New a/c norm for staff benefit provisions spooks banks
August, 18th 2006
Banks have sought the Reserve Bank of Indias (RBI) intervention for ensuring forbearance in adhering to the new accounting standard for making provisions for employee retirement benefits.
The government is expected to notify in a month the revised accounting standard-15 (AS-15) for making provisions for employee retirement benefits by all large and medium companies. It will entail the need for making such provisions on the basis of acturial assumptions.
Shortfalls in provisioning in past years based on acturial calculations will have to be fully adjusted in the current year (2006-07) against the opening balance of revenue reserves and surplus.
As for banks, revenue reserves and surplus are considered for calculation of tier-I capital for capital adequacy purposes. The deduction of the entire shortfall from reserves and surplus will lead to a reduction in the core capital of banks and, ultimately, in their capital adequacy ratios.
The Indian Banks Association (IBA) has written to the central bank urging it to take up the issue with the Institute of Chartered Accountants of India (ICAI) on a priority basis before the government notifies the accounting standard as required under the Companies Act, 1956.
Kamlesh Vikamsey, former ICAI president, said, Public sector banks have already started making provisions for post-retirement benefits in the current financial year according to the revised standard. So, the issue relates to past provisions. When the revised norms are applied, banks will have to shell out more for past provisions.
The revised standard prescribes that adjustment for difference should be made in one go. This amount will be charged to reserves and surplus, and that is a huge burden for public sector banks, which are a large workforce with pension facility.
The IBA said, Banks are required to have a minimum capital adequacy ratio of 9 per cent. If the reserves get depleted on account of the proposed limited revision to AS-15, it will seriously impair capital adequacy ratios of banks. The impact will be more serious with banks implementing Basel-II norms by March 31, 2007.
As pension is a long-term liability and is not vested in the employee unless he/ she puts in the required number of years of service, and as the quantum of pension is dependent on other factors, it is considered appropriate for a bank to provide for the liability during the working life of the employee, it stressed.
With regard to the undue strain that the adoption of AS-15 in its present form will place on capital adequacy of banks, the IBA has suggested that banks should have the option to amortise the increase in liability over a period equal to the working life of the employee or at least over a period of five years from the date of adoption of the standard as was permitted by the international accounting standard-19 (IAS-19).
The revision to AS-15 mandates that the difference between the transitional liability and the liability that would have been recognised at the same date as per the method of valuation hitherto followed should be adjusted immediately against the opening balance of revenue reserves and surplus.