1).The
method of accounting of retirement benefits depends on the nature of retirement
benefits and in practice
it
may not be incorrect to say that it also depends on the mode of funding.
2).On
the basis of nature, a retirement benefit scheme can be classified either as
defined benefit plan or defined
contribution
plan.
3).Defined
contribution schemes are schemes where the amounts to be paid as retirement
benefits are
determined
by contributions to a fund together with earnings thereon; e.g., provident fund
schemes.
4). Defined benefit
schemes are retirement benefit schemes under which amounts to be paid as
retirement benefits are determinable
usually by reference to employee’s earnings and/or years of service; e.g.,
gratuity schemes.
5).For
defined contribution schemes, contribution payable by employer is charged to
Profit & Loss Account.
For
defined benefit schemes, accounting treatment will depend on the type of
arrangements which the
employer
has made.
6).If
payment for retirement benefits is made out of employers funds, appropriate
charge to Profit & Loss
Account
to be made through a provision for accruing liability, calculated according to
actuarial valuation.
If
liability for retirement benefit is funded through creation of trust, the
excess/shortfall of contribution paid
against
amount required to meet accrued liability as certified by actuary is treated as
pre-payment or charged
to
Profit & Loss Account.
7).If
liability for retirement benefit is funded through a scheme administered by an
insurer, an actuarial
certificate
or confirmation from insurer is obtained. The excess/shortfall of the
contribution paid against the
amount
required to meet accrued liability as confirmed by insurer is treated as
pre-payment or charged to
Profit
& Loss Account.
8).Any
alteration in the retirement benefit cost should is charged or credited to
Profit & Loss Account and
change
in actuarial method is to be disclosed.
9).Financial
statements to disclose method by which retirement benefit cost have been
determined.
The
institute has issued AS-15 which is broadly on lines of IFRS-19. It is
applicable for accounting periods
commencing
after December 7, 2007. The Standard improves the existing practices mainly in
the following
areas.
—
It is broad in its applicability as it covers all short-term and long term
employee benefits. For example,
annual
paid leave (though not encashable), long-term service rewards, subsidised goods
or services, etc. are
also
covered
—
Additional disclosures are required in relation to any defined benefits plans
including:
(i)
The reconciliation of (opening to closing) of Projected Benefit Obligation.
(ii)
The reconciliation of (opening to closing) of Fair Value of Plan Assets.
(iii)
The reconciliation of (opening to closing) of Net Liability/Prepaid Asset.
(iv)
Components of charge during the year.
(v)
Principal actuarial assumptions.
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