AS15(revised 2005)

Requirement for Accounting for Retirement Benefits:

Occurrence of corporate scandals involving financial and accounting frauds in India and in other countries of the world in the last few years have shaken the confidence of investors and general public in corporate balance sheets/financial statements, audit firms, and analysts etc. who used to enjoy a very high profile in public life.

These events created a demand for openness, transparency and accountability of all transactions in the corporate world and triggered a search for cleaner corporate governance. In our country this led to the setting up of the Naresh Chandra Committee on Corporate Audit and Governance. This Committee has recommended far reaching measures designed to alter the way India Inc works.

Taking the above developments into consideration, it is felt that (in addition to other issues not falling within the scope of this letter) financial reporting in the balance sheet and in other financial statements of companies needs to be very fair. This places a very high responsibility on those showing value of liabilities and assets in the balance sheet/financial statements of companies and these values should be arrived at with utmost care. Therefore the contents of this letter should be of significance to accountants, finance executives, auditors and all those who deal with the financial statements.

In this context I draw your attention to the treatment to be given to retirement benefits in the financial statements. These benefits, particularly the benefits which are in the nature defined benefits are required to be evaluated by an Actuary.

Therefore a close collaboration between the Actuary & Accountant is desirable in this area. The Institute of Chartered Accountants of India has issued ACCOUNTING STANDARD 15R which contains the details for accounting for retirement benefits. It is pertinent to note that the two most important retirement benefits are: (i) Gratuity and (ii) Leave Encashment Benefit on Retirement.

These are in the nature of defined benefits and therefore their computation falls in the discipline of Actuarial Science. However, value of retirement benefits is not being reflected properly in balance sheets by many organisations. A survey reveals that a considerable number of companies are not getting the above liabilities (particularly leave encashment) evaluated by an Actuary.

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