A. Facts of the case:
The public sector undertaking (company) was making provision for encashment of earned leaves upto the maximum level of encashment permitted by the company’s rules although there was policy in company to carry-forward the half-pay leaves if it was not utilized by employee, but these accumulated leaves can’t be encashed by the employee.
As per paragraph 14 of the Accounting Standard (AS) 15 (revised), ‘Employee Benefits’, the liability for the expected cost of accumulated compensated absence is to be recognized only when there is expectation to pay any additional amount on account of accumulation.
However, the Comptroller & Auditor General (CAG) had raised the issue of non-provision of accumulated half pay leaves stating that the company is accounting the expenditure on cash basis rather than on accrual basis.
B. Query:
C. Opinion:
It was held that from an accounting angle, the nature of unencashable leave is similar to that of the encashable leave insofar as the company provides a right to an employee to receive salaries and wages for the period for which employees can avail leaves during that period as they do not render any services to the employer.
Also, accumulating half pay leave creates an obligation on the enterprise because any unused entitlement increases the employee’s entitlement to avail leave in future period. Thus, a provision should be recognized for all these benefits and recorded as part of the cost of service rendered during the period in which the service was rendered.
The Committee is of the opinion that a liability on account of compensated absences should be recognized as per the requirements of AS 15, which should be reviewed at each reporting date.
The Above opinion was affirmed by the ICAI–Expert committee.
