EAC Opinion

 Facts

(i) In the case of a public sector company the rules relating to the leave by employees are as under:

(a) The entitlement of Earned Leave (EL) is related to the number of years of service put in by the employee. The earned leave has two components viz. Encashable Leave (EEL) and Non-Encashable Leave (NEL).

(b) The company gives advance credit of leave in terms of EEL and NEL on the standard dates i.e., 25th June and 25th December.

(c) The EL can be accumulated up to 300 days. Beyond this period, the EL will lapse.

(d) EL can be encashed at any time during the period of 300 days. NEL can be encashed at the time of retirement.

(e) There are similar Rules for Half-Pay Leave (HPL).

 (ii) The accounting practice followed by the company in respect of Leave Liability is as under: Liability for encashable earned leave (EEL), nonencashable earned leave (NEL) and half-pay leave (HPL) is provided for in the books on accrual basis for the value of leave outstanding at the end of the year. According to the company, provision for half-pay leave is made for the total leave balance at the year end without restricting it to 480 half days (240 full days) per employee in line with the requirements of AS-15.

(iii) The Auditors were of the view that this was a long-term liability for the reasons that the past pattern indicates that the employees are unlikely to avail/encash the entire carried forward leave during the next twelve months and hence, the benefit would not be short-term. Accordingly, keeping in view of behavioural pattern of the employees, the leave benefit should be considered as long-term benefit and the provision should be made based on actuarial valuation.

(a) whether the company’s view that ‘Leave Liability’ is a short-term liability is correct and

(b) if not, how the change in accounting treatment should be accounted in the books.

Opinion

a) Short-term employee benefits are those benefits which fall due wholly within 12 months after the end of the period in which the employees render the related service. Therefore, the treatment of ‘Leave Liability’ as ‘short-term employee benefit’ as interpreted by the company is not correct.

(b) The change in the accounting treatment of Leave Liability from ‘short-term employee benefits’ to ‘other long-term employee benefits’ should be treated as ‘prior period item’. Accordingly, the nature and amount thereof should be included and disclosed in the profit and loss account for the period in which the error is revealed as provided in AS-5. (Refer pages 710-714 of C.A. Journal for November, 2011)