AS 15 - Accounting for Retirement Benefits in the Financial Statements of Employers

Purpose: This statement deals with accounting for retirement benefits in the financial statements of employers.

Retirement benefits usually consist of:

  1. Provident Fund
  2. Superannuation / Pension
  3. Gratuity
  4. Leave Encashment Benefit on Retirement
  5. Post-Retirement Health & Welfare Schemes
  6. Other Retirement Benefits

However, it is to be noted that this statement does not apply to those retirement benefits, which cannot be reasonably be estimated, e.g. ad hoc ex-gratia amounts paid to employees on retirement.

Types of Retirement Benefits

Provident Fund Benefits: Are generally contributory from the point of view of the employees. However, gratuity schemes are non-contributory. Further, superannuation schemes can be either contributory or non-contributory

Funding: The main objective of funding a retirement benefit scheme is to ensure that funds are available to meet future obligations for the payment of retirement benefits. Further, in determining the periodical amounts to be paid into the funds, the employer is influenced by factors such as availability of money and tax benefits

Accounting Treatment

  1. Defined Contribution Scheme
    Defined benefit schemes, especially where benefits are payable on the basis of remuneration at or near retirement, present significant complications in determination of the periodic amounts to be charged to the profit and loss account because of the length of the period over which the benefits are earned. The employer's obligation under such schemes is generally uncertain and requires assumptions regarding future conditions and events which are largely out of the employer's control.
    Further, due to long-term uncertainties, estimates of earlier years may need to be adjusted, thereby leading to significant adjustments in relation to current service cost
    Since the cost of retirement benefits to an employer arises on receiving services from the employees who are entitled to receive such benefits, the cost of retirement benefits should be accounted for in the period during which these services are rendered. Thus, accounting for retirement benefit cost when the employee leaves, i.e. on cash basis, is not appropriate
  2. Gratuity & Other Deferred Benefit Schemes
    The accounting treatment depends upon the type and arrangement the employer has chosen to make:

Provident Fund and Other Defined Contribution Schemes: The contribution payable by the employee for the period is charged to the statement of profit and loss account for the year. Besides the amount of contribution paid, any shortfall of the amount of the contribution paid compared with the amount payable for that year is also charged to the profit and loss account of the year. On the other hand, if the contribution paid is in excess of the amount payable for the year, then the excess is treated as a pre-payment

Actuarial Principles: The actuarial method selected for determining accrual of liability and the assumptions made have a significant effect on the expense to be recorded in each accounting period. Therefore, an actuary chooses a suitable valuation method in consultation with the employer, makes appropriate assumptions about the variable elements affecting the computations. The assumption could relate to the expected inflow from future contributions and from investments, the uncertainty in projecting future trends of salary, rates of inflation etc.

Past Service Cost and Review of Actuarial Assumptions

  1. An actuarially determined past service cost arises on:
  2. There can also be a change in the retirement benefit cost on account of changes in the actuarial methods used or assumptions adopted for determining the retirement benefit costs. In such case the change in the amount shall be charged or credited to the profit and loss statement for the year or, alternatively, spread over a period not more than the expected remaining working lives of the participating employees
  3. Further, a change in the actuarial method used for determining the retirement benefit costs constitutes a change in an accounting policy and is disclosed accordingly
  4. It is also to be noted that if a retirement benefit scheme for retired employees is amended (whether due to inflation or for other reasons) to provide additional benefits to retired employees, any additional costs incurred are charged to the profit and loss account of the year

Disclosures

  1. The financial statement should disclose the method by which retirement benefits cost has been determined
  2. In case acturial valuation has been carried out it should be clearly mentioned as to whether it was carried out at the end of the year or in earlier periods
  3. In case actuarial valuation is not at the end of the period but at an earlier date, such date should be specified and the method by which the accrual for the period has been determined should be described, if the same is not based on the report of the acturary

Full Text of AS 15 - Accounting for Retirement Benefits in the Financial Statements of Employers
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