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A Standard, revised and deferred
March, 22nd 2007
Though AS-15 (Revised) has been postponed to 2007-08, it is better to follow the measurement principles enunciated for 2006-07.

The National Accounting Standard (NACAS) Board has notified all accounting standards issued by the Institute of Chartered Accountant of India (ICAI) AS 1 to AS 29 (except AS 8) on December 7, 2006.

The rules also say that all these standards will come into effect for accounting year commencing on or after that date.

Levels combined

As per the provisions of the Companies Act, till NACAS notifies, all standards prescribed by the ICAI will be mandatory. Hence, for 2006-07, the standards issued by the ICAI will be mandatory . NACAS has not made any changes to the standards, but it has combined Level II and Level III enterprises into a single group.

This means all standards applicable to Level II enterprises will apply to Level III enterprises.

The ICAI originally made AS-15 (Revised) mandatory for all accounting years commencing on or after April 1, 2006. Following the notification issued by NACAS, the ICAI has postponed the applicability of AS-15 (Revised) to accounting years commencing on or after December 7, 2006. This means for the accounting year 2006-07, old AS-15 still applies.

AS-15 (Revised) is more or less a verbatim reproduction of IAS 19. Under Indian situations PF/superannuation constitute `defined contributions', while gratuity and leave encashment are `defined benefit'. Measurement of these benefits under the old AS-15 and the revised AS-15 are not materially different, the only major change being disclosure.

Hence, all the companies should presume that AS-15 (Revised) as more or less mandatory, and start working towards that.

There is a doubt whether PF trust maintained by companies will fall under `defined benefit' as the return risk is on the employer.

Considering the fact that only one-year interest difference (which may not be a material amount) has to be made up, and considering substance over form, contributions to PF trust maintained by companies fall under defined contributions only.

Further, the interest rate is not static but varies from year to year based on the declaration by the Centre. Unlike gratuity, which is payable on the last drawn salary, PF amount at credit as on the date of balance sheet is only payable.

If there is any interest difference, it pertains only to the current year, and hence falls under AS 29 and not under AS-15.

A suitable note explaining the situation must be given. However, a clarification from the ICAI is awaited on this subject in the form of `frequently asked questions'.

Lingering doubt

There is also a lingering doubt whether the leave encashment is a short-term or long-term benefit. The standard, in more than one place, lays emphasis on the practice followed by the company, and based on which only this has to be decided. Further, in `substance over form' is the underlying principle for all accounting standards.

Under Indian conditions, excess leave over a limit is encashed immediately in the next year. The leave that is encashed immediately is a short-term benefit as payment is made within 12 months.

The balance leave is carried forward year after year to be encashed on retirement or resignation. This is a long-term benefit and measurement is to be done based on actuarial valuation. In fact, almost all companies follow this method of measurement under old AS-15.

Even the Income-Tax Act recognises leave encashment up to Rs 3 lakh at the time of retirement as exempt from income-tax.

Barring a very few companies, nationalised banks and nationalised insurance companies, the concept of pension is not a benefit (except superannuation contribution). Hence pension, as a defined benefit, is almost absent in India.

A handful of companies are extending medical benefit after retirement. Hence, valuation for the benefit is not common. However, the disclosure requirement for this benefit is too elaborate considering the amount involved.

Follow it in spirit

Thus, even though AS-15 (Revised) has been postponed to 2007-08, it is better to follow measurement principles enunciated for 2006-07 itself and make adequate provision/disclosure; on the principle of measurement there is no difference between the old and the revised AS-15.

The disclosure requirement under AS-15 (Revised) is very elaborate, and thankfully it has been postponed by a year. Hence, all companies should try to follow AS-15 (Revised) in spirit. It needs a close coordination with external agencies such as LIC. It is understood that LIC is prepared to help companies implement AS-15 (Revised) with necessary software support. The ICAI is also planning an FAQ to clear some of the doubts expressed. This one-year gap should be used to familiarise and implement the revised AS-15.

As all the new standards are more or less a reproduction of International Accounting Standards, which is very elaborate and some which do not suit Indian conditions, the ICAI should publish `model accounts' comparing the existing and the proposed standards. Similarly, industry associations, such as CII and Assocham, should give suitable recommendations with "model accounts ". They should also participate effectively in the standard-setting process. In fact, the experience of AS-15 (Revised) should not be repeated.

L. Venkatesan
(The author is a Chennai-based chartered accountant.)

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