement.

98 Where an enterprise reduces benefits payable under an existing defined benefit plan, the resulting reduction in the defined benefit liability is recognised as (negative) past service cost over the average period until the reduced portion of the benefits becomes vested.

99 Where an enterprise reduces certain benefits payable under an existing defined benefit plan and, at the same time, increases other benefits payable under the plan for the same employees, the enterprise treats the change as a single net change.

Recognition and Measurement: Plan Assets

Fair Value of Plan Assets

100 The fair value of any plan assets is deducted in determining the amount recognised in the balance sheet under paragraph 55. When no market price is available, the fair value of plan assets is estimated; for example, by discounting expected future cash flows using a discount rate that reflects both the risk associated with the plan assets and the maturity or expected disposal date of those assets (or, if they have no maturity, the expected period until the settlement of the related obligation).

101 Plan assets exclude unpaid contributions due from the reporting enterprise to the fund, as well as any non-transferable financial instruments issued by the enterprise and held by the fund. Plan assets are reduced by any liabilities of the fund that do not relate to employee benefits, for example, trade and other payables and liabilities resulting from derivative financial instruments.

102 Where plan assets include qualifying insurance policies that exactly match the amount and timing of some or all of the benefits payable under the plan, the fair value of those insurance policies is deemed to be the present value of the related obligations, as described in paragraph 55 (subject to any reduction required if the amounts receivable under the insurance policies are not recoverable in full).

(a)

any resulting change in the present value of the defined benefit obligation;

(b)

any resulting change in the fair value of the plan assets;

(c)

any related past service cost that, under paragraph 94, had not previously been recognised.

111 Before determining the effect of a curtailment or settlement, an enterprise should remeasure the obligation (and the related plan assets, if any) using current actuarial assumptions (including current market interest rates and other current market prices).

112 A curtailment occurs when an enterprise either:

(a)

has a present obligation, arising from the requirement of a statute/ regulator or otherwise, to make a material reduction in the number of employees covered by a plan; or

(b)

amends the terms of a defined benefit plan such that a material element of future service by current employees will no longer qualify for benefits, or will qualify only for reduced benefits.

A curtailment may arise from an isolated event, such as the closing of a plant, discontinuance of an operation or termination or suspension of a plan. An event is material enough to qualify as a curtailment if the recognition of a curtailment gain or loss would have a material effect on the financial statements. Curtailments are often linked with a restructuring. Therefore, an enterprise accounts for a curtailment at the same time as for a related restructuring.

113 A settlement occurs when an enterprise enters into a transaction that eliminates all further obligations for part or all of the benefits provided under a defined benefit plan, for example, when a lump-sum cash payment is made to, or on behalf of, plan participants in exchange for their rights to receive specified post-employment benefits.

114 In some cases, an enterprise acquires an insurance policy to fund some or all of the employee benefits relating to employee service in the current and prior periods. The acquisition of such a policy is not a settlement if the enterprise retains an obligation (see paragraph 40 ) to pay further amounts if the insurer does not pay the employee benefits specified in the insurance policy. Paragraphs 103 - 106 deal with the recognition and measurement of reimbursement rights under insurance policies that are not plan assets.

115 A settlement occurs together with a curtailment if a plan is terminated such that the obligation is settled and the plan ceases to exist. However, the termination of a plan is not a curtailment or settlement if the plan is replaced by a new plan that offers benefits that are, in substance, identical.

116 Where a curtailment relates only to some of the employees covered by a plan, or where only part of an obligation is settled, the gain or loss includes a proportionate share of the previously unrecognised past service cost (and of transitional amounts remaining unrecognised under paragraph 145(b) ). The proportionate share is determined on the basis of the present value of the obligations before and after the curtailment or settlement, unless another basis is more rational in the circumstances.

Example Illustrating Paragraph 116

An enterprise discontinues a business segment and employees of the discontinued segment will earn no further benefits. This is a curtailment without a settlement. Using current actuarial assumptions (including current market interest rates and other current market prices) immediately before the curtailment, the enterprise has a defined benefit obligation with a net present value of Rs. 1,000 and plan assets with a fair value of Rs. 820 and unrecognised past service cost of Rs. 50. The enterprise had first adopted this Standard one year before. This increased the net liability by Rs. 100, which the enterprise chose to recognise over five years (see paragraph 145(b)). The curtailment reduces the net present value of the obligation by Rs. 100 to Rs. 900.

(37)

An asset of Rs. 37 will be recognised (it is assumed that the amount under paragraph 59(b) is higher than Rs. 37)

Proviso

Provided that a Small and Medium-sized Company, as defined in Appendix I to this Compendium, may not apply the recognition and measurement principles laid down in paragraphs 50 to 116 in respect of accounting for defined benefit plans. However, such company should actuarially determine and provide for the accrued liability in respect of defined benefit plans as follows:

The method used for actuarial valuation should be the Projected Unit Credit Method; and

The discount rate used should be determined by reference to market yields at the balance sheet date on government bonds as per paragraph 78 of the Standard.

Proviso

Provided further that a a Micro, Small and Medium-sized non-company entity, as defined in Appendix 1 to this Compendium, may not apply the recognition and measurement principles as laid down in paragraphs 50 to 116 in respect of accounting for defined benefit plans. However, such an entity may calculate and account for the accrued liability under the defined benefit plans by reference to some other rational method, e.g., a method based on the assumption that such benefits are payable to all employees at the end of the accounting year.

Presentation

Offset

117 . An enterprise should offset an asset relating to one plan against a liability relating to another plan when, and only when, the enterprise:

(a)

has a legally enforceable right to use a surplus in one plan to settle obligations under the other plan; and

(b)

intends either to settle the obligations on a net basis, or to realise the surplus in one plan and settle its obligation under the other plan simultaneously.

Financial Components of Post-employment Benefit Costs

118 . This Standard does not specify whether an enterprise should present current service cost, interest cost and the expected return on plan assets as components of a single item of income or expense on the face of the statement of profit and loss.

Proviso

Provided that a Small and Medium-sized company and a Micro, Small and Medium-sized entity, as defined in Appendix 1 to this Compendium, may not apply the presentation requirements laid down in paragraphs 117 to 118 of the Standard in respect of accounting for defined benefit plans.

Disclosure

119 An enterprise should disclose information that enables users of financial statements to evaluate the nature of its defined benefit plans and the financial effects of changes in those plans during the period.

120 An enterprise should disclose the following information about defined benefit plans:

(a)

the enterprise’s accounting policy for recognising actuarial gains and losses.

(b)

a general description of the type of plan.

(c)

a reconciliation of opening and closing balances of the present value of the defined benefit obligation showing separately, if applicable, the effects during the period attributable to each of the following:

(i)

current service cost,

(ii)

interest cost,

(iii)

contributions by plan participants,

(iv)

actuarial gains and losses,

(v)

foreign currency exchange rate changes on plans measured in a currency different from the enterprise’s reporting currency,

(vi)

benefits paid,

(vii)

past service cost,

(viii)

amalgamations,

(ix)

curtailments, and

(x)

settlements.

(d)

an analysis of the defined benefit obligation into amounts arising from plans that are wholly unfunded and amounts arising from plans that are wholly or partly funded.

(e)

a reconciliation of the opening and closing balances of the fair value of plan assets and of the opening and closing balances of any reimbursement right recognised as an asset in accordance with paragraph 103 showing separately, if applicable, the effects during the period attributable to each of the following:

(i)

expected return on plan assets,

(ii)

actuarial gains and losses,

(iii)

foreign currency exchange rate changes on plans measured in a currency different from the enterprise’s reporting currency,

(iv)

contributions by the employer,

(v)

contributions by plan participants,

(vi)

benefits paid,

(vii)

amalgamations, and

(viii)

settlements.

(f)

a reconciliation of the present value of the defined benefit obligation in (c) and the fair value of the plan assets in (e) to the assets and liabilities recognised in the balance sheet, showing at least:

(i)

the past service cost not yet recognised in the balance sheet (see paragraph 94 );

(ii)

any amount not recognised as an asset, because of the limit in paragraph 59(b) ;

(iii)

the fair value at the balance sheet date of any reimbursement right recognised as an asset in accordance with paragraph 103 (with a brief description of the link between the reimbursement right and the related obligation); and

(iv)

the other amounts recognised in the balance sheet.

(g)

the total expense recognised in the statement of profit and loss for each of the following, and the line item(s) of the statement of profit and loss in which they are included:

(i)

current service cost;

(ii)

interest cost;

(iii)

expected return on plan assets;

(iv)

expected return on any reimbursement right recognised as an asset in accordance with paragraph 103 ;

(v)

actuarial gains and losses ;

(vi)

past service cost ;

(vii)

the effect of any curtailment or settlement; and

(viii)

the effect of the limit in paragraph 59 (b), i.e., the extent to which the amount determined in accordance with paragraph 55 (if negative) exceeds the amount determined in accordance with paragraph 59 (b) .

(h)

for each major category of plan assets, which should include, but is not limited to, equity instruments, debt instruments, property, and all other assets, the percentage or amount that each major category constitutes of the fair value of the total plan assets.

(i)

the amounts included in the fair value of plan assets for:

(i)

each category of the enterprise’s own financial instruments; and

(ii)

any property occupied by, or other assets used by, the enterprise.

(j)

a narrative description of the basis used to determine the overall expected rate of return on assets, including the effect of the major categories of plan assets.

(k)

the actual return on plan assets, as well as the actual return on any reimbursement right recognised as an asset in accordance with paragraph 103 .

(l)

the principal actuarial assumptions used as at the balance sheet date, including, where applicable:

(i)

the discount rates;

(ii)

the expected rates of return on any plan assets for the periods presented in the financial statements;

(iii)

the expected rates of return for the periods presented in the financial statements on any reimbursement right recognised as an asset in accordance with paragraph 103;

(iv)

medical cost trend rates; and

(v)

any other material actuarial assumptions used.

An enterprise should disclose each actuarial assumption in absolute terms (for example, as an absolute percentage) and not just as a margin between different percentages or other variables.

Apart from the above actuarial assumptions, an enterprise should include an assertion under the actuarial assumptions to the effect that estimates of future salary increases, considered in actuarial valuation, take account of inflation, seniority, promotion and other relevant factors, such as supply and demand in the employment market.

(m)

the effect of an increase of one percentage point and the effect of a decrease of one percentage point in the assumed medical cost trend rates on:

(i)

the aggregate of the current service cost and interest cost components of net periodic post-employment medical costs; and

(ii)

the accumulated post-employment benefit obligation for medical costs.

For the purposes of this disclosure, all other assumptions should be held constant. For plans operating in a high inflation environment, the disclosure should be the effect of a percentage increase or decrease in the assumed medical cost trend rate of a significance similar to one percentage point in a low inflation environment.

(n)

the amounts for the current annual period and previous four annual periods of:

(i)

the present value of the defined benefit obligation, the fair value of the plan assets and the surplus or deficit in the plan; and

(ii)

the experience adjustments arising on:

(A)

the plan liabilities expressed either as (1) an amount or (2) a percentage of the plan liabilities at the balance sheet date, and

(B)

the plan assets expressed either as (1) an amount or (2) a percentage of the plan assets at the balance sheet date.

(o)

the employer’s best estimate, as soon as it can reasonably be determined, of contributions expected to be paid to the plan during the annual period beginning after the balance sheet date.

121 Paragraph 120(b) requires a general description of the type of plan. Such a description distinguishes, for example, flat salary pension plans from final salary pension plans and from post-employment medical plans. The description of the plan should include informal practices that give rise to other obligations included in the measurement of the defined benefit obligation in accordance with paragraph 53 . Further detail is not required.

122 When an enterprise has more than one defined benefit plan, disclosures may be made in total, separately for each plan, or in such groupings as are considered to be the most useful. It may be useful to distinguish groupings by criteria such as the following:

(a)

the geographical location of the plans, for example, by distinguishing domestic plans from foreign plans; or

(b)

whether plans are subject to materially different risks, for example, by distinguishing flat salary pension plans from final salary pension plans and from post-employment medical plans.

When an enterprise provides disclosures in total for a grouping of plans, such disclosures are provided in the form of weighted averages or of relatively narrow ranges.

123 Paragraph 30 requires additional disclosures about multi-employer defined benefit plans that are treated as if they were defined contribution plans.

124 Where required by AS 18, Related Party Disclosures , an enterprise discloses information about:

(a)

related party transactions with post-employment benefit plans; and

(b)

post-employment benefits for key management personnel.

125 Where required by AS 29, Provisions, Contingent Liabilities and Contingent Assets an enterprise discloses information about contingent liabilities arising from post-employment benefit obligations.

Illustrative Disclosures

126 Illustration II attached to the Standard contains illustrative disclosures.

Proviso

Provided that a Small and Medium-sized Company, as defined in Appendix 1 to this Compendium, may not apply the disclosure requirements laid down in paragraphs 119 to 123 of the Standard in respect of accounting for defined benefit plans. However, such company should disclose actuarial assumptions as per paragraph 120(l) of the Standard.

Proviso

Provided further that a Micro, Small and Medium-sized non-company entity, as defined in Appendix 1 to this Compendium, may not apply the disclosure requirements laid down in paragraphs 119 to 123 of the Standard in respect of accounting for defined benefit plans.

Other Long-term Employee Benefits

127 Other long-term employee benefits include, for example:

(a)

long-term compensated absences such as long-service or sabbatical leave;

(b)

jubilee or other long-service benefits;

(c)

long-term disability benefits;

(d)

profit-sharing and bonuses payable twelve months or more after the end of the period in which the employees render the related service; and

(e)

deferred compensation paid twelve months or more after the end of the period in which it is earned.

128 In case of other long-term employee benefits, the introduction of, or changes to, other long-term employee benefits rarely causes a material amount of past service cost. For this reason, this Standard requires a simplified method of accounting for other long-term employee benefits. This method differs from the accounting required for post-employment benefits insofar as that all past service cost is recognised immediately.

Recognition and Measurement

129 The amount recognised as a liability for other long-term employee benefits should be the net total of the following amounts:

(a)

the present value of the defined benefit obligation at the balance sheet date (see paragraph 65);

(b)

minus the fair value at the balance sheet date of plan assets (if any) out of which the obligations are to be settled directly (see paragraphs 100 - 102 ).

In measuring the liability, an enterprise should apply paragraphs 49 - 91 , excluding paragraphs 55 and 61 . An enterprise should apply paragraph 103 in recognising and measuring any reimbursement right.

130 For other long-term employee benefits, an enterprise should recognise the net total of the following amounts as expense or (subject to paragraph 59) income, except to the extent that another Accounting Standard requires or permits their inclusion in the cost of an asset:

(a)

current service cost (see paragraphs 64 - 91 );

(b)

interest cost (see paragraph 82 );

(c)

the expected return on any plan assets (see paragraphs 107 - 109 ) and on any reimbursement right recognised as an asset (see paragraph 103 );

(d)

actuarial gains and losses, which should all be recognised immediately;

(e)

past service cost, which should all be recognised immediately; and

(f)

the effect of any curtailments or settlements (see paragraphs 110 and 111 ).

131 One form of other long-term employee benefit is long-term disability benefit. If the level of benefit depends on the length of service, an obligation arises when the service is rendered. Measurement of that obligation reflects the probability that payment will be required and the length of time for which payment is expected to be made. If the level of benefit is the same for any disabled employee regardless of years of service, the expected cost of those benefits is recognised when an event occurs that causes a long-term disability.

Proviso

Provided that a Small and Medium-sized Company, as defined in Appendix I to this Compendium, may not apply the recognition and measurement principles laid down in paragraphs 129 to 131 in respect of accounting for other long-term employee benefits. However, such a company should actuarially determine and provide for the accrued liability in respect of other long-term employee benefits as follows:

The method used for actuarial valuation should be the Projected Unit Credit Method; and

The discount rate used should be determined by reference to market yields at the balance sheet date on government bonds as per paragraph 78 of the Standard.

Proviso

Provided further that a Micro, Small and Medium-sized non-company entity, as defined in Appendix I to this Compendium, whose average number of persons employed during the year is less than 50 and Micro Enterprises (Level IV Non-company entities) may not apply the recognition and measurement principles as laid down in paragraphs 129 to 131 in respect of accounting for other long-term employee benefits. However, such an entity may calculate and account for the accrued liability under the other long-term employee benefits by reference to some other rational method, e.g., a method based on the assumption that such benefits are payable to all employees at the end of the accounting year.

Disclosure

132 Although this Standard does not require specific disclosures about other long-term employee benefits, other Accounting Standards may require disclosures, for example, where the expense resulting from such benefits is of such size, nature or incidence that its disclosure is relevant to explain the performance of the enterprise for the period (see AS 5, Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies ). Where required by AS 18 Related Party Disclosures an enterprise discloses information about other long- term employee benefits for key management personnel.

(a)

the enterprise has a present obligation as a result of a past event;

(b)

it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and

(c)

a reliable estimate can be made of the amount of the obligation.

135 An enterprise may be committed, by legislation, by contractual or other agreements with employees or their representatives or by an obligation based on business practice, custom or a desire to act equitably, to make payments (or provide other benefits) to employees when it terminates their employment. Such payments are termination benefits. Termination benefits are typically lump-sum payments, but sometimes also include:

(a)

enhancement of retirement benefits or of other post-employment benefits, either indirectly through an employee benefit plan or directly; and

(b)

salary until the end of a specified notice period if the employee renders no further service that provides economic benefits to the enterprise.

136 Some employee benefits are payable regardless of the reason for the employee’s departure. The payment of such benefits is certain (subject to any vesting or minimum service requirements) but the timing of their payment is uncertain. Although such benefits may be described as termination indemnities, or termination gratuities, they are post-employment benefits, rather than termination benefits and an enterprise accounts for them as post- employment benefits. Some enterprises provide a lower level of benefit for voluntary termination at the request of the employee (in substance, a post- employment benefit) than for involuntary termination at the request of the enterprise. The additional benefit payable on involuntary termination is a termination benefit.

137 Termination benefits are recognised as an expense immediately.

138 Where an enterprise recognises termination benefits, the enterprise may also have to account for a curtailment of retirement benefits or other employee benefits (see paragraph 110 ).

Measurement

139. Where termination benefits fall due more than 12 months after the balance sheet date, they should be discounted using the discount rate specified in paragraph 78.

Proviso

Provided that a Small and Medium-sized Company and a Micro, Small and Medium-sized non-company entity, as defined in Appendix I to this Compendium, may not discount amounts that fall due more than 12 months after the balance sheet date.

Disclosure

140 Where there is uncertainty about the number of employees who will accept an offer of termination benefits, a contingent liability exists. As required by AS 29, Provisions, Contingent Liabilities and Contingent Assets an enterprise discloses information about the contingent liability unless the possibility of an outflow in settlement is remote.

141 As required by AS 5, Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies an enterprise discloses the nature and amount of an expense if it is of such size, nature or incidence that its disclosure is relevant to explain the performance of the enterprise for the period. Termination benefits may result in an expense needing disclosure in order to comply with this requirement.

(a)

the present value of the obligation (see paragraph 65 ) at the date of adoption;

(b)

minus the fair value, at the date of adoption, of plan assets (if any) out of which the obligations are to be settled directly (see paragraphs 100 - 102 );

(c)

minus any past service cost that, under paragraph 94 , should be recognised in later periods.

145 If the transitional liability is more than the liability that would have been recognised at the same date as per the pre-revised AS 15, the enterprise should make an irrevocable choice to recognise that increase as part of its defined benefit liability under paragraph 55:

(a)

immediately as an adjustment against the opening balance of revenue reserves and surplus (as adjusted by any related tax expense), or

(b)

as an expense on a straight-line basis over up to five years from the date of adoption.

If an enterprise chooses (b), the enterprise should:

(i)

apply the limit described in paragraph 59(b) in measuring any asset recognised in the balance sheet;

(ii)

disclose at each balance sheet date (1) the amount of the increase that remains unrecognised; and (2) the amount recognised in the current period;

(iii)

limit the recognition of subsequent actuarial gains (but not negative past service cost) only to the extent that the net cumulative unrecognised actuarial gains (before recognition of that actuarial gain) exceed the unrecognised part of the transitional liability; and

(iv)

include the related part of the unrecognised transitional liability in determining any subsequent gain or loss on settlement or curtailment.

If the transitional liability is less than the liability that would have been recognised at the same date as per the pre-revised AS 15, the enterprise should recognise that decrease immediately as an adjustment against the opening balance of revenue reserves and surplus.

Example Illustrating Paragraphs 144 and 145

At 31st March 20X7, an enterprise's balance sheet includes a pension liability of Rs. 100, recognised as per the pre-revised AS 15 issued by the ICAI in 1995. The enterprise adopts the Standard as of 1 st April 20X7, when the present value of the obligation under the Standard is Rs. 1,300 and the fair value of plan assets is Rs. 1,000. On 1 st April 20X1, the enterprise had improved pensions (cost for non-vested benefits: Rs. 160; and average remaining period at that date until vesting: 10 years).

(Amount in Rs.)

The transitional effect is as follows:

Present value of the obligation

1,300

Fair value of plan assets

(1,000)

Less: past service cost to be rinecognised later periods (160 x 4/10)

(64)

Transitional liability

236

Liability already recognised

100

Increase in liability

136

An enterprise may choose to recognise the increase in liability (as adjusted by any related tax expense) either immediately as an adjustment against the opening balance of revenue reserves and surplus as on 1 April 20X7 or as an expense on straight line basis over up to five years from that date. The choice is irrevocable.

At 31 March 20X8, the present value of the obligation under the Standard is Rs. 1,400 and the fair value of plan assets is Rs. 1,050. Net cumulative unrecognised actuarial gains since the date of adopting the Standard are Rs. 120. The enterprise is required, as per paragraph 92, to recognise all actuarial gains and losses immediately.

(Amount in Rs.)

The effect of the limit in paragraph 145 (b) (iii) is as follows:

Net unrecognised actuarial gain

120

Unrecognised part of the transitional liability (136 x 4/5)

(If the enterprise adopts the policy of recognising it over 5 years)

109

Maximum gain to be recognised

Termination Benefits

146. This Standard requires immediate expensing of expenditure on termination benefits (including expenditure incurred on voluntary retirement scheme (VRS)). However, where an enterprise incurs expenditure on termination benefits on or before 31 st March, 2009, the enterprise may choose to follow the accounting policy of deferring such expenditure for amortisation over its pay- back period. However, the expenditure so deferred cannot be carried forward to accounting periods commencing on or after 1 st April, 2010.

Illustration I

Illustration

This illustration is illustrative only and does not form part of the Standard. The purpose of this illustration is to illustrate the application of the Standard to assist in clarifying its meaning. Extracts from statements of profit and loss and balance sheets are provided to show the effects of the transactions described below. These extracts do not necessarily conform with all the disclosure and presentation requirements of other Accounting Standards.

Background Information

The following information is given about a funded defined benefit plan. To keep interest computations simple, all transactions are assumed to occur at the year end. The present value of the obligation and the fair value of the plan assets were both Rs. 1,000 at 1 April, 20X4.

(Amount in Rs.)

20X4-X5

20X5-X6

20X6-X7

Discount rate at start of year

Expected rate of return on plan

10.0%

9.0%

8.0%

assets at start of year

12.0%

11.1%

10.3%

Current service cost

130

140

150

Benefits paid

150

180

190

Contributions paid

100

110

Present value of obligation at 31 March

1,141

1,197

1,295

Fair value of plan assets at 31 March

1,092

1,109

1,093

Expected average remaining working lives of employees (years

In 20X5-X6, the plan was amended to provide additional benefits with effect from 1 April 20X5. The present value as at 1 April 20X5 of additional benefits for employee service before 1 April 20X5 was Rs. 50 for vested benefits and Rs. 30 for non-vested benefits. As at 1 April 20X5, the enterprise estimated that the average period until the non-vested benefits would become vested was three years; the past service cost arising from additional non-vested benefits is therefore recognised on a straight-line basis over three years. The past service cost arising from additional vested benefits is recognised immediately (paragraph 94 of the Standard).

Changes in the Present Value of the Obligation and in the Fair Value of the Plan Assets

The first step is to summarise the changes in the present value of the obligation and in the fair value of the plan assets and use this to determine the amount of the actuarial gains or losses for the period. These are as follows:

(Amount in Rs.)

20X4-X5

20X5-X6

20X6-X7

Present value of obligation, 1 April

1,000

1,141

1,197

Interest cost

100

103

Current service cost

130

140

150

Past service cost - (non vested benefits

Past service cost - (vested benefits)

Benefits paid