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Accounting Standard (AS) 15

Employee Benefits

Objective

The objective of this Standard is to prescribe the accounting and disclosure for employee benefits. The Standard

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.

Scope

1. This Standard should be applied by an employer in accounting for all employee benefits, except employee

share-based payments17.

2. This Standard does not deal with accounting and reporting by employee benefit plans.

3. The employee benefits to which this Standard applies include those provided:

(a) under formal plans or other formal agreements between an enterprise and individual employees, groups of

employees or their representatives;

(b) under legislative requirements, or through industry arrangements, whereby enterprises are required to

contribute to state, industry or other multi-employer plans; or

where the enterprise has no realistic alternative but to pay employee benefits. An example of such an

obligation is where a change in the enterprise’s informal practices would cause unacceptable damage to its

relationship with employees.

4. Employee benefits include:

(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, profitsharing

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;

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 Standard establishes separate

requirements for each category.

5. Employee benefits include benefits provided to either employees or their spouses, children or other dependants

and may be settled by payments (or the provision of goods or services) made either:

(a) directly to the employees, to their spouses, children or other dependants, or to their legal heirs or

nominees; or

(b) to others, such as trusts, insurance companies.

6. An employee may provide services to an enterprise on a full-time, part-time, permanent, casual or temporary

basis. For the purpose of this Standard, employees include whole-time directors and other management personnel.

Definitions

7. The following terms are used in this Standard with the meanings specified:

7.1 Employee benefits are all forms of consideration given by an enterprise in exchange for service rendered

by employees.

7.2 Short-term employee benefits are 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.

7.3 Post-employment benefits are employee benefits (other than termination benefits) which are payable

after the completion of employment.

17 The accounting for such benefits is dealt with in the Guidance Note on Accounting for Employee Share-based Payments

issued by the Institute of Chartered Accountants of India.

7.4 Post-employment benefit plans are formal or informal arrangements under which an enterprise provides postemployment

benefits for one or more employees.

7.5 Defined contribution plans are post-employment benefit plans under which an enterprise pays fixed

contributions into a separate entity (a fund) and will have no obligation to pay further contributions if the

fund does not hold sufficient assets to pay all employee benefits relating to employee service in the current and

prior periods.

7.6 Defined benefit plans are post-employment benefit plans other than defined contribution plans.

7.7 Multi-employer plans are defined contribution plans (other than state plans) or defined benefit plans (other

than state plans) that:

(a) pool the assets contributed by various enterprises that are not under common control; and

(b) use those assets to provide benefits to employees of more than one enterprise, on the basis that

contribution and benefit levels are determined without regard to the identity of the enterprise that

employs the employees concerned.

7.8 Other long-term employee benefits are employee benefits (other than post-employment benefits and

termination benefits) which do not fall due wholly within twelve months after the end of the period in which the

employees render the related service.

7.9 Termination benefits are employee benefits payable as a result of either:

(a) an enterprise’s decision to terminate an employee’s employment before the normal retirement date; or

(b) an employee’s decision to accept voluntary redundancy in exchange for those benefits (voluntary

retirement).

7.10 Vested employee benefits are employee benefits that are not conditional on future employment.

7.11 The present value of a defined benefit obligation is the present value, without deducting any plan

assets, of expected future payments required to settle the obligation resulting from employee service in the

current and prior periods.

7.12 Current service cost is the increase in the present value of the defined benefit obligation resulting from

employee service in the current period.

7.13 Interest cost is the increase during a period in the present value of a defined benefit obligation which arises

because the benefits are one period closer to settlement.

7.14 Plan assets comprise:

(a) assets held by a long-term employee benefit fund; and

(b) qualifying insurance policies.

7.15 Assets held by a long-term employee benefit fund are assets (other than non-transferable financial

instruments issued by the reporting enterprise) that:

(a) are held by an entity (a fund) that is legally separate from the reporting enterprise and exists solely to

pay or fund employee benefits; and

(b) are available to be used only to pay or fund employee benefits, are not available to the reporting

enterprise’s own creditors (even in bankruptcy), and cannot be returned to the reporting enterprise, unless

either:

(i) the remaining assets of the fund are sufficient to meet all the related employee benefit obligations of

the plan or the reporting enterprise; or

(ii) the assets are returned to the reporting enterprise to reimburse it for employee benefits already paid.

7.16 A qualifying insurance policy is an insurance policy issued by an insurer that is not a related party (as

defined in AS 18, Related Party Disclosures) of the reporting enterprise, if the proceeds of the policy:

(a) can be used only to pay or fund employee benefits under a defined benefit plan; and

(b) are not available to the reporting enterprise’s own creditors (even in bankruptcy) and cannot be paid to

the reporting enterprise, unless either:

(i) the proceeds represent surplus assets that are not needed for the policy to meet all the related

employee benefit obligations; or

(ii) the proceeds are returned to the reporting enterprise to reimburse it for employee benefits already

paid.

7.17 Fair value is the amount for which an asset could be exchanged or a liability settled between knowledgeable,

willing parties in an arm’s length transaction.

7.18 The return on plan assets is interest, dividends and other revenue derived from the plan assets, together with

realised and unrealised gains or losses on the plan assets, less any costs of administering the plan and less any tax

payable by the plan itself.

7.19 Actuarial gains and losses comprise:

(a) experience adjustments (the effects of differences between the previous actuarial assumptions and what has

actually occurred); and

(b) the effects of changes in actuarial assumptions.

7.20 Past service cost is the change in the present value of the defined benefit obligation for employee service in

prior periods, resulting in the current period from the introduction of, or changes to, post-employment benefits or

other long-term employee benefits. Past service cost may be either positive (where benefits are introduced or

improved) or negative (where existing benefits are reduced).

Short-term Employee Benefits

8. Short-term employee benefits include items such as:

(a) wages, salaries and social security contributions;

(b) 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;

render the related service; and

(d) non-monetary benefits (such as medical care, housing, cars and free or subsidised goods or services) for

current employees.

9. Accounting for short-term employee benefits is generally straight- forward because no actuarial assumptions are

required to measure the obligation or the cost and there is no possibility of any actuarial gain or loss. Moreover,

short-term employee benefit obligations are measured on an undiscounted basis.

Recognition and Measurement

All Short-term Employee Benefits

10. When an employee has rendered service to an enterprise during an accounting period, the enterprise

should recognise the undiscounted amount of short-term employee benefits expected to be paid in exchange for

that service:

(a) as a liability (accrued expense), after deducting any amount already paid. If the amount already paid exceeds

the undiscounted amount of the benefits, an enterprise should recognise that excess as an asset (prepaid

expense) to the extent that the prepayment will lead to, for example, a reduction in future payments or a

cash refund; and

(b) as an expense, unless another Accounting Standard requires or permits the inclusion of the benefits in the

cost of an asset (see, for example, AS 10, Property, Plant and Equipment).

Paragraphs 11, 14 and 17 explain how an enterprise should apply this requirement to short-term employee

benefits in the form of compensated absences and profit-sharing and bonus plans.

Short-term Compensated Absences

11. An enterprise should recognise the expected cost of short-term employee benefits in the form of compensated

absences under paragraph 10 as follows:

(a) in the case of accumulating compensated absences, when the employees render service that increases their

entitlement to future compensated absences; and

(b) in the case of non-accumulating compensated absences, when the absences occur.

12. An enterprise may compensate employees for absence for various reasons including vacation, sickness and

short-term disability, and maternity or paternity. Entitlement to compensated absences falls into two categories:

(a) accumulating; and

(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 nonvesting

(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.

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.

Provided that a Small and Medium-sized Company, as defined in the Notification, 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 for 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:

(a) the enterprise has a present obligation to make such payments as a result of past events; and

(b) a reliable estimate of the obligation can be made.

A present obligation exists when, and only when, the enterprise has no realistic alternative but to make the

payments.

18. Under some profit-sharing plans, employees receive a share of the profit only if they remain with the

enterprise for a specified period. Such plans create an obligation as employees render service that increases the

amount to be paid if they remain in service until the end of the specified period. The measurement of such

obligations reflects the possibility that some employees may leave without receiving profit-sharing payments.

19. An enterprise may have no legal obligation to pay a bonus. Nevertheless, in some cases, an enterprise has a

practice of paying bonuses. In such cases also, the enterprise has an obligation because the enterprise has no realistic

alternative but to pay the bonus. The measurement of the obligation reflects the possibility that some employees may

leave without receiving a bonus.

20. An enterprise can make a reliable estimate of its obligation under a profit-sharing or bonus plan when, and

only when:

(a) the formal terms of the plan contain a formula for determining the amount of the benefit; or

(b) the enterprise determines the amounts to be paid before the financial statements are approved; or

21. An obligation under profit-sharing and bonus plans results from employee service and not from a transaction

with the enterprise’s owners. Therefore, an enterprise recognises the cost of profit-sharing and bonus plans not as a

distribution of net profit but as an expense.

22. If profit-sharing and bonus payments are not due wholly within twelve months after the end of the period

in which the employees render the related service, those payments are other long-term employee benefits (see

paragraphs 127-132).

Disclosure

23. Although this Standard does not require specific disclosures about short-term employee benefits, other

Accounting Standards may require disclosures. For example, where required by AS 18, Related Party Disclosures

an enterprise discloses information about employee benefits for key management personnel.

Post-employment Benefits: Defined Contribution Plans and Defined Benefit Plans

24. Post-employment benefits include:

(a) retirement benefits, e.g., gratuity and pension; and

(b) other benefits, e.g., post-employment life insurance and post- employment medical care.

Arrangements whereby an enterprise provides post-employment benefits are post-employment benefit plans. An

enterprise applies this Standard to all such arrangements whether or not they involve the establishment of a separate

entity to receive contributions and to pay benefits.

25. Post-employment benefit plans are classified as either defined contribution plans or defined benefit plans,

depending on the economic substance of the plan as derived from its principal terms and conditions. Under defined

contribution plans:

(a) the enterprise’s obligation is limited to the amount that it agrees to contribute to the fund. Thus, the amount of the

post-employment benefits received by the employee is determined by the amount of contributions paid by an

enterprise (and also by the employee) to a post-employment benefit plan or to an insurance company, together with

investment returns arising from the contributions; and

(b) in consequence, actuarial risk (that benefits will be less than expected) and investment risk (that assets invested will be

insufficient to meet expected benefits) fall on the employee.

26. Examples of cases where an enterprise’s obligation is not limited to the amount that it agrees to contribute to the

fund are when the enterprise has an obligation through:

(a) a plan benefit formula that is not linked solely to the amount of contributions; or

(b) a guarantee, either indirectly through a plan or directly, of a specified return on contributions; or

history of increasing benefits for former employees to keep pace with inflation even where there is no legal

obligation to do so.

27. Under defined benefit plans:

(a) the enterprise’s obligation is to provide the agreed benefits to current and former employees; and

(b) actuarial risk (that benefits will cost more than expected) and investment risk fall, in substance, on the

enterprise. If actuarial or investment experience are worse than expected, the enterprise’s obligation may be

increased.

28. Paragraphs 29 to 43 below deal with defined contribution plans and defined benefit plans in the context of

multi-employer plans, state plans and insured benefits.

Multi-employer Plans

29. An enterprise should classify a multi-employer plan as a defined contribution plan or a defined benefit

plan under the terms of the plan (including any obligation that goes beyond the formal terms). Where a multiemployer plan is a defined benefit plan, an enterprise should:

(a) account for its proportionate share of the defined benefit obligation, plan assets and cost associated

with the plan in the same way as for any other defined benefit plan; and

(b) disclose the information required by paragraph 120.

30. When sufficient information is not available to use defined benefit accounting for a multi-employer plan

that is a defined benefit plan, an enterprise should:

(a) account for the plan under paragraphs 45-47 as if it were a defined contribution plan;

(b) disclose:

(i) the fact that the plan is a defined benefit plan; and

(ii) the reason why sufficient information is not available to enable the enterprise to account for the plan as

a defined benefit plan; and

in addition:

(i) any available information about that surplus or deficit;

(ii) the basis used to determine that surplus or deficit; and

(iii) the implications, if any, for the enterprise.

31. One example of a defined benefit multi-employer plan is one where:

(a) the plan is financed in a manner such that contributions are set at a level that is expected to be sufficient to pay

the benefits falling due in the same period; and future benefits earned during the current period will be paid

out of future contributions; and

(b) employees’ benefits are determined by the length of their service and the participating enterprises have no

realistic means of withdrawing from the plan without paying a contribution for the benefits earned by

employees up to the date of withdrawal. Such a plan creates actuarial risk for the enterprise; if the ultimate

cost of benefits already earned at the balance sheet date is more than expected, the enterprise will have to

either increase its contributions or persuade employees to accept a reduction in benefits. Therefore, such a plan

is a defined benefit plan.

32. Where sufficient information is available about a multi-employer plan which is a defined benefit plan, an

enterprise accounts for its proportionate share of the defined benefit obligation, plan assets and post-employment

benefit cost associated with the plan in the same way as for any other defined benefit plan. However, in some cases,

an enterprise may not be able to identify its share of the underlying financial position and performance of the plan

with sufficient reliability for accounting purposes. This may occur if:

(a) the enterprise does not have access to information about the plan that satisfies the requirements of this

Standard; or

(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:

(a) actuarial losses relating to other participating enterprises because each enterprise that participates in a multiemployer

plan shares in the actuarial risks of every other participating enterprise; or

(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:

(a) pay the employee benefits directly when they fall due; or

(b) pay further amounts if the insurer does not pay all future employee benefits relating to employee

service in the current and prior periods.

If the enterprise retains such an obligation, the enterprise should treat the plan as a defined benefit plan.

41. The benefits insured by an insurance contract need not have a direct or automatic relationship with the

enterprise’s obligation for employee benefits. Post-employment benefit plans involving insurance contracts are

subject to the same distinction between accounting and funding as other funded plans.

42. Where an enterprise funds a post-employment benefit obligation by contributing to an insurance policy under

which the enterprise (either directly, indirectly through the plan, through the mechanism for setting future premiums

or through a related party relationship with the insurer) retains an obligation, the payment of the premiums does not

amount to a defined contribution arrangement. It follows that the enterprise:

(a) accounts for a qualifying insurance policy as a plan asset (see paragraph 7); and

(b) recognises other insurance policies as reimbursement rights (if the policies satisfy the criteria in paragraph 103).

43. Where an insurance policy is in the name of a specified plan participant or a group of plan participants and the

enterprise does not have any obligation to cover any loss on the policy, the enterprise has no obligation to pay

benefits to the employees and the insurer has sole responsibility for paying the benefits. The payment of fixed

premiums under such contracts is, in substance, the settlement of the employee benefit obligation, rather than an

investment to meet the obligation. Consequently, the enterprise no longer has an asset or a liability. Therefore, an

enterprise treats such payments as contributions to a defined contribution plan.

Post-employment Benefits: Defined Contribution Plans 44. Accounting for defined contribution plans is straightforward because the reporting enterprise’s obligation for

each period is determined by the amounts to be contributed for that period. Consequently, no actuarial assumptions

are required to measure the obligation or the expense and there is no possibility of any actuarial gain or loss.

Moreover, the obligations are measured on an undiscounted basis, except where they do not fall due wholly within

twelve months after the end of the period in which the employees render the related service.

Recognition and Measurement

45. When an employee has rendered service to an enterprise during a period, the enterprise should recognise

the contribution payable to a defined contribution plan in exchange for that service:

(a) as a liability (accrued expense), after deducting any contribution already paid. If the contribution already

paid exceeds the contribution due for service before the balance sheet date, an enterprise should

recognise that excess as an asset (prepaid expense) to the extent that the prepayment will lead to, for

example, a reduction in future payments or a cash refund; and

(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.

Provided that a Small and Medium-sized Company, as defined in the Notification, 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

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:

(a) using actuarial techniques to make a reliable estimate of the amount of benefit that employees have earned in

return for their service in the current and prior periods. This requires an enterprise to determine how much

benefit is attributable to the current and prior periods (see paragraphs 68-72) and to make estimates

(actuarial assumptions) about demographic variables (such as employee turnover and mortality) and

financial variables (such as future increases in salaries and medical costs) that will influence the cost of the

benefit (see paragraphs 73-91);

(b) discounting that benefit using the Projected Unit Credit Method in order to determine the present value of the defined

benefit obligation and the current service cost (see paragraphs 65-67);

(d) determining the total amount of actuarial gains and losses (see paragraphs 92-93);

(e) where a plan has been introduced or changed, determining the resulting past service cost (see paragraphs 94-99); and

(f) where a plan has been curtailed or settled, determining the resulting gain or loss (see paragraphs 110-116).

Where an enterprise has more than one defined benefit plan, the enterprise applies these procedures for each material

plan separately.

52. For measuring the amounts under paragraph 51, in some cases, estimates, averages and simplified

computations may provide a reliable approximation of the detailed computations.

Accounting for the Obligation under a Defined Benefit Plan

53. An enterprise should account not only for its legal obligation under the formal terms of a defined benefit

plan, but also for any other obligation that arises from the enterprise’s informal practices. Informal practices give

rise to an obligation where the enterprise has no realistic alternative but to pay employee benefits. An example of

such an obligation is where a change in the enterprise’s informal practices would cause unacceptable damage to

its relationship with employees.

54. The formal terms of a defined benefit plan may permit an enterprise to terminate its obligation under the plan.

Nevertheless, it is usually difficult for an enterprise to cancel a plan if employees are to be retained. Therefore, in the

absence of evidence to the contrary, accounting for post-employment benefits assumes that an enterprise which is

currently promising such benefits will continue to do so over the remaining working lives of employees.

Balance Sheet

55. The amount recognised as a defined benefit liability 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 any past service cost not yet recognised (see paragraph 94);

settled directly (see paragraphs 100-102).

56. The present value of the defined benefit obligation is the gross obligation, before deducting the fair value of

any plan assets.

57. An enterprise should determine the present value of defined benefit obligations and the fair value of any plan

assets with sufficient regularity that the amounts recognised in the financial statements do not differ materially

from the amounts that would be determined at the balance sheet date.

58. 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 recognised 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 date.

59. The amount determined under paragraph 55 may be negative (an asset). An enterprise should measure the

resulting asset at the lower of:

(a) the amount determined under paragraph 55; and

(b) the present value of any economic benefits available in the form of refunds from the plan or reductions in

future contributions to the plan. The present value of these economic benefits should be determined using

the discount rate specified in paragraph 78.

60. An asset may arise where a defined benefit plan has been overfunded or in certain cases where actuarial gains

are recognised. An enterprise recognises an asset in such cases because:

(a) the enterprise controls a resource, which is the ability to use the surplus to generate future benefits;

(b) that control is a result of past events (contributions paid by the enterprise and service rendered by the

employee); and

cash refund, either directly to the enterprise or indirectly to another plan in deficit.

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);

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

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.

Attributing Benefit to Periods of Service

68. In determining the present value of its defined benefit obligations and the related current service cost and,

where applicable, past service cost, an enterprise should attribute benefit to periods of service under the plan’s

benefit formula. However, if an employee’s service in later years will lead to a materially higher level of

benefit than in earlier years, an enterprise should attribute benefit on a straight-line basis from:

(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.

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.

71. The obligation increases until the date when further service by the employee will lead to no material amount

of further benefits. Therefore, all benefit is attributed to periods ending on or before that date. Benefit is attributed to

individual accounting periods under the plan’s benefit formula. However, if an employee’s service in later years will

lead to a materially higher level of benefit than in earlier years, an enterprise attributes benefit on a straight-line basis

until the date when further service by the employee will lead to no material amount of further benefits. That is

because the employee’s service throughout the entire period will ultimately lead to benefit at that higher level.

72. Where the amount of a benefit is a constant proportion of final salary for each year of service, future

salary increases will affect the amount required to settle the obligation that exists for service before the balance sheet

date, but do not create an additional obligation. Therefore:

(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 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 enterprisespecific

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.

81. In some cases, there may be no government bonds with a sufficiently long maturity to match the estimated

maturity of all the benefit payments. In such cases, an enterprise uses current market rates of the appropriate term

to discount shorter term payments, and estimates the discount rate for longer maturities by extrapolating current

market rates along the yield curve. The total present value of a defined benefit obligation is unlikely to be particularly

sensitive to the discount rate applied to the portion of benefits that is payable beyond the final maturity of the

available government bonds.

82. Interest cost is computed by multiplying the discount rate as determined at the start of the period by the

present value of the defined benefit obligation throughout that period, taking account of any material changes in the

obligation. The present value of the obligation will differ from the liability recognised in the balance sheet because

the liability is recognised after deducting the fair value of any plan assets and because some past service cost are

not recognised immediately. [Illustration I attached to the Standard illustrates the computation of interest cost, among

other things]

Actuarial Assumptions: Salaries, Benefits and Medical Costs

83. Post-employment benefit obligations should be measured on a basis that reflects:

(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

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; or

(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.

93. Actuarial gains and losses may result from increases or decreases in either the present value of a defined

benefit obligation or the fair value of any related plan assets. Causes of actuarial gains and losses include, for

example:

(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;

(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). 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);

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 nontransferable

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).

Reimbursements

103. When, and only when, it is virtually certain that another party will reimburse some or all of the expenditure

required to settle a defined benefit obligation, an enterprise should recognise its right to reimbursement as

a separate asset. The enterprise should measure the asset at fair value. In all other respects, an enterprise should

treat that asset in the same way as plan assets. In the statement of profit and loss, the expense relating to a

defined benefit plan may be presented net of the amount recognised for a reimbursement.

104. Sometimes, an enterprise is able to look to another party, such as an insurer, to pay part or all of the

expenditure required to settle a defined benefit obligation. Qualifying insurance policies, as defined in paragraph 7,

are plan assets. An enterprise accounts for qualifying insurance policies in the same way as for all other plan assets

and paragraph 103 does not apply (see paragraphs 40-43 and 102).

105. When an insurance policy is not a qualifying insurance policy, that insurance policy is not a plan asset.

Paragraph 103 deals with such cases: the enterprise recognises its right to reimbursement under the insurance

policy as a separate asset, rather than as a deduction in determining the defined benefit liability recognised under

paragraph 55; in all other respects, including for determination of the fair value, the enterprise treats that asset in the

same way as plan assets. Paragraph 120(f)(iii) requires the enterprise to disclose a brief description of the link between

the reimbursement right and the related obligation. 106. If the right to reimbursement arises under an insurance policy that exactly matches the amount and timing of

some or all of the benefits payable under a defined benefit plan, the fair value of the reimbursement right is deemed to

be the present value of the related obligation, as described in paragraph 55 (subject to any reduction required if the

reimbursement is not recoverable in full).

Return on Plan Assets

107. The expected return on plan assets is a component of the expense recognised in the statement of profit

and loss. The difference between the expected return on plan assets and the actual return on plan assets is an

actuarial gain or loss.

108. The expected return on plan assets is based on market expectations, at the beginning of the period, for returns

over the entire life of the related obligation. The expected return on plan assets reflects changes in the fair value of

plan assets held during the period as a result of actual contributions paid into the fund and actual benefits paid out of

the fund.

109. In determining the expected and actual return on plan assets, an enterprise deducts expected administration

costs, other than those included in the actuarial assumptions used to measure the obligation. Curtailments and Settlements

110. An enterprise should recognise gains or losses on the curtailment or settlement of a defined benefit plan

when the curtailment or settlement occurs. The gain or loss on a curtailment or settlement should comprise:

(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;

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. Provided that a Small and Medium-sized Company as defined in the Notification, 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.

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.

Provided that a Small and Medium-sized company, as defined in the Notification, 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.

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

420 THE GAZETTE OF INDIA : EXTRAORDINARY [PART II—SEC. 3(i)]

(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—??? ? 3(i)] ???? ?? ??????? : ??????? 421

(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.

Provided that a Small and Medium-sized Company, as defined in the Notification, 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.

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;

(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);

422 THE GAZETTE OF INDIA : EXTRAORDINARY [PART II—SEC. 3(i)]

(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);

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.

Provided that a Small and Medium-sized Company, as defined in the Notification, may not apply the recognition and

measurement principles laid down in paragraphs 129 to 131 of the Standard 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.

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.

Termination Benefits

133. This Standard deals with termination benefits separately from other employee benefits because the event

which gives rise to an obligation is the termination rather than employee service.

Recognition

134. An enterprise should recognise termination benefits as a liability and an expense when, and only when:

(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

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.

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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 postemployment

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.

Provided that a Small and Medium-sized Company, as defined in the Notification , 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.

142. Where required by AS 18, Related Party Disclosures an enterprise discloses information about termination

benefits for key management personnel.

Transitional Provisions18

142A. An enterprise may disclose the amounts required by paragraph 120(n) as the amounts are determined for

each accounting period prospectively from the date the enterprise first adopts this Standard.

Employee Benefits other than Defined Benefit Plans and Termination Benefits

143. Where an enterprise first adopts this Standard for employee benefits, the difference (as adjusted by any related

tax expense) between the liability in respect of employee benefits other than defined benefit plans and termination

benefits, as per this Standard, existing on the date of adopting this Standard and the liability that would have been

recognised at the same date, as per the pre-revised AS 15 issued by the ICAI in 1995, should be adjusted against

opening balance of revenue reserves and surplus.

Defined Benefit Plans

144. On first adopting this Standard, an enterprise should determine its transitional liability for defined benefit

plans at that date as:

(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);

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

18 Transitional Provisions given in Paragraphs 142A-146 are relevant only for standards notified under Companies

(Accounting Standards) Rules, 2006, as amended from time to time.

(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.

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

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 1st April, 2010.

The group also participates in an industry-wide defined benefit plan which provides pensions linked to final salaries

and is funded in a manner such that contributions are set at a level that is expected to be sufficient to pay the benefits

falling due in the same period. It is not practicable to determine the present value of the group’s obligation or the

related current service cost as the plan computes its obligations on a basis that differs materially from the basis used

in [name of reporting enterprise]’s financial statements. [describe basis] On that basis, the plan’s financial

statements to 30 September 20X3 show an unfunded liability of Rs. 27,525. The unfunded liability will result in

future payments by participating employers. The plan has approximately 75,000 members, of whom

approximately 5,000 are current or former employees of [name of reporting enterprise] or their dependants. The

expense recognised in the statement of profit and loss, which is equal to contributions due for the year, and is not

included in the above amounts, was Rs. 230 (20X4-X5: Rs. 215). The group’s future contributions may be increased

substantially if other enterprises withdraw from the plan.