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IND AS 37 PROVISION, CONTINGENT

LIABILITIES &CONTINGENT ASSETS

Topics Pg.

I. Objective 1

II. Scope 1

III. Provisions 1

Recognition Criteria 1

Present obligation 2

Past Events 2

Probable Outflow 3

Measurement 3

Reimbursement 4

Onerous Contracts 4

Restructuring cost provision 5

Disclosures 6

IV. Contingent Liabilities 7

V. Contingent Assets 8

VI. Rights to Interests arising from Decommissioning,

Restoration & Environmental Rehabilitation Funds

9

VII. Levies 10

VIII. Practical Questions 12

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I.

The objective of this Standard is to ensure that appropriate recognition criteria

and measurement bases are applied to provisions, contingent liabilities and

contingent assets and that sufficient information is disclosed in the notes to

enable users to understand their nature, timing and amount.

II.

1. This IND AS is residual standard i.e. provision which are covered by other standards

are excluded from its scope.

2. It also excludes provisions, contingent liabilities, contingent assets resulting from

executory contracts. (Executory contracts are contracts under which neither party has

performed any of its obligations or both parties have partially performed their

obligations to an equal extent. This Standard does not apply to executory contracts

unless they are onerous.)

3. Term provision is also used in context to item such as depreciation, doubtful debts etc,

these are adjustment to the cost of asset and hence outside the scope of this IND AS.

II.

1. Provisions is a liability of uncertain timing and amount

2. Liability is a present obligation of the entity arising from past events the

settlement of which is expected to result in outflow of resources embodying

economic benefits.

3. Recognition criteria

a. A provision shall be recognised when all of the following conditions are met.

i. An entity has present obligation (legal or constructive) as a result of a Past event &

ii. It is probable that outflow of resources embodying economic benefit will be required

to settle the obligation &

iii. A reliable estimate can be made of amount of obligation

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If any of above condition is not met, then the obligation is disclose

as contingent liabilities, unless the probability of payment is remote.

b. Present obligation: an obligation is called present obligation when, the obligation or

liability is present on the reporting date, i.e. on the reporting date, it is 100%

certain that the liability exists. In a rare circumstance, if it is not clear, that whether

the present obligation exist then entity determines the same based on the probability

i.e. if the probability of a liability coming into existence is more than the probability of

Liability not coming into existence (more than 50% chances) then entity has to

consider it as present obligation. If the probability of a Liability coming into existence

is less than the probability of Liability not coming into existence (less than equal to

50%) then it is considered to be a Possible obligation.

c. Past event (obligating event)

i. For an event to be an obligating event, it is necessary that, entity has no realistic

alternative to settle the obligation created by the event, this is the case only, where

settlement of obligation can be enforced by law or in case of constructive obligation.

ii. Constructive obligation is an obligation that is derived from entities action

e.g. by established pattern of past practices, published policies or sufficient specific

current statement through which entity has indicate to other parties, that it will accept

certain responsibility and as a result entity has created valid expectation on part of

those other parties that it will discharge those responsibilities. E.g.- an entity voluntary

announces a compensation to those affected by operations of business though there is

no law compelling it to do so.

iii. Only those obligations, arising from past events and exist independently of

entities future actions are recognised as provisions. If an obligation can be avoided

through any of the future actions of an entity than it is not considered to be

independently existing, and hence no provision shall be created for such obligation.

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iv. Financial statements deal with financial position as on the reporting date and

not financial position in future, therefore no provision is recognised of any cost to be

incurred for operating in future. i.e. provisions are created only for those liabilities,

which are existing at the reporting date.

d. Probable outflow of resources: A provision is to be recognized only if there

probability of making payment to settle the obligation is more compare to the

probability of not making the payment to settle the obligation. Where there are a

number of similar obligation, the probability of outflow to settle an obligation, is

determined for the class of obligation as a whole, although the likelihood of outflow

for any one item may be very small, it may be probable that outflow of resources will

be require to settle the class of obligation as a whole e.g. warranty provisions.

e. Measurement: Reliable estimation of obligation

i. The amount recognised as provision, shall be the best estimate of expenditure require

to settle the present obligation at the reporting date.

ii. When the effect of time value of money is material, the amount of provision shall

be present value of expenditure expected to be required to settle the obligation. i.e. any

provision that is expected to be settle beyond the period of 12 month should be

measured at its present value.

iii. Provisions is measured before tax, as tax consequences of the provision and change

in it are dealt in IND AS – 12 Income tax.

iv. Future events that may affect the amount require to settle the obligations shall be

considered in amount of provision, where there is sufficient objective evidence

that they will occur. However, an entity does not anticipate the development of a

completely new event unless it is supported by sufficient objective evidence. The

effect of possible new legislation is taken into consideration in measuring an existing

obligation when sufficient objective evidence exists that the legislation is virtually

certain to be enacted.

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v. Gains from expected disposal shall not be considered in measuring provision.

vi. Uncertainties surrounding the amount to be recognised as a provision are dealt with by

various means according to the circumstances. Where the provision being measured

involves a large population of items, the obligation is estimated by weighting all

possible outcomes by their associated probabilities. The name for this statistical

method of estimation is ‘Expected Value Method’.

4. Reimbursement: Where some or all of the expenditure require to settle provision is

expected to be reimbursed by another party, the reimbursement shall be recognised

when and only when it is virtually certain that the reimbursement will be

received if the entity settles the obligation.

5. Changes in provisions: The provision shall be reviewed at the end of each reporting

period and adjusted to reflect current best estimate, if it is no longer probable that,

outflow of resources will be require to settle the obligation, the provision shall be

reversed. The reversal of provision is disclosed as a separate line item as per

IND AS – 1. Where Discounting is used the carrying an of provision increases in each

year to reflect passage of time, this increase recognised as borrowing cost.

6. Use of Provisions: A provision shall be used only for expense for which provision

was originally recognised, setting off expenditure against a provision that was

original recognized for another purpose would conceal the impact of two different

events and hence disallowed.

7. Application of the recognition and measurement rules

a. Future operating losses: Provisions shall not be for future operating losses. As the

future operating loss does not meet the definition of liability and recognition criteria of

provision, no provision is recognized for it.

b. Onerous Contract: Onerous contract are one in which unavoidable cost of

meeting the obligation under the contract exceeds the economic benefit expected to

be received under the contract. The unavoidable cost under the contract reflects the

least net cost of existing the contract, which is lower of:-

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i. Cost of fulfilling contract &

ii. Any compensation or penalties arising from failure to fulfill it.

Before a separate provision for onerous contract is recognized, the assets related to

that contract, should be tested for impairment IND AS – 36.

c. Restructuring Cost Provisions:

i. A restructuring is a program that is planned & controlled by management and

it materially changes either the scope of a business undertaken by entity or the

manner in which business is conducted. E.g. Sale or termination of a line of business,

Closure of business location in a country or region or relocation of business activities

from one geographical area to another or Change in management structure (from

triangle structure to flat structure) etc.

ii. A provision for restructuring is recognised only if recognition criteria are met. Further

a constructive obligation to restructure arises only when an entity

a. has a detailed formal plan for restructuring &

b. has raised a valid expectation in those affected that it will carry-out

restructuring, by starting to implement plan / by announcing it’s main features to those

affected.

iii. If the board’s decision of restructuring is taken before end of year but no

communication of same is done, till the year end, it does not give rise to

constructive obligation on reporting date, hence no provision is recognised. If the

restructuring decision and the communication happens after balance sheet date, but

before the finalization of accounts, then only a disclosure in the financial statements of

previous year is required, i.e. it is a non-adjusting event as per IND AS – 10.

iv. No obligation arises for sale of an operation until the entity is committed to the sale,

i.e. there is a binding sale agreement. Even when an entity has taken a decision to sell

an operation and announced that decision publicly, it cannot be committed to the sale

until a purchaser has been identified and there is a binding sale agreement. Until there

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is a binding sale agreement, the entity will be able to change its mind and will have to

take another course of action if a purchaser cannot be found on acceptable terms.

v. A restructuring provision shall includes only direct expenses arising from

restructuring i.e. they are necessarily required by restructuring and not associated with

on-going activities of entity. E.g. re-training, or re-locating cost of staff, marketing or

investment in new distribution systems etc.

8. Disclosures:

a. For each class of provision, an entity shall disclose:

i. the carrying amount at the beginning and end of the period;

ii. additional provisions made in the period, including increases to existing provisions;

iii. amounts used (ie incurred and charged against the provision) during the period ;

iv. unused amounts reversed during the period ; and

v. the increase during the period in the discounted amount arising from the passage of

time and the effect of any change in the discount rate.

b. Comparative information is not required: Entity shall disclose for each class of provision:

i. A brief description of the nature of the obligation and the expected timing of any

resulting outflows of economic benefits;

ii. An indication of the uncertainties about the amount or timing of those outflows.

Where necessary to provide adequate information, an entity shall disclose the major

assumptions made concerning future events and

iii. The amount of any expected reimbursement, stating the amount of any asset that has

been recognised for that expected reimbursement.

c. In extremely rare cases, disclosure of some or all of the information required by

IND AS 37 can be expected to prejudice seriously the position of the entity in a

dispute with other parties on the subject matter of the provision, contingent liability or

contingent asset. In such cases, an entity need not disclose the information, but shall

disclose the general nature of dispute, together with the fact that, and reason

why, the information has not been disclosed.

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IV.

1. Meaning : It is

a. A possible obligation that arises from past events, who’s existence will be

confirmed only by occurrence or non-occurrence of one or more uncertain future

events, not only within the control of enterprises. OR

b. A present obligation that arises from past event, but it’s not recognized because

i. It is not probable that an outflow of resources embodying economic benefit

will be require settle the obligation or

ii. Amt of obligation cannot be reliably estimated.

2. An entity shall not recognise a contingent liability.

3. Where an entity is jointly & severally liable for an obligation, the part of the

obligation that is expected to be met by other parties is treated as a contingent liability.

The entity recognises a provision for the part of the obligation for which an outflow of

resources embodying economic benefits is probable, except in the extremely rare

circumstances where no reliable estimate can be made.

4. Contingent liabilities are assessed continually to determine whether an outflow of

resources embodying economic benefits has become probable. If it becomes probable

that an outflow of future economic benefits will be required for an item previously

dealt with as a contingent liability, a provision is recognised in the financial statements

of the period in which the change in probability occurs (except in the extremely rare

circumstances where no reliable estimate can be made).

5. Unless the possibility of any outflow in settlement is remote, an entity shall disclose

for each class of contingent liability at the end of the reporting period a brief

description of the nature of the contingent liability and, where practicable:

a. an estimate of its financial effect.

b. an indication of the uncertainties relating to the amount or timing of any outflow; and

c. the possibility of any reimbursement.

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V.

1. Contingent Asset is a possible asset that arises from past event, who’s existence

will be confirmed only by occurrence or non-occurrence of one or more uncertain

future event, not wholly within the control of enterprise.

2. An entity shall not recognise a contingent asset.

3. Contingent assets are not recognised in financial statements since this may result in the

recognition of income that may never be realised. However, when the realisation of

income is virtually certain, then the related asset is not a contingent asset and its

recognition is appropriate.

4. Contingent assets are assessed continually to ensure that developments are

appropriately reflected in financial statements. If it has become virtually certain that an

inflow of economic benefits will arise, the asset and the related income are recognised

in the financial statements of the period in which the change occurs. If an inflow of

economic benefits has become probable, an entity discloses the contingent asset.

5. Where an inflow of economic benefits is probable, an entity shall disclose a brief

description of the nature of the contingent assets at the end of the reporting period,

and, where practicable, an estimate of their financial effect, measured using the

principles set out for provisions.

6. It is important that disclosures for contingent assets avoid giving misleading

indications of the likelihood of income arising.

VI.

1. Introduction: The purpose of decommissioning, restoration and environmental

rehabilitation funds is to segregate assets to fund some or all of the costs of

decommissioning or in undertaking environmental rehabilitation together referred to

as ‘decommissioning’.

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2. Contributions to these funds may be voluntary or required by regulation or law. The

funds may have one of the following structures:

a. Established by a single contributor to fund its own decommissioning obligations,

whether for a particular site, or for a number of geographically dispersed sites.

b. Established with multiple contributors to fund their individual or joint

decommissioning obligations, when contributors are entitled to reimbursement for

decommissioning expenses.

3. Such funds generally are separately administered by independent trustees and

entities (contributors) make contributions to the fund, which are invested in a

range of assets that may include both debt and equity investments, and are available to

help pay the contributors’ decommissioning costs.

c. Contributors retain obligation to pay decommissioning costs. However, contributors

are able to obtain reimbursement of decommissioning costs from fund up to the

lower of decommissioning costs incurred & contributor’s share of assets of fund.

d. the contributors may have restricted access or no access to any surplus of assets of

the fund over those used to meet eligible decommissioning costs.

4. Scope: This applies to accounting in the financial statements of a contributor for

interests arising from decommissioning funds that have both of the following features:

a. the assets are administered separately (either by being held in a separate legal entity or

as segregated assets within another entity); and

b. a contributor’s right to access the assets is restricted.

If residual interest in a fund that extends beyond a right to reimbursement, such as a

contractual right to distributions once all the decommissioning has been completed or

on winding up the fund, may be an equity instrument within the scope of Ind AS

32 and is not within the scope of this Appendix.

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5.

a. Accounting for an interest in a fund

i. The contributor shall recognise its obligation to pay decommissioning costs as a

liability and recognise its interest in the fund separately unless the contributor is

not liable to pay decommissioning costs even if the fund fails to pay.

ii. The contributor shall recognise the right to receive reimbursement from fund as a

reimbursement in accordance with Ind AS 37. This reimbursement shall be measured

at the lower of:

1. the amount of decommissioning obligation recognised; and

2. the contributor’s share of the fair value of the net assets of the fund.

iii. Changes in the carrying value of the right to receive reimbursement other than

contributions to and payments from the fund shall be recognised in profit or loss in the

period in which these changes occur.

b. Accounting for obligations to make additional contributions

When a contributor has an obligation to make potential additional contributions, for

example, in the event of the bankruptcy of another contributor or if the value of the

investment assets held by the fund decreases to an extent that they are insufficient to

fulfill the fund’s reimbursement obligations, this obligation is a contingent liability

that is within the scope of Ind AS 37. The contributor shall recognise a liability only if

it is probable that additional contributions will be made.

VII.

1. This parts deals with recognitions of liability to pay government imposed a levy that

are within scope of IND AS 37 and also addresses the accounting for a liability to

pay a levy whose timing and amount is certain.

2. This does not address the accounting for costs that arise from recognising a

liability to pay a levy. Entities should apply other Standards to decide whether the

recognition of a liability to pay a levy gives rise to an asset or an expense.

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3. Levy is an outflow of resources embodying economic benefits that is imposed

by governments on entities in accordance with legislation (i.e. laws and /or

regulations), other than:

a. those outflows of resources that are within the scope of other Standards (such as

income taxes that are within the scope of Ind AS 12, Income Taxes); and

b. fines or other penalties that are imposed for breaches of the legislation.

c. A payment made by an entity for the acquisition of an asset, or for the rendering of

services under a contractual agreement with a government.

4. Government refers to government, government agencies and similar bodies whether

local, national or international.

5. The obligating event that gives rise to a liability to pay a levy is the activity that

triggers the payment of the levy, as identified by the legislation.

6. The preparation of financial statements under the going concern assumption does not

imply that an entity has a present obligation to pay a levy that will be triggered by

operating in a future period.

7. The liability to pay a levy is recognised progressively if the obligating event

occurs over a period of time.

8. An entity shall apply the same recognition principles in the interim financial report

that it applies in the annual financial statements.

9. An entity shall recognise an asset if it has prepaid a levy but does not yet have a

present obligation to pay that levy.

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VIII.

Provisions

Q1. An entity in oil industry causes contamination and operates in a country where there is

no environmental Legislation. However the entity widely published environmental

policy an which it undertakes to clean, all the contamination caused by it. Entity has a

record of honouring it's policy. Should a provision be recognise for such cleanup cost?

Q2. X has litigation pending Legal advice is that, X will Loose the case is cost of ` 1200

crores in 2 years time are estimated, the Discount rate at which the liability has to

recognise is a risk - free rate of 4.5%, how should management calculate the amount

of borrowing cost, recognise on unwinding of Discount.

Q3. An entity is a telecom operator. Laying of cables across the world is a requirement to

enable the entity to run its business. Cables are also laid under the sea and contracts

are entered into for the same. By virtue of laws of the countries through which the

cable passes, the entity is required to restore the sea bed at the end of the contract

period. What is the nature of obligation that the entity has in such a case?

Q4. X Ltd. has entered into an agreement with its selling agent Y, in accordance with

which X Ltd. has to pay a base percentage of commission on export sales and an

additional commission is to be paid if the export incentives are received. As per the

accounting policy of X Ltd., it recognises export incentives when actually realised,

on account of the uncertainty in realising such incentives. Export incentives have

not been received for the year 2017- 2018, however X Ltd. is hopeful of receiving

the export incentives in the year 2018-2019. In the financial statements for 2017-

2018, should X Ltd. provide for both base commission and additional commission?

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Q5. X Sugars Ltd. has entered into a sale contract of ` 3,00,00,000 with Y Choclates Ltd.

for the supply of sugar during 20X1-20X2. As per the contract the delivery is to be

made within 2 months from the date of contract. In case of failure to deliver within

the schedule, X Sugars Ltd. has to pay a compensation of ` 30,00,000 to Y

Chocolates Ltd. During the transit, the vehicle carrying the sugar met accident and X

Sugar Ltd. lost the entire consignment. It is, however covered by an insurance policy.

According to the report of the surveyor, the amount is collectible, subject to the

deductible clause [i.e., 15% of the claim] in the insurance policy. The cost of goods

lost was ` 2,50,00,000. Before the financial year end, X Sugars Ltd. received informal

information from the insurance company that their claim had been processed and the

payment had been dispatched for 85% of the claim amount. Meanwhile Y Chocolates

Ltd. has made demand of ` 30,00,000 since the goods were not delivered on time.

What provision or disclosure would X Ltd. need to make at year end?

Q6. An entity sells goods with a warranty under which customers are covered for the cost

of repairs of any manufacturing defects that become apparent within the first six

months after purchase. If minor defects were detected in all products sold, repair

costs of ` 1 million would result. If major defects were detected in all products sold,

repair costs of ` 4 million would result. The entity’s past experience and future

expectations indicate that, for the coming year, 75% of the goods sold will have no

defects, 20% of the goods sold will have minor defects and 5% of the goods sold will

have major defects. In accordance with the standard, an entity assesses the probability

of an outflow for the warranty obligations as a whole.

Q7. X Solar Power Ltd., a power company, has a present obligation to dismantle its plant

after 35 years of useful life. X Solar Power Ltd. cannot cancel this obligation or

transfer to third party. X Solar Power Ltd. has estimated the total cost of dismantling

at ` 50,00,000, the present value of which is ` 30,00,000. Based on the facts and

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circumstances, X Solar Power Ltd. considers the risk factor of 5% i.e., the risk that the

actual outflows would be more from the expected present value. How should X Solar

Power Ltd. account for the obligation?

Q8. X Chemicals Ltd. engaged in the chemical industry causes environmental damage by

dumping waste in the river near its factory. It does not clean up because there is no

environmental legislation requiring cleaning up and X Chemicals Ltd. is causing

damage for last 40 years. As at March 31, 20X2, the State Legislature has passed a

path breaking legislation requiring all polluting factories to clean-up the river water

already contaminated. The formal Gazette notification of the law is pending. How

should X Chemicals Ltd. deal with this situation?

Reimbursement

Q9. X Beauty Solutions Ltd. is selling cosmetic products under its brand name ‘B’, but it is

getting its product manufactured from Y Ltd. It has an understanding (enforceable

agreement) with Y Ltd. that if the company becomes liable for any damage claims,

due to any injury or harm to the customer of the cosmetic products, 30% will be

reimbursed to it by Y Ltd. During the financial year 20X1-20X2, a claim of `

30,00,000 becomes payable to customers by X Beauty Solutions Ltd. How should X

Beauty Solutions Ltd. account for the claim that becomes payable?

Q10. X Ltd. is operating in the telecom industry. During the Financial Year 20X1-20X2, the

Income Tax authorities sent a scrutiny assessment notice under Section 143(2) of the

Income-tax Act, 1961, in respect to return filed under Section 139 of this Act for

Previous Year 20X0- 20X1 (Assessment Year 20X1-20X2) and initiated assessment

proceedings on account of a deduction claimed by the company which in the view of

the authorities was inadmissible.

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During the financial year 20X1-20X2 itself, the assessment proceedings were

completed and the assessing officer did not allow the deduction and raised a demand

of ` 1,00,00,000 against the company. The company contested such levy and filed an

appeal with the Appellate authority. At the end of the financial year 20X1-20X2, the

appeal had not been heard. The company is not confident whether that the company

would win the appeal. However, the company was advised by its legal counsel that on

a similar matter, two appellate authorities of different jurisdictions had given

conflicting judgements, one in favour of the assessee and one against the assessee. The

legal counsel further stated it had more than 50% chance of winning appeal. Please

advise how company should account for these transactions in year 20X1-20X2.

Onerous Contracts

Q11. An entity operates profitability from a factory that it has leased under an operating

lease, during December 2019, entity re-locates it's Location to new factory, the Lease

of old factory continues for next 4 years, it cannot be cancelled and factory cannot be

re-let. comment.

Q12. A Company has entered into sale's contract with another company, the Delivery to

take place during the first month of next Financial Year, in case of Failure of

Company to Deliver within the schedule, a compensation is to be paid to the buyer.

The Company planned to manufactured the goods, during the last month of current

financial year. As on balance sheet date company realised that it would not be in a

position to meet the contractual obligation the amount of Compensation to be paid is

more than total profit to be derived from contract; in such a case both the

manufacturing schedule is the selling schedule would fall during the next financial

year. Could it be termed as present obligation

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Q13. X Metals Ltd. had entered into a non-cancellable contract with Y Ltd. to purchase

10,000 units of raw material at ` 50 per unit at a contract price of ` 5,00,000. As per

the terms of contract, X Metals Ltd. would have to pay ` 60,000 to exit the said

contract. X Metals Ltd. has discontinued manufacturing the product that would use the

said raw material. For that X Metals Ltd. has identified a third party to whom it can

sell the said raw material at ` 45 per unit. How should X Metals Ltd. account for this

transaction in its books of account in respect of the above contract?

Restructuring

Q14. X Ltd. has two segments, packaging division and paper division. In March 20X1, the

board of directors approved and announced a formal plan to sell the paper division in

June 20X1. Operating losses of paper division are estimated to be approximately `

50,00,000 during period from April 1, 20X1 to the expected date of disposal.

Management of X Ltd. wants to include the future operating loss of ` 50,00,000 in a

provision for restructuring in the financial statements for the period ended March 31,

20X1. Can X Ltd. include these operating losses in a provision for restructuring?

Q15. X Cements Ltd. has three manufacturing units situated in three different states of

India. Board of directors of X Cements Ltd., in their meeting held on January 10,

20X1, decided to close down its operations in one particular state on account of

environmental reasons. A detailed formal plan for shutting down the above unit was

also formalised and agreed by board of directors in that meeting, which specifies

approximate number of employees who will be compensated & expenditure expected

to be incurred. Date of implementation of plan has also been mentioned. Meetings

were also held with customers, suppliers, and workers to communicate the features of

the formal plan to close down the operations in the said state, and representatives of all

interested parties were present in those meetings. Do actions of board of directors

create a constructive obligation that needs a provision for restructuring?

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Contingent Liability

Q16. X Ltd. is operating in the vicinity of a river since 20 years. A community living

near X Ltd. claims that its operations has caused contamination of drinking water.

X Ltd. has received notice from the governmental environmental agency that

official investigations will be made into claims of pollution caused by the entity.

If it is found that X Ltd. has caused contamination, then penalties and fine would be

levied on it. X Ltd. believes that it has implemented all environmental safety

measures to an extent that it is unlikely to cause pollution. Management is not sure

whether it has all the information about the entire 20 years. .’. neither management

nor external experts are able to assess X Ltd.’s responsibility until the

investigation has completed. How should X Ltd. account for a liability?

Q17. X Shipping Ltd. is required by law to overhaul its shipping fleet once in every 3 years.

The company’s finance team was of the view that recognising the costs only when

paid would prevent matching of revenue earned all the time with certain costs of large

amounts which are incurred occasional. Thereby, it has formulated an accounting

policy of providing in its books of account for the future cost of maintenance

(overhauls, annual inspection etc.) by calculating a rate per hours sailed on sea and

accumulating a provision over time. The provision is adjusted when the expenditure is

actually incurred. Is the accounting policy of X Shipping Ltd. correct?

Q18. A Ltd has it's financial year end 31/3/2019 and has 15 law suits pending as on that

date. The director's have estimated the possible outcomes as below:

Results Probability Amt of Loss

1st 10 cases

Win 0.6 –

Lose - low Damage 0.3 90,000

Lose - High Damage 0.1 160,000

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Rest 5 cases

Win 0.5 –

Lose - Low Damage 0.3 60,000

Lose - high Damage 0.2 95,000

Calculate the amount of provision and contingent Liability.

Notes

Q19. A manufacturer gives warranties at the time of sale to purchasers of its three product

lines. Under the terms of the warranty, the manufacturer undertakes to repair or

replace items that fail to perform satisfactorily for two years from the date of sale. At

the end of the reporting period, a provision of ` 60,000 has been recognised. The

provision has not been discounted as the effect of discounting is not material. Draft

the Note.

Q20. In 2017, an entity involved in nuclear activities recognises a provision for

decommissioning costs of ` 300 million. The provision is estimated using the

assumption that decommissioning will take place in 60–70 years’ time. However,

there is a possibility that it will not take place until 100–110 years’ time, in which case

the present value of the costs will be significantly reduced. Draft the note.

Q21. An entity is involved in a dispute with a competitor, who is alleging that the entity has

infringed patents and is seeking damages of ` 100 million. The entity recognises a

provision for its best estimate of the obligation, but

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IND AS19 Employee benefits

Topics Pg.

I. Objective 1

II. Scope 1

III. Short term employee benefits 2

Recognition 2

Short rem paid absence 2

Profit-sharing and bonus plans 3

IV. Post employment benefits 4

Defined contribution plan 4

Defined benefit plan 5

Net defined benefit liabilities / Asset 5

Components of net defined benefit plan 5

Current & Past service cost 6

Net interest on defined benefit plan 6

Remeasurement on net defined benefit plan 6

Multiemployer plan 7

State plan 7

Disclosures 8

V. Other long term employee benefits 10

VI. Termination benefits 10

VII. Practical Questions 11

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I.

The objective of this Standard is to prescribe the accounting & disclosure for

employee benefits. The Standard requires an entity 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 entity consumes the economic benefit arising from service

provided by an employee in exchange for employee benefits.

II.

This Standard shall be applied by an employer in accounting for all employee

benefits, except those to which Ind AS 102, Share- based Payment.

1 This Standard does not deal with reporting by employee benefit plans.

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

a. under formal plans or other formal agreements between an entity and individual

employees, groups of employees or their representatives;

b. under legislative requirements, or through industry arrangements, whereby entities

are required to contribute to national, state, industry or other multi-employer plans

c. by those informal practices that give rise to a constructive obligation.

3. An employee may provide services to an entity on a full -time, part- time, permanent,

casual or temporary basis. For the purpose of this Standard, employees include

directors and other management personnel.

4. Employee benefits are all forms of consideration given by an entity in exchange for

service rendered by employees or for the termination of employment. Employee

benefits are classifies in to (SPOT)

a. Short Term Employee Benefits

b. Post Employment Benefits

c. Other Long Term Employment Benefits

d. Termination Benefit.

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III.

1. Short-term employee benefits are employee benefits (other than termination

benefits) that are expected to be settled wholly before 12 months after the end of

the annual reporting period in which the employees render related service. E.g.

wages, salaries and social security contributions, paid annual leave and paid sick

leave, profit-sharing and bonuses & non-monetary benefits (such as medical care,

housing, cars & free or subsidised goods or services) for current employees.

2. Recognition: When an employee has rendered service to an entity during an

accounting period, the entity shall recognise the undiscounted amount of short-term

employee benefits expected to be paid in exchange for that service as a liability

(accrued expense), after deducting any amount already paid. If the amount already

paid exceeds the undiscounted amount of the benefits, an entity shall recognise that

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

for e.g., a reduction in future payments or a cash refund or as an expense, unless

another Ind AS requires or permits inclusion of the benefits in the cost of an asset.

3. Short-term paid absences

a. An entity may pay employees for absence for various reasons including holidays,

sickness and short-term disability, maternity or paternity, jury service and military

service. Entitlement to paid absences falls into two categories:

i. Accumulating paid absences are those that are carried forward and can be used

in future periods if current period’s entitlement is not used in full. Accumulating

paid absences may be either

• Vesting: employees are entitled to a cash payment for unused entitlement or

• Non-vesting: employees are not entitled to a cash payment for unused entitlement

hence the obligation for such leaves are measured based on probability of leave

that is expected to be availed by the employee.

ii. Non-accumulating are other than accumulating, they lapse if current period’s

entitlement is not used in full & do not entitle employees to a cash payment for

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unused entitlement on leaving the entity. This is commonly the case for sick pay,

maternity or paternity leave and paid absences for jury service or military service. An

entity recognises no liability or expense until the time of the absence,

because employee service does not increase the amount of the benefit.

b. An entity shall recognise the expected cost of short-term employee benefits in the

form of paid absences as follows:

i. in the case of accumulating paid absences, when the employees render service that

increases their entitlement to future paid absences.

ii. in the case of non-accumulating paid absences, when the absences occur.

4. Profit-sharing and bonus plans

a. An entity shall recognise the expected cost of profit-sharing & bonus payments

when, and only when:

i. the entity has a present legal/constructive obligation to make such payments as

a result of past events; and

ii. a reliable estimate of the obligation can be made.

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

remain with the entity for a specified period. Such plans create a constructive

obligation as employees render service that increases the amount to be paid if they

remain in service until the end of the specified period. Measurement of such

constructive obligations reflects possibility that some employees may leave without

receiving profit-sharing payments.

c. An entity may have no legal obligation to pay a bonus. Nevertheless, in some cases,

an entity has a practice of paying bonuses. In such cases, the entity has a constructive

obligation because the entity has no realistic alternative but to pay the bonus.

Measurement of constructive obligation reflects the possibility that some employees

may leave without receiving a bonus.

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IV. 1. Post-employment benefits are employee benefits (other than termination benefits and

short-term employee benefits) that are payable after the completion of

employment. They are formal or informal arrangements under which an entity

provides post-employment benefits for one or more employees.

2. 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.

a. Defined contribution plans are post-employment benefit plans under which an

entity pays fixed contributions into a separate entity (a fund) and will have no

legal or constructive 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. 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, in substance, on the employee.

Recognition

b. The entity shall recognise the contribution payable to a defined contribution plan as

an expense in year in which the service has been rendered by the employee.

c. The contribution should not be discounted unless they are not expected to be

settled wholly before twelve months after the end of the annual reporting period in

which the employees render the related service.

d. Disclosure

i. Entity shall disclose amount recognised as an expense for defined contribution plans.

ii. Where required by Ind AS 24 an entity discloses information about contributions to

defined contribution plans for key management personnel.

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4. Defined Benefit Plan: are post-employment benefit plans other than defined

contribution plans. Under defined benefit plans the entity’s obligation is to provide

the agreed benefits to current and former employees and actuarial risk (that benefits

will cost more than expected) and investment risk fall, in substance, on the entity.

If actuarial or investment experience are worse than expected, entity’s obligation

may increase.

a. The net defined benefit liability (asset) is the deficit or surplus, adjusted for

any effect of limiting a net defined benefit asset to the asset ceiling.

Present value of the defined benefit obligation X X X

Less: Fair value of plan assets (if any) XXX

Surplus / Deficit XXX

b. The asset ceiling is the present value of any economic benefits available in the form

of refunds from the plan or reductions in future contributions to the plan.

c. The discount rate used in post-employment benefit obligations shall be

determined by reference to market yields at the end of the reporting period on

government bonds. However, for currencies other than Indian rupee for which

there is deep market in high quality corporate bonds, the market yields (at the end of

the reporting period) on such high quality corporate bonds denominated in that

currency shall be used. The currency and term of the government bonds or corporate

bonds shall be consistent with the currency and estimated term of the post-

employment benefit obligations.

d. Plan assets comprise assets held by a long-term employee benefit fund and

qualifying insurance policies.

e. An entity shall recognise the components of defined benefit cost, as follows:

i. Service cost in profit & loss;

ii. Net interest on the net defined benefit liability (asset) in profit or loss; and

iii. Remeasurement of net defined benefit liability(asset) in OCI income.

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f. Service cost comprises:

i. Current service cost, which is the increase in the present value of the defined

benefit obligation resulting from employee service in the current period;

ii. Past service cost, which is the change in the present value of the defined benefit

obligation for employee service in prior periods, resulting from a plan

amendment (introduction or withdrawal of, or changes to, a defined benefit plan)

or a curtailment (a significant reduction by the entity in the number of employees

covered by a plan); and

iii. any gain / loss on settlement.

g. Net interest on the net defined benefit liability (asset) is the change during the

period in the net defined benefit liability (asset) that arises from the passage of

time. Net interest on the net defined benefit liability (asset) shall be determined

Obligation * market yields on government bond XXX

Less: Plan asset * market yields on government bond XXX

Net Interest XXX

h. Remeasurement of the net defined benefit liability (asset) comprise:

i. Actuarial gains and losses;

ii. Return on plan assets, excluding amounts included in net interest on the net

defined benefit liability (asset); and

iii. any change in the effect of the asset ceiling, excluding amounts included in net

interest on the net defined benefit liability (asset).

i. Actuarial gains & losses are changes in the present value of the defined benefit

obligation resulting from experience adjustments (the effects of differences

between the previous actuarial assumptions and what has actually occurred) and

effects of changes in actuarial assumptions. (closing balance of obligation as

per previous actuary valuation – present valuations as per actuary). With respect to

Plan asset it is difference between expected & actual returns.

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j. Return on plan assets is interest, dividends and other income derived, together with

realised & unrealised gains or losses on plan assets and Excludes

a. any costs of managing plan assets; and

b. any tax payable by plan itself, other than tax included in the actuarial assumptions

used to measure the present value of the defined benefit obligation.

k. Multiemployer plans

1. Multi-employer plans are defined contribution plans (other than state plans) or

defined benefit plans (other than state plans) that:

a. pool assets contributed by various entities that are not under common control &

b. use those assets to provide benefits to employees of more than one entity, on the

basis that contribution and benefit levels are determined without regard to the

identity of the entity that employs the employees.

2. An entity shall classify a multi-employer plan as a defined contribution plan or a

defined benefit plan under the terms of the plan (including any constructive obligation

that goes beyond the formal terms).

3. If an entity participates in a multi-employer defined benefit plan, it shall 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

disclose the information

4. When sufficient information is not available to use defined benefit accounting for

a multi-employer defined benefit plan, an entity shall account for the plan as if it

were a defined contribution plan and disclose the information.

l. State Plans: State plans are established by legislation to cover all entities (or all

entities in a particular category, for example, a specific industry) and are operated

by national / local government / by another body (for example, an autonomous agency

created specifically for this purpose) that is not subject to control or influence by the

reporting entity. Entity shall account for a state plan in the same way as for a multi-

employer plan.

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m. Disclosures

Entity shall disclose information that enables users of FS to evaluate nature of its

defined benefit plans & financial effects of changes in those plans during period.

1. General

a. An entity shall disclose information that:

i. explains characteristics of its defined benefit plans & risks associated with them

ii. identifies & explains amounts in its FS arising from its defined benefit plans &

iii. describes how its defined benefit plans may affect the amount, timing and

uncertainty of the entity’s future cash flows.

b. To meet these objectives, an entity should have regard to all the following:

i. the level of detail necessary to satisfy the disclosure requirements;

ii. How much emphasis to place on each of the various requirements;

iii. How much aggregation or disaggregation to undertake; and

iv. Whether users of financial statements need additional information to evaluate the

quantitative information disclosed.

c. If the disclosures provided in accordance with Ind AS 19 and other Ind AS are

insufficient to meet the objectives above, additional information necessary to

meet those objectives should be disclosed. For example, an entity might present an

analysis of the present value of the defined benefit obligation that distinguishes

the nature, characteristics & risks of the obligation. Disclosure could distinguish:

i. between amounts owing to active members, deferred members, and pensioners

ii. between vested benefits and accrued but not vested benefits and

iii. between conditional benefits, amounts attributable to future salary increases &

other benefits.

d. An entity is required to assess whether all or some disclosures should be

disaggregated to distinguish plans or groups of plans with materially different risks.

For example, an entity may disaggregate disclosure about plans showing one or

more of the following features: different geographical locations; different

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characteristics such as flat salary pension plans, final salary pension

plans/postemployment medical plans different regulatory environments; different

reporting segments; and different funding arrangements (e.g. wholly unfunded,

wholly or partly funded).

e. Characteristics of defined benefit plans and risks associated with them

An entity shall disclose:

1. information about the characteristics of its defined benefit plans, including:

i. the nature of the benefits provided by the plan

(e.g. final salary defined benefit plan or contribution-based plan with guarantee);

ii. a description of the regulatory framework in which the plan operates (e.g. level of

any minimum funding requirements, and any effect of regulatory framework on plan,

such as asset ceiling); and

iii. a description of any other entity’s responsibilities for the governance of the plan

(e.g. responsibilities of trustees or of board members of the plan).

2. a description of the risks to which the plan exposes the entity, focused on any

unusual, entity specific or plan-specific risks, and of any significant concentrations

of risk. For example, if plan assets are invested primarily in one class of

investments (e.g. property), the plan may expose the entity to a concentration of

property market risk; and

3. a description of any plan amendments, curtailments and settlements.

f. Explanation of amounts in FS: Entity shall provide a reconciliation of opening

& closing balance for net defined benefit liability (asset).

g. The fair value of the plan assets shall be disaggregated into classes that

distinguish the nature and risks of those assets, subdividing each class of plan asset

into those that have a quoted market price in an active market (as defined in Ind AS

113, Fair Value Measurement) and those that do not.

i. An entity shall disclose the significant actuarial assumptions used to

determine the present value of the defined benefit obligation. Such disclosure shall

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be in absolute terms (e.g. as an absolute percentage, and not just as a margin

between different percentages and other variables). When an entity provides

disclosures in total for a grouping of plans, it shall provide such disclosures in form

of weighted averages or relatively narrow ranges.

V.

1. Other long term employee benefits are all employee benefits other than short-term

employee benefits, post-employment benefits and termination benefits.

2. Recognition & measurement same as Post employment benefit

3. Presentation same as Post employment benefit except remeasurement of net defined

liability or asset should be presented in P&L and not in other comprehensive Income.

VI.

1. Termination benefits are employee benefits provided in exchange for termination of an

employee’s employment as a result of either:

a. entity decision to terminate an employee’s employment before normal retirement date or

b. employee’s decision to accept an offer of benefits for termination of employment.

2. Event which gives rise to obligation is termination and not service provided.

3. Termination benefit should be recognised only when entity is demonstratably

committed to termination of employee. i.e. when entity has a detailed formal plan

for termination and there is no realistic possibility of withdrawal.

4. Termination should be recognised when they become due. If benefits fall due for

period beyond 12 months the amount of obligation should be discount.

5. Disclosure: This Standard does not require specific disclosures about termination

benefits, other Ind AS may require disclosures. For example, where required by Ind

AS 24 an entity discloses information about termination benefits for key

management personnel. Ind AS 1 requires disclosure of employee benefits expense.

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VII.

Basis Concept

Q1. A company has a scheme for payment of settlement allowance to retiring employees.

Under the scheme, retiring employees are entitled to reimbursement of certain travel

expenses for class they are entitled to as per company rule and to a lump-sum payment

to cover expenses on food and stay during the travel. Alternatively, employees can

claim a lump sum amount equal to one month pay last drawn. The company’s

contentions in this matter are:

a. Settlement allowance does not depend upon the length of service of the employee. It is

restricted to employee’s eligibility under the Travel rule of the company or where

option for lump sum payment is exercised, equal to last pay drawn.

b. As it is not related to length of service of employees, it is accounted for on claim basis.

State whether the contentions of company are correct as per relevant standard.

Short Term Employee Benefits

Q2. Sunderam Pvt. Ltd. has a headcount of 100 employees in 20X0-20X1. As per the

employee policy, the employees are entitled to:

• 30 casual leaves out of which 10 casual leaves may be carried forward to next year &

• 10 sick leaves out of which 2 sick leaves may be carried forward as paid leave.

At March 31, 20X1, the average unused entitlement is 5 days per employee for casual

leaves and 1 day per employee for sick leave. On an average, it is found that the

number of such employees who would be claiming casual leaves would be 30 and 10

employees who would claim sick leaves. Compute the liability to be recognised in

respect of sick leaves and casual leaves by entity at end of the year 20X0-20X1.

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Q3. XYZ Ltd has a group of employees from which details of Mr. Lal is available follows:

1. Leave allowed by XYZ (to each employee) : 30 days

2. Salary of Mr. Lal : 25000 per month

3. Standard working days in a month : 25 days

4. Total accumulated leave in 2018-2019 : 40 days

5. Maximum Leave that can be carried forward : 30 days

6. Lal has accumulated 32 days in 2017-2018 from which 27 days was availed by him in

CY 2017-2018. Pass Journal entries on 31.3.2019, assuming leave is vesting & unvesting.

Q4. A Ltd. has the following details of leave to employees

Name Total Leave Total Leave Vested Unvested Probability

Availed

A 80 50 20 5 0.9

B 70 45 15 10 0.7

C 60 50 - 9 0.6

D 90 70 20 - 0.5

E 85 65 10 10 1

F 65 45 9 10 0.2

Salary per working day = ` 1000. Calculate liability for vested and unvested leave?

Q5. Laxmi Mills is a profit making entity and has reported ` 200 crore in the financial

year 20X1-20X2. According to its profit–sharing plan, it distributes and pays 5% as

its portion of profit to its employees if they complete 1 year with the organisation.

Under this plan, an entity is under an obligation to pay if the employees complete a

specified period with the organisation. Laxmi Mills has estimated that due to staff

turnover in the organisation, the estimated pay-out would be around 4.5%. Compute

the liability and expense of the company under this plan.

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Q6. An entity has 100 employees, who are each entitled to five working days of paid sick

leaves for each year. Unused sick leave may be carried forward for one calendar year.

Sick leave is taken first out of the current year's entitlement and then out of any

balance brought forward from the previous year (LIFO basis).

At 31st March, 20X1, the average unused entitlement is two days per employee. The

entity expects, on the basis of experience that is expected to continue, that 92

employees will take no more than five days of paid sick leaves in 20X1-20X2 and

that the remaining eight employees will take an average of six and a half days each.

The entity expects that it will pay an additional twelve days of sick pay as a result of

the unused entitlement that has accumulated at 31st March, 20X1 (one & a half days

each, for 8 employees). Is entity require to recognize any liability in respect of leaves?

Post-Employment Plan & Other Long Term employee benefits

Q7. A plan pays a benefit of ` 140 for each year of service, excluding service before age of

25. Benefits vest immediately. Compute benefit to be attributed before & after age of 25?

Q8. B Pvt. Ltd. has a post-employment medical plan which will reimburse 20% of an

employee’s post-employment medical costs if the employee leaves after more than ten

and less than twenty years of service and 50% of those costs if the employee leaves

after twenty or more years of service. How would you measure the benefit to be

attributed for employee service for the last 20 years, 10 & 20 years & within 10 years?

Q9. Paras Pvt. Ltd. does not have sufficient information about a defined benefit plan and

thus accounts for the plan as if it were defined contribution plan. In the plan, there is a

contractual agreement between Paras Pvt. Ltd. and its participants to share the deficit

amongst all. The funding valuation shows a deficit of ` 500 million in the plan. The

plan has agreed under contract a schedule of contributions with the participating

employers in the plan that will eliminate the deficit over the next 10 years. The

entity’s total contributions under the contract are ` 30 million.

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Q10. RKA Private Ltd is an old company established in 19XX. The company started with a

very small capital base and today it is one of the leading companies in India in its

industry. The company has an annual turnover of ` 11,000 crores and planning to get

listed in the next year. The company has a large employee base. Company provided a

defined benefit plan to its employees. Following is the information relating to the

balances of the fund’s assets and liabilities as at 1st April, 20X1 & 31st March, 20X2.

Particulars 1st April, 20X1 31st March, 20X2 (` Lakhs)

Present value of benefit obligation 1,400 1,580

Fair value of plan assets 1,140 1,275

For financial year ended 31st March, 20X2, service cost was ` 55 lacs. Company

made a contribution of an amount of ` 111 lacs to plan. No benefits were paid during

year.

Consider a discount rate of 8%. You are required to -

a. Compute the balance(s) of the company to be included its balance sheet as on

31st March, 20X2 and amounts to be recognized in the statement of profit and loss and

other comprehensive income for the year ended 31st March, 20X2.

b. Give the journal entries in respect of amount(s) to be recognized.

Q11. FV of plan assets at beginning of the year ` 2,800. FV of plan assets at the end of the

year ` 3,086. Employer’s contribution to the plan during the year ` 290. Benefit

payments to retirees 320. Calculate actual return on plan assets?

Q12. A company reports the following information regarding pension plan assets. Calculate

FV of plan assets.

FMV Plan assets (op. balance) ` 7,00,000

Employer contribution ` 1,00,000

Actual return on plan ` 50,000

Benefit payment to retirees ` 40,000

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Q12. The fair value of plan assets of Anupam Ltd. was ` 2,00,000 in respect of employee

benefit pension plan as on 1st April 2018. On 30th September, 2018 the plan paid out

benefits of ` 25,000 and received inward contributions of ` 55,000. On 31st March,

2019 the fair value of plan assets was ` 3,00,000. On 1st April 2018 the company made

following estimates, based on its market studies and prevailing prices.

Interest and dividend income (after tax) payable by fund 10.25 %

Realized gains on plan assets (after tax) 3.00 %

Fund administrative costs (3.00) %

Expected rate of return 10.25 %

Calculate the expected and actual returns on plan assets as on 31st March 2019.

Q13. Rock Star Ltd. discontinues a business segment. Under the agreement with employee’s

union, the employees of the discontinued segment will earn no further benefit. This is

a curtailment without settlement, because employees will continue to receive benefits

for the services rendered before discontinuance of the business segment. Curtailment

reduces the gross obligation for various reasons including change in actuarial

assumptions made before curtailment. In this, if the benefits are determined based on

last pay drawn by employees, the gross obligation reduces after the curtailment

because the last pay earlier assumed is no longer valid. Assuming the following:

a. Immediately before the curtailment, based on current actuarial assumption, the gross

obligation was estimated at ` 6000

b. The fair value of plan assets on the date was estimated at ` 5100

c. The unamortized past service cost was ` 180

d. Curtailment reduces the obligation by ` 600, which is 10% of the gross obligation.

Rock Star Ltd. estimates the shares of unamortized service cost that relates to the part

of the obligation that is estimated at 10% of ` 180 at ` 18.

Calculate the gain from curtailment and liability after curtailment to be recognized in

the balance sheet.

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Q14. OPQ Ltd is a listed company having its corporate office at Nagpur. The company has

a branch office at Chennai. The company has been operating in Indian market for the

last 10 years. The company operates a pension plan that provides a pension of 2.5% of

the final salary for each year of service. The benefits become vested after seven years

of service. On 1st April, 20X8, the company increased the pension to 3% of the final

salary for each year of service starting from 1st April, 20X1. On the date of the

improvement, the present value of the additional benefits for service from 1st April,

20X1 to 1 April 20X8 was as follows:

• Employees with more than seven years’ service on 1 January 20X8 – `2,75,000

• Employees with less than 7 years of service – `2,21,000 (average 4 years to go).

What would be the accounting treatment in this case?

Q15. SA Pvt Ltd is engaged in the business of retail having 100 retail outlets across

Northern and Southern India. The company’s head office is located at Chennai. SA

Pvt Ltd is a subsidiary of SAG Ltd. SAG Ltd is listed on the National Stock Exchange

in India. Following information is available for SA Pvt Ltd: Plan Assets

At 1st April, 20X1, the fair value of plan assets was ` 10,000.

Contribution to the plan assets done on 31st March, 20X2 – ` 3,000

Amount paid on 31st March, 20X2 – ` 300

At 31st March, 20X2, the fair value of plan assets was ` 14,700

Actual return on plan assets – ` 2,000

Defined Benefit Obligation

At 1st April, 20X1, present value of the defined benefit obligation was ` 12,000.

At 31st March, 20X2, present value of the defined benefit obligation was ` 15,500.

Actuarial losses on the obligation for the year ended 31st March, 20X2 were ` 100.

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Q16. Nature of benefit : 1 Lumpsum Payment

Basis of Payment : 1% of final salary for each year of service

No of year of service to be paid for : 6 years

Expected final salary : ` 25,500 p.a. (to be drawn)

Yield on Govt. bonds : 6% p.a.

Journalise by applying the Projected unit method.

Q17. Nature of benefit : 1 Lumpsum Payment

Basis of Payment : 1% of final salary for each year of service

No of year of service to be paid for : 5 years

Salary of current year : ` 10,000 p.a.

Increase in salary : 7% p.a. compounding

Discount rate : 6% p.a.

Expected return on plan asset : 15%

Journalise by applying the Projected unit method.

Q18. X Ltd Furnishes the following information with respect to defined benefit plan assume

all transaction occur on the Last day of the year the present value of obligation is Fair

value of plan asset on 1/4/2017 are ` 1000

Particulars 17 – 18 18 – 19 19 – 20

1. Discount rate at start of the year 10% 9% 8%

2. Expected rate of return on plan

asset

12% 11.1% 10.3%

3. Current service cost 130 140 150

4. Benefits paid 150 180 190

5. Contributions paid 90 100 110

6. PV of obligation on 31/3 1141 1197 1295

7. FV of plan asset on 31/3 1092 1109 1093

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In 18 - 19 plan amendment to provide additional benefit with effect from 1/4/2017 the

present value of additional benefit for employee services before 1.4.18 was ` 50

(vested benefits) is ` 30 (unvested benefits) the enterprise estimated that the Average

period untill unvested benefits would become vested was 3 yrs.

Minimum Funding Requirement & Asset Ceiling

Q19. An entity has a defined benefit plan wherein before contributions, its gross obligations

are ` 1100 and the fair value of its plan assets are ` 1200. The entity has a minimum

funding requirement to the plan of ` 200. The plan rules permit a full refund of any

surplus to the entity at the end of plan life. Show effects under IND AS 19

Q20. An entity has a defined benefit plan wherein before contributions, its gross obligations

are ` 1100 and the fair value of its plan assets are ` 1000. The entity has a minimum

funding requirement to the plan of 300. The plan rules permit a refund of only 60% of

any surplus to the entity at the end of plan life. Show effects under IND AS 19.

Q21. An entity has a defined benefit plan wherein before contributions, its gross obligations

are ` 500 and the fair value of its plan assets are ` 550. The entity has a minimum

funding requirement to the plan of ` 300. No refund is permitted under the plan to the

entity at the end of the plan. However, due to the surplus, there is an estimate of

lowered future contributions to the plan as under:-

Year 1 2 3

Reduction in future contributions 3 6 2

A DCF of 8% is considered appropriate. Show effects under IND AS 19.