CA Inter – Advanced Accounting AS 15

AS 15 – EMPLOYEE BENEFITS
Illustration 1
What are the kinds of employees covered in the revised AS 15 and whether a formal employer employee
relationship is necessary or not, for benefits to be covered under the Standard?
Solution
The Standard does not define the term “employee”. Paragraph 6 of the Standard states that ‘an employee
may provide services to an enterprise on a full time, part time, permanent, casual or temporary basis and
the term would also include the whole-time directors and other management personnel. The Standard is
applicable to all forms of employer employee relationships. There is no requirement for a formal employer
employee relationship. Several factors need to be considered to determine the nature of relationship.
Generally, ‘outsourcing contracts’ may not meet the definition of employer -employee relationship.
However, such contracts need to be carefully examined to distinguish between a “contract of service” and a
“contract for services”. A ‘contract for services’ implies a contract for rendering services, e.g., professional
or technical services which is subject to limited direction and control whereas a ‘contract of service’ implies
a relationship of an employer and employee, and the person is obliged to obey orders in the work to be
performed and as to its mode and manner of performance.

Illustration 2
Whether an enterprise is required to provide for employee benefits arising from informal practices?
Solution
Paragraph 3(c) of the Standard defines employee benefits to include those informal practices that give rise
to an obligation where the enterprise has no realistic alternative but to pay employee benefits. The
historical pattern of granting such benefits, the expectation created and the impact on the relationship with
employees in the event such benefit is withdrawn should be considered in determining whether the informal
practice gives rise to a benefit covered by the Standard. For example, where an employer has a practice of
making a lumpsum payment on occasion of a festival or regularly grants advances against informal benefits
to employees it would be necessary to provide for such benefits.
Careful judgement should be applied in assessing whether an obligation has arisen particularly in instances
where an enterprise's practice is to provide improvements only during the collective bargaining process and
not during any informal process. If the employer has not set a pattern of benefits that can be projected
reliably to give rise to an obligation there is no requirement to provide for the benefits.
However, if the practice established by an employer was that of a consistent benefit granted either as part
of union negotiations or otherwise that clearly established a pattern (e.g., a cost of living adjustment or fixed
rupee increase), it could be concluded that an obligation exists and that those additional benefits should be
included in the measurement of the benefit obligation.
Employee benefits include:
a) Short-term employee benefits (e.g., wages, salaries, paid annual leave and sick leave, profit sharing
bonuses etc. (payable within 12 months of the year-end) and non-monetary benefits for current
employees.
b) Post-employment benefits (e.g., gratuity, pension, provident fund, postemployment medical care etc.).
c) long-term employee benefits (e.g., long-service leave, long-term disability benefits, bonuses not wholly
payable within 12 months of the year end etc.), and
d) termination benefits (e.g. VRS payments)

The Standard lays down recognition and measurement criteria and disclosure requirements for the above
four types of employee benefits separately.
Illustration 3

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CA Inter – Advanced Accounting AS 15
Entity XY is required to pay salary of ₹ 2 crore for the year 20X1-X2. It actually paid a salary of ₹ 1.90 crore
up to 31st March 20X2, and balance in April 20X2.
Determine the actual costs to be recognized in the year 20X1-X2 and any amounts to be shown through
balance sheet.
Solution
Total expense for the year (20X1-X2) ₹ 2 crore
Amount to be shown under liability (unpaid) ₹ 2 crore – 1.90 ₹crore
= ₹ 10 lakhs

Illustration 4
Whether an entitlement to earned leave which can be carried forward to future periods is a short -term
employee benefit or a long-term employee benefit.
Solution
Paragraph 7.2 of the Standard defines ‘Short-term’ benefits as employee benefits (other than termination
benefits) which fall due wholly within twelve months after the end of the period in which the employees
render the related service.
Paragraph 8(b) of the Standard illustrates the term ‘Short -term benefits’ to include “short term
compensated absences (such as paid annual leave) where the absences are expected to occur within
twelve months after the end of the period in which the employees render the related employee service”.
Paragraph 7.2 of the Standard uses “falls due” as the basis, paragraph 8(b) of the Standard uses “expected
to occur” as the basis to illustrate classification of short term compensated absences. A reading of
paragraph 8(b) together with paragraph 7.2 would imply that the classification of short -term compensated
absences should be only when absences have “fallen due” and are also “expected to occur”. In other
words, where employees are entitled to earned leave which can be carried forward to future periods, the
benefit would be a ‘short-term benefit’ provided the employee is entitled to either encash or utilise the
benefit during the twelve months after the end of the period when the employee became entitled to the
leave and is also expected to utilise the leave.
Where there are restrictions on encashment and/or availment, clearly the compensated absence has not
fallen due and the benefit of compensated absences is more likely to be a long-term benefit. For example,
where an employee has 100 days of earned leave which he is entitled to an unlimited carry forward, but the
rules of the enterprise allow him to encash/utilise only 30 days during the next twelve months, the benefit
would be considered as a ‘long-term’ benefit. In some situations, where there is no restriction but the
absence is not expected to wholly occur in the next twelve months, the benefit should be considered as
‘long-term’. For example, where an employee has 400 days carry forward earned leave and the past
pattern indicates that the employees are unlikely to avail / encash the entire carry forward during the next
twelve months, the benefit would not be ‘short-term’.
Whilst it is necessary to consider the earned leave which “falls due”, the pattern of actual
utilisation/encashment by employees, although reflective of the behavioural pattern of employees, does
determine the status of the benefit, i.e., whether ‘short-term’ or ‘long-term’. The value of short-term benefits
should be determined without discounting and if the benefit is determined as long-term, it would be
recognised and measured as “Other long-term benefits” in accordance with paragraph 129 of the Standard.
The categorisation in ‘short-term’ or ‘long-term’ employee benefits should be done on the basis of the
overall behavioural pattern of all the employees of the enterprise and not on individual basis.

Illustration 5
In case an enterprise allows unutilised employee benefits, e.g., medical care, leave travel, etc., to be
carried forward, whether it is required to recognise a provision in respect of carried forward benefits.
Solution
A provision should be recognised for all benefits (conditional or unconditional) which an employee becomes
entitledto as a result of rendering of the service and should be recorded as part of the cost of service
rendered during the period in which the service was rendered which resulted the entitlement. In estimating
the cost of such benefit the probability of the employee availing such benefit should be considered.

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Illustration 6 (RTP May’24)

Neerav Ltd., is in engineering industry. The company received an actuarial valuation for the first time for its
pension scheme which revealed a surplus of ₹ 6 lakhs. It wants to spread the same over the next 2 years
by reducing the annual contribution to ₹ 2 lakhs instead of ₹ 5 lakhs; The average remaining life of the
employee is estimated to be 6 years. You are required to advise the company in accordance with AS 15.
Solution:
According to para 92 of AS 15 (Revised) “Employee Benefits”, actuarial gains and losses should be
recognized immediately in the statement of profit and loss as income or expense. Therefore, surplus of ₹ 6
lakhs in the pension scheme on its actuarial valuation is required to be credited to the profit and loss
statement of the current year. Hence, Neerav Ltd. cannot spread the actuarial gain of ₹ 6 lakhs over the
next 2 years by reducing the annual contributions to ₹ 2 lakhs instead of ₹ 5 lakhs. It has to contribute ₹ 5
lakhs annually for its pension schemes.

Illustration 7
As on 1st April, 20X1 the fair value of plan assets was ₹ 1,00,000 in respect of a pension plan of Zeleous
Ltd. On 30th September, 20X1 the plan paid out benefits of ₹ 19,000 and received inward contributions of ₹
49,000. On 31st March, 20X2 the fair value of plan assets was₹ 1,50,000 and present value of the defined
benefit obligation was ₹ 1,47,920. Actuarial losses on the obligations for the year 20X1- 20X2 were ₹ 600.
On 1st April, 20X1, the company made the following estimates, based on its market studies, understanding
and prevailing prices.
%
Interest & dividend income, after tax payable by the fund 9.25
Realised and unrealised gains on plan assets (after tax) 2.00
Fund administrative costs (1.00)
Expected Rate of Return 10.25
You are required to find the expected and actual returns on plan assets.
Solution
Computation of Expected and Actual Returns on Plan Assets
₹
Return on ₹ 1,00,000 held for 12 months at 10.25% 10,250
Return on ₹ 30,000 (49,000-19,000) held for six months at 5% (equivalent to 10.25% 1,500
annually, compounded every six months)
Expected return on plan assets for 20X1-20X2 11,750
Fair value of plan assets as on 31 March, 20X2 1,50,000
Less: Fair value of plan assets as on 1 April,20X1 1,00,000
Contributions received 49,000 (1,49,000)
1,000
Add: Benefits paid 19,000
Actual return on plan assets 20,000
Alternatively, the above question may be solved without giving compound effect to rate of return.

Illustration 8
Rock Star Ltd. discontinues a business segment. Under the agreement with employee’s union, the
employees of the discontinued segment will earn no further benefit. This is a curtailment without settlement,

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because employees will continue to receive benefits for services rendered before discontinuance of the
business segment. Curtailment reduces the gross obligation for various reasons including change in
actuarial assumptions made before curtailment. If the benefits are determined based on the last pay drawn
by employees, the gross obligation reduces after the curtailment because the last pay earlier assumed is
no longer valid.
Rock Star Ltd. estimates the share of unamortized service cost that relates to the part of the obligation at ₹
18 (10% of ₹ 180). Calculate the gain from curtailment and liability after curtailment to be recognised in the
balance sheet of Rock Star Ltd. on the basis of given information:
a) Immediately before the curtailment, gross obligation is estimated at ₹ 6,000 based on current actuarial
assumption.
b) The fair value of plan assets on the date is estimated at ₹ 5,100.
c) The unamortized past service cost is ₹ 180.
d) Curtailment reduces the obligation by ₹ 600, which is 10% of the gross obligation.
Solution
Gain from curtailment is estimated as under:
₹
Reduction in gross obligation 600
Less: Proportion of unamortised past service cost (18)
Gain from curtailment 582
The liability to be recognised after curtailment in the balance sheet is estimated as under:
₹
Reduced gross obligation (90% of ₹ 6,000) 5,400
Less: Fair value of plan assets (5,100)
300
Less: Unamortised past service cost (90% of ₹ 180) (162)
Liability to be recognised in the balance sheet 138

Illustration 9
An employee Roshan has joined a company XYZ Ltd. in the year 20X1. The annual emoluments of Roshan
as decided is ₹ 14,90,210. The company also has a policy of giving a lump sum payment of 25% of the last
drawn annual salary of the employee for each completed year of service if the employee retires after
completing minimum 5 years of service. The salary of the Roshan is expected to grow @ 10% per annum.
The company has inducted Roshan in the beginning of the year and it is expected that he will complete the
minimum five year term before retiring. Thus he will get 5 yearly increment.
What is the amount the company should charge in its Profit and Loss account every year as cost for the
Defined Benefit obligation? Also calculate the current service cost and the interest cost to be charged per
year assuming a discount rate of 8%.
(P.V factor for 8% - 0.735, 0.794, 0.857, 0.926, 1)
Solution
Calculation of Defined Benefit Obligation (DBO)
Expected last drawn salary = ₹ 14,90,210 x 110% x 110% x 110% x 110% x 110%
= ₹ 24,00,000
Defined Benefit Obligation (DBO) = ₹ 24,00,000 x 25% x 5 = ₹ 30,00,000
Amount of ₹ 6,00,000 will be charged to Profit and Loss Account of the company every year as cost for
Defined Benefit Obligation.

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Calculation of Current Service Cost
Year Equal apportioned amount Discounting @ 8% PV factor Current service cost
of DBO [i.e. ₹ 30,00,000/5 (Present Value)
years]
a b c d=bxc
1 6,00,000 .735 (4 Years) 4,41,000
2 6,00,000 0.794 (3 Years) 4,76,400
3 6,00,000 0.857 (2 Years) 5,14,200
4 6,00,000 0.926 (1 Year) 5,55,600
5 6,00,000 1 (0 Year) 6,00,000
Calculation of Interest Cost to be charged per year
Year Opening balance Interest cost Current service Closing balance
cost
a b c = b x 8% d e=b+c+d
1 0 0 4,41,000 4,41,000
2 4,41,000 35,280 4,76,400 9,52,680
3 9,52,680 76,214 5,14,200 15,43,094
4 15,43,094 1,23,447 5,55,600 22,22,141
5 22,22,141 1,77,859* 6,00,000 30,00,000
*Due to approximations used in calculation, this figure is adjusted accordingly.

Illustration 10
What are the types of Employees benefits and what is the objective of Introduction of this Standard i.e. AS
15?
Solution:
There are four types of employee benefits according to AS 15 (Revised 2005). They are:
a) short-term employee benefits, such as wages, salaries and social security contributions (e.g.,
contribution to an insurance company by an employer to pay for medical care of its employees), paid
annual leave, profit-sharing and bonuses (if payable within twelve months of the end of the period) and
non-monetary benefits (such as medical care, housing, cars and free or subsidised goods or services)
for current employees;
b) post-employment benefits such as gratuity, pension, other retirement benefits, post-employment life
insurance and post-employment medical care;
c) other long-term employee benefits, including long-service leave or sabbatical leave, jubilee or other
long-service benefits, long-term disability benefits and, if they are not payable wholly within twelve
months after the end of the period, profit-sharing, bonuses and deferred compensation; and
d) termination benefits.
Because each category identified in (a) to (d) above has different characteristics, this Statement
establishes separate requirements for each category.
The objective of AS 15 is to prescribe the accounting and disclosure for employee benefits. The statement
requires an enterprise to recognise:
a) a liability when an employee has provided service in exchange for employee benefits to be paid in the
future; and
b) an expense when the enterprise consumes the economic benefit arising from service provided by an
employee in exchange for employee benefits.

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Illustration 11
A company has a scheme for payment of settlement allowance to retiring employees. Under the scheme,
retiring employees are entitled to reimbursement of certain travel expenses for class they are entitled to as
per company rule and to a lump-sum payment to cover expenses on food and stay during the travel.
Alternatively, employees can claim a lump sum amount equal to one month pay last drawn.
The company’s contentions in this matter are:
(i) Settlement allowance does not depend upon the length of service of employee. It is restricted to
employee’s eligibility under the Travel rule of the company or where option for lump-sum payment is
exercised, equal to the last pay drawn.
(ii) Since it is not related to the length of service of the employees, it is accounted for on claim basis.
State whether the contentions of the company are correct as per relevant Accounting Standard. Give
reasons in support of your answer.
Solution:
The present case falls under the category of defined benefit scheme under Para 49 of AS 15 (Revised)
“Employee Benefits”. The said para encompasses cases where payment promised to be made to an
employee at or near retirement presents significant difficulties in the determination of periodic charge to the
statement of profit and loss. The contention of the Company that the settlement allowance will be
accounted for on claim basis is not correct even if company’s obligation under the scheme is uncertain and
requires estimation. In estimating the obligation, assumptions may need to be made regarding future
conditions and events, which are largely outside the company’s control. Thus,
1. Settlement allowance payable by the company is a defined retirement benefit, covered by AS 15
(Revised).
2. A provision should be made every year in the accounts for the accruing liability on account of settlement
allowance. The amount of provision should be calculated according to actuarial valuation.
3. Where, however, the amount of provision so determined is not material, the company can follow some
other method of accounting for settlement allowances.

Illustration 12
The following data apply to ‘X’ Ltd. defined benefit pension plan for the year ended 31.03.20X2 calculate
the actual return on plan assets:
- Benefits paid 2,00,000
- Employer contribution 2,80,000
- Fair market value of plan assets on 31.03.20X2 11,40,000
- Fair market value of plan assets as on 31.03.20X1 8,00,000
Solution:
₹
Fair value of plan assets on 31.3.20X1 8,00,000
Add: Employer contribution 2,80,000
Less: Benefits paid (2,00,000)
(A) 8,80,000
Fair market value of plan assets at 31.3.20X2 (B) 11,40,000
Actual return on plan assets (B-A) 2,60,000

Illustration 13

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CA Inter – Advanced Accounting AS 15
The fair value of plan assets of Anupam Ltd. was ₹ 2,00,000 in respect of employee benefit pension plan as
on 1st April, 20X1. On 30th September, 20X1 the plan paid out benefits of ₹ 25,000 and received inward
contributions of ₹ 55,000. On 31st March, 20X2 the fair value of plan assets was ₹ 3,00,000.
On 1st April, 20X1 the company made the following estimates, based on its market studies and prevailing
prices.
%
Interest and dividend income (after tax) payable by fund 10.25
Realized gains on plan assets (after tax) 3.00
Fund administrative costs (3.00)
Expected rate of return 10.25
Calculate the expected and actual returns on plan assets as on 31st March, 20X2, as per AS 15.
Solution:
Computation of Expected Returns on Plan Assets as on 31st March, 20X2, as per AS 15
₹
Return on opening value of plan assets of ₹ 2,00,000 (held for the year) @ 10.25% 20,500
Add: Return on net gain of ₹ 30,000 (i.e. ₹ 55,000 – ₹ 25,000) during the year i.e. held 1,500
for six months @ 5% (equivalent to 10.25% annually, compounded every six months)
Expected return on plan assets as on 31st March, 20X2 22,000
Computation of Actual Returns on Plan Assets as on 31st March, 20X2, as per AS 15
₹ ₹
Fair value of Plan Assets as on 31st March, 20X2 3,00,000
Less: Fair value of Plan Assets as on 1st April, 20X1 (2,00,000)
Add: Contribution received as on 30th September, 20X1 55,000 (2,55,000)
45,000
Add: Benefits paid as on 30th September, 20X1 25,000
Actual returns on Plan Assets as on 31st March, 20X2 70,000

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CA Inter – Advanced Accounting AS 15

MTP / RTP / Past Exam

Question 1 (RTP Nov 20)
Luv limited is a private Limited company. As per HR policy of Luv Limited, Grade F employees are
eligible for sabbatical leave (Long term compensated absences as per AS 15). Till previous year,
there were 15 employees who are eligible for Sabbatical leave and company had duly recorded the liability
for long term compensated absences based on the actuarial valuation for eligible employees.
During the current period out of total 15 employees, 13 employees have left the organization
and only 2 employees are continuing in LUV Limited. Due to budget constraint, CFO has denied to involve
actuary and told finance manager to determine the liability based on the recent actuarial report
available with them. Finance manager ensured the following:

 There is no material change in interest rate

 There is no change in fair value of plan assets.

Based on that, Finance manager have manually computed an amount of Rs. 5,00,000 (considering last
year actuarial report as base) towards long term compensation liability without involving Actuary
during the period ended 31.03.2020. Is this treatment is in line with AS 15?
Solution:
As per para 58 of the AS 15, the detailed actuarial valuation of the present value of defined benefit
obligations may be made at intervals not exceeding three years. However, with a view that the amounts
recognized in the financial statements do not differ materially from the amounts that would be
determined at the balance sheet date, the most recent valuation is reviewed at the balance sheet date and
updated to reflect any material transactions and other material changes in circumstances (including
changes in interest rates) between the date of valuation and the balance sheet date. The fair value of any
plan assets is determined at each balance sheet.
Since AS-15 (Para 58) states that actuarial valuation needs to be done at least once in three years. Since
management had done the actuarial valuation in Previous Year, they can go ahead with exemption for this
year subject to evaluation and conclusion by management as at balance sheet date that there are no
significant changes in the amount of liability compared to previous year. Hence working done by the
finance manager is appropriate. It is in line with AS 15, since company had recently done the actuaria l
valuation in previous year and there is no material changes in the external environment.

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CA Inter – Advanced Accounting AS 15
TEST YOUR KNOWLEDGE
MCQs
1. Gratuity and Pension would be examples of:
(a) Short-term employee benefits
(b) Long-term employee benefits
(c) Post-employment benefits.
(d) None of the above.

2. Non-accumulating compensating absence is commonly referred to as:

(a) Earned Leave
(b) Sick Leave
(c) Casual leave
(d) All of the above

3. The plans that are established by legislation to cover all enterprises and are operated by Governments
include:
(a) Multi-Employer plans
(b) State plans
(c) Insured Benefits
(d) Employee benefit plan

4. Best estimates of the variable to determine the eventual cost of postemployment benefits is referred to
as:
(a) Employer’s contribution
(b) Actuarial assumptions
(c) Cost to Company
(d) Employee’s contribution

5. Actuarial gains / losses should be:

(a) Recognised through reserves
(b) Charged over the expected life of employees
(c) Charged immediately to Profit and Loss Statement
(d) Do not charged to Profit and Loss Statement

Answers - MCQs
1. (c) 2. (c) 3. (b) 4. (b) 5. (c)

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