 Accounting standard 15 employee benefits, okay, what do you understand by employee benefits? Provident fund, okay, someone said PF, someone said retirement benefits, okay, what is retirement benefits? Retirement benefits, okay, retirement benefits you are saying, Gratitude and leave and cash Okay, leave and cashment is not retirement, right, okay, okay, encashment is only at retirement, okay, it's a big topic, we'll discuss it in detail, leave and cashment, pension, PF I have written, what else, NPS, it's also retirement, new pension scheme, so it's pension, yes, okay, Medi-claim, Medi-claim premium is paid by, one second, one second, Medi-claim premium is paid by employer, no, no, no, we are discussing employee benefits, we are not discussing retirement benefits, okay, retirement benefits is part of employee benefits, so our topic is employee benefits, retirement benefit is a sub topic, so leave, travel, okay, various types of allowances, salary, bonus, so various allowances, okay, group insurance, various reimbursement or allowances, I'll put it in one, anything else, bold and enough, right, okay, various allowances, you might have various types of allowances, I've clubbed it in one, transport allowance, children allowance, education allowance, whatever, many allowances, study leave, okay, so leave and cashment can have, so basically let's make it a big, a macro thing, leaves, okay, paid leaves, which we call it, okay, now paid leaves can have a sub portion of leave and cashment, paid leaves can have your normal sick leave, your, as you said, study leave, so there can be various components of your paid leaves, I understand, so I'm saying there are paid leaves, out of those paid leaves, there are some leaves which you can encash and some leaves which get over in the same year, that means you cannot carry forward, so some laps and some you can carry forward, out of some which you can carry forward, you can encash some of them, so I'm saying a macro point which I'm saying is paid leaves, paid leaves can have sub portions, long term training, so education I can put it in under allowance or various other, you know, other types of benefits you might get, but these are the basic ones or the macro ones, now first of all let us understand what is an employee, okay, the standard does not define what is an employee, but there is an inclusive definition, that means employee includes these things, okay, so it says full time employee, part time employee, permanent employee, casual employee, temporary basis employee, so employee, any of these will fall under the definition of employee, even if it is part time, even if it is temporary employment, employee also includes whole time directors and managerial persons, so those are also employees, in fact it says employee benefits which has been pointed out here can also be paid to spouse, children or any other dependent, so those will also fall under employee benefits, okay, these are some of the benefits which I have tried to note down, which is salaries, bonus, medical care, housing, cars, food, subsidized food, paid leaves, gratuity, pension, sabbatical leaves, okay, we did not write sabbatical leaves, okay, study leave is one kind of sabbatical leave, any disability benefits and then there is a VRS scheme, okay, now they have classified employee benefits into four types, major four types which is short term, other long term, why other long term because post employment is also long term and termination is also long term, hence short term, post employment, termination and other long term, these are the four basic classifications, it says short term means, examples are wages or salary, bonus, paid annual leaves, medical care, housing, cars, free or subsidized goods, the point here is it should be payable within 12 months from the end of the year, for anything which is payable within 12 months from the end of the year is short term, other long term means long service leaves, sabbatical leaves, long term disability benefits, any deferred compensation which is not payable within 12 months from the end of the year, post employment something which is payable after completion of employment, gratitude, pension or any post employment insurance or medical care post insurance, post employment medical care, any other retirement benefits which we are missing and last is termination benefits, termination benefits are of two types, one is notice pay, so you know one if you are you know handed over the pink slip then the notice pay is what you get, that is one type of termination benefit, the other is VRS, voluntary retirement scheme, these are the basic classifications, now why do we classify benefits into four types or four parts, basically it is for the purpose of accounting, now short term benefits will be simply accounted like salaries, we just accounted every month ok, so short term it is simple we just accounted whereas long term it says that you will have to do actual valuation, so whether it is post employment or it is other long term you will have to consider whether actual valuation is required or not and then there is termination benefit, termination benefit because of the nature you will come to know of those benefits only when it is time to terminate, that means when we have floated we are a scheme or when the employee is handed over a pink slip or the employee has put in his resignation, these are the times when you come to know about the termination and hence termination benefits because of its nature you do not go for actual valuation or discounting or any such things, so these are the basic four types, let us go one by one and understand each of them, short term as I said is very simple, there is no discounting, no actual valuation, simple charge to your income and expenditure account right, short term we said is salary, bonus all those types ok, let us come to a very important topic which is compensated absences or paid leaves ok, how do you account for paid leaves, first of all let me understand the structure of paid leaves that you get, how many leaves do you get in a year, 30 8 or 30, 30 leaves and 8 ok 30 EL 8 CL, how many of it can you carry forward, 30 and 20 you can carry forward, 8 ok up to 300 days that means before the end of next year, one second, one second, one second, one second, one second, in 2013 you must have earned 30 leaves for next year, for next year, suppose next year those 30 leaves are not used, 300 leaves I can carry forward up to retirement ok, so not 300 days 300 leaves ok, up to 300 leaves I can carry forward up till retirement ok, can it be encached on retirement ok, this 8 CL will lapse in the same year ok, 20 HPL you can carry forward till retirement, no limit can you encache it, please one at a time please yes, so it can be encached, up to 300, up to this, so basically this EL plus HPL maximum you can encache is 300, yes that is correct, now how do you account for these leaves, suppose a person does not take any leave or a person takes only this 8 CL, so forget this 8 CL, a person does not take any leave out of this 30 and 20 how do you account for it, it is accumulated, no no I am not talking about it is exceeding 300, forget 300 it is the first year, so a person has not taken any leave during the year, entire 50 leaves is carry forward, how do you account for it, there is no accounting only there is no register in which we write that 50 leaves carry forward and we keep on counting till it is 300, after 300 we do not carry forward, I understand the first year might be 30 but otherwise it can be carry only it is accounted in the study leave account, there is no impact in the account, wait there is no impact in the account, there is no effect should there be an impact in the accounts, yes and why so, it is a definite one second one second one second he has something to say, yes, sir it is a definite hello, it is not we are not accounting every year it is a wrong concept I think so why every year you do the actual valuation, in actual valuation leave and casement is one of the part, leave and casement how much leave is accrued to each and every employee at the end of the year, so you do the actual valuation based on that we make the provision which gets debited into the expenditure account, why do you need to account for such things, sir, why it is a liability, because 300 can be uncashed that is why, suppose it could not be uncashed, the purpose of actual valuation is if today what is my if the full leave is uncashed what would be my actual liability this is actual valuation based on that company has some liability as on date towards all employees of the institute, ok, this is the reason suppose leaves cannot be uncashed, will you still do accounting for these leaves will you still do actual valuation, no, no, suppose any leave in excess of 300 there should not be any valuation, the company institute is liable to enhance up to 300 days maximum ok, that means you are saying that if 300 days or actual leave due whichever is I got your point you are saying that only because it is uncashable that is why we do the accounting that is why we do actual valuation if it was not uncashable we would not go for any accounting or any actual valuation yes, whenever any employee retires we then debit the provision account so this means only when there is a cash outflow I will think of accounting for the expense if there is no cash flow there is no accounting why there is no accounting when I am doing the actual valuation and I am taking heat in my eye of course it is affecting my viability, profitability and the consumption surplus reduces to that extent but you are saying we are doing this only because it is uncashable suppose leaves are not uncashable yes of course, yes of course, liabilities they are when liabilities they are we are recognizing the liability every year liability is there because it is uncashable it is uncashable suppose it was not uncashable then no liability, no provision ok, ok how many working days are there in a year how many working days are there in a year without these paid leaves, without these paid leaves how many working days are there in a year suppose we remove, we remove Sundays, we remove Saturdays and we remove public holidays 214, 214 around what I mean to say is when a salary is paid ok, let us do a very rough calculation let us not go on the actuals see 65 days a year 52 sorry so 52 Sundays, 52 Saturdays and say some 20 public holidays suppose just random I am saying so basically working days would be some 265 minus 25 so some 260, 240 240 working days out of these 240 working days I am getting some 58 leaves suppose let us take it as 40 leaves so basically 200 working days in a year right I am just taking rough calculation ok suppose a person is paid 2 lakh rupees per annum ok this 2 lakh rupees per annum is paid for 200 working days we are all we are all we are all no no see if let us not think from employee's angle let us think from employer's angle right accounting is done for the employer is done for the institution right let us think from the employer's angle if I am an employer I want to hire an employee I want to pay some 2 lakh rupees per annum I am paying the 2 lakh rupees for these 200 days because rest all is either holidays or leaves and suppose he takes leaves all the he consumes all the leaves if he does not consume I have to anyways pay and if he consumes then I am paying him for 200 days so this 2 lakh is for 200 days right hello yes or no yes yes good so I am paying 2 lakh rupees for 200 days suppose he does not take any leaves he works for 250 days he is still getting this 2 lakhs yes yes yes he might get the benefit afterwards no one second one second he might get the benefit afterwards suppose in the next year he takes 50 days leave of this year and 50 days leave of the next year also he takes 100 days leave in the next year so what he is doing is he is working for 100 days and still getting 2 lakhs in one year he is working for 250 days and still getting 2 lakhs in next year he is working for 100 days and still getting 2 lakhs now if I am an employer ok see when an employee works every day he is giving me some benefit in terms of revenue can I associate some revenue with every employee that means if he works for one day then some revenue will be generated if he works for 200 days then 200 times that revenue will be generated right now we have heard of matching concept every time someone earns some money we have to charge something to the income and expenditure account so every time an employee works for a day he will charge his one day salary to the accounts right so if he is expected to work for 200 days he generates some revenue for 200 days for me and I am paying him 2 lakh rupees for those 200 days next year so when he works for 250 days in the same year what happens is he is generating revenue 250 times but my charge to the PNL is only for 200 times are you with me yes next year he is generating only for 100 days he is generating revenue for only 100 days but I am making a payment for 200 days that means there is no matching concept are you agreeing with me so suppose there is no leave encashment there is no encashment happening still for matching concept I should do at least some accounting so that every year whatever revenue he earns per day there is a charge per day are you with me that is why you have this actual valuation or you have this accrual basis accounting so whenever a leave can be carried forward there should be some credit or income in the current year are you with me that means he has worked for 250 days I am paying him for 200 days I should charge PNL for another 50 days in the current year and next year when he is taking leaves of 50 extra I should give income of those 50 days in the next year so what I am doing is I am transferring some expenditure in the current year which should ideally come in the next year let me expand this or let me 200 days for 2 lakh rupees which is 1000 rupees per day suppose he earns for me 2000 rupees per day he has worked for 250 days in a year in this year I am paying him 2 lakhs he should ideally earn me 4 lakhs but he is earning for me 5 lakhs in this year next year I again pay him 2 lakhs he should ideally earn 4 lakhs again for me but he is earning only 2 lakhs I think this should be 6 and this should be 2 something like this what I should do now is I should charge some expense over here and I should give some income over here because I am paying 2 lakhs I am not getting 2 lakhs worth I am paying here 2 lakhs I am getting worth more than 2 lakhs this accounting is a cruel basis accounting and hence you should go for actual valuation whether there is encashment or no encashment actual valuation is required wherever there is leaves which you can carry forward for more than 1 year so if it is less than 12 months you can carry forward it is short term benefit short term benefit there is no actual valuation but if it can be carried forward for more than 12 months then actual valuation is required this system is to be followed then the salary component and the leave encashment component will come separately in the bills also so it will be inconsistent with the government present system so the policy is to come from the higher level actually otherwise preparation of the salary bill will undergo massive changes this will be charged as provision for leave encashment now you are also charging provision for leave encashment no conceptually it is understood sir conceptually there is no problem at all conceptually there is no problem at all what you have explained it is well understood also but point is that we prepare 30 days or 31 days salary bill now if you are explaining this then certain portion is actuarial portion which has to come from that actuarial fund which has been created and some portion has to come from the salary head now you do actuarial valuation yeah we do actuarial valuation when you do actuarial valuation what data do you give to actuary no this we don't include in actuarial valuation how do you know that actuary what calculation do you do have you ever seen have you tried to understand from the actuary what calculations he does we actually give the report we provide provision without understanding what goes into that calculation that is true I am sure actuary would take this into account the point is not that sir what is the data that is what are these plans in the end world how many days in the end world sir now the problem when I know how many leaves he has taken in the current year there are two things which I will estimate okay once again listen to me when I know how many leaves he has taken in the current year when I know his accumulated leave till now there are two things which I will consider how many leaves is he expected to take in the years to come before retirement that means out of the accumulated leave and the next year's leave how many leaves is he expected to take before retirement see normally it is a tendency that if there is 301 leave even if we do not require one leave we will go and take that leave that actuary will consider when he considers that he will charge you or he will create that he will he will the expense which he will give you will include that one day extra leave which that employee will definitely take so in the assumptions which an which the actuary take he takes this into account that how many leaves are you going to take before retirement so that is very and how many leaves you will encash after retirement if that is the case once a person touches 300 leaves accumulated the actuary will not charge anything to the PNL but that is not the case because he knows that accumulated leave in a year is only 50 and the employee might take 60, 70, 80 leaves in that year so again that 300 might come down to 250 then again in next year it might go to 275 then again it might come so it will so my point is totally different I am saying suppose in the first year he does not take leave and leave gets accumulated he gets full salary whatever 240 days he is working 240 days salary is paid to him next year he takes 50 days leave now salary will come for 190 days and 50 days he is taking leave that will go from actuarial fund so when will prepare the salary will this problem will be problem will not come that is what I am saying see you have not understood what calculations actuary does actuary will take into account how many leaves you are going to take and how many leaves you are going to encash the two things which actuary takes into account not that I am talking about the payment side now when we make the payment of the services he has rendered we have to make the payment for the whole year he has worked for the whole year now actually he has worked for only 200 days and 40 days he has taken leave but total period will be counted to 40 days will be paid towards salary for 200 days and 40 days accumulated leave there are two things which I have explained yesterday also today also I am explaining one is operation angle one is accounting angle accounting angle will not tell you how much you should pay to the employee what you are paying today you will pay tomorrow also next year also but the source of fund will be different source of fund will also not be different accounting will not tell you source of fund accounting will tell you you should create a fund for this in future now you might create a fund you might not create a fund if you do not create a fund accounting will tell you there should be a liability standing in your accounts for this if you have already created a fund accounting will tell you ok fine if you have created a fund there is no liability liability and assets will knock off and there is zero liability the point is to understood well that salary had suppose he renders 200 days actually he will get salary for 200 days he will get for 240 days he will be paid for 240 days 40 days leave he is taking now 40 days actuarial value has already been created last year this year and it has gone to actuarial fund now that 40 days is to be deducted from actuarial fund which is being in cash actually so when will prepare the salary bill what kind of salary bill will you prepare see there will be no change in your salary bill that is what I am explaining that is operational angle but 40 days deduction is to be made from actuarial that salary component which is getting towards the leave away see understand this I am telling you that when I do not take leave suppose today I did not take leave then also I will get salary for 200 days for 240 days I will not get extra salary even if I do not take a leave ok even if I take a leave next year which is within the limits I will still be paid the same salary so there is no change in the salary bill salary bill remain same right I am just saying that there should be a matching concept today if I have worked extra and I have earned extra there should be a charge created in the PNL today or the fund created in your liability today so that next year when I when I want compensation for the extra time I have given that compensation can be given out of that fund out of that fund out of that fund which is what happening today when you make the payment for encashment leave encashment don't you reduce from that fund you do in fact suppose getting that fund is actually do you have provision for leave encashment on your balance sheet yes if you if you have a provision for leave encashment on your balance sheet whenever anyone does leave encashment don't you reduce that provision so that is a fund which is being created and if if a person takes extra leave suppose you know try giving actually a false data tell him that all the leaves have been encashed during the year or tell him that everyone has forget encashment everyone has gone for a holiday throughout the year there is no one working throughout the year the leave encashment provision will automatically come down to zero my point is that only even if there is no encashment all have gone for leaves still the leave encashment fund will become zero because you are not eligible for any leave encashment my point is that only when we will prepare the chart of account and code of account will be prepared then 200 days salary will go to one particular chart of accounting code and 40 days will go to actuarial code no but I will tell you how it happens what I am saying you are automatically doing but I am making you realize what you are doing I am telling you how say this is 2012 leave encashment provision the actuary has asked you to create 1 lakh rupees fine you have simply created expense account debit to provision for leave encashment 1 lakh rupees 1 lakh is there in the fund 2013 some people have taken leave some people have not taken leave some people have left, some people have encashed some people are new joinees what he does, he does opening 1 lakh some people have taken leave so what I will do I will take out from this fund so what I will do is 20,000 I will reduce some people let me complete sir, I take the leave I want to take you I want to take you I want to take you not from the old because every year every year I will not disturb you from branch of public I am taking because if you take more than the current years leave I am taking I have taken only 15 leave sir how much you have paid for the last year how much you have paid for the last year that will be deducted from the actual valuation that data you need to provide ok, one second sir last year to when, when they actually will start calculating when they actually will start calculating he will take the opening balance at the same time he will ask you how much you have paid in the last financial year that will be deducted from the opening balance and again sir, evaluation will take place sir, let me complete then we will discuss all your queries let me explain what I am in middle of I will answer all your queries ok so what actually will do he will take opening balance 1 lakh then he will consider how much leaves have been taken from the opening balance then he will consider how much leaves have been added to the carry forward so suppose 30,000 more has been added so what has happened total is 1 lakh 10,000 now he will say what you will create a total provision of 1 lakh 10,000 you have a opening of 1 lakh new provision to be created 10,000 so what you will do expense account debit 10,000 to provision for leave encashment 10,000 you are not realizing what you are doing is you are taking out of the fund all the leaves which have been encached or leaves have been taken excess and then you are creating more fund for leaves which are carried forward so this is automatically happening I am just making you realize what are the conditions behind it how things happen and why things happen is this clear so you do not have to pass anything out of the fund but what actually it is a percentage that this much percentage should be transferred to the actual it does not go by you know yearly calculation it does not take the record from the institute on every year then that is a wrong thing then you are not doing actual valuation as per accounting standard 15 that may be wrong actually I will show you actual valuation reports I have in my presentation how it happens if you want I will show you the entire report from my laptop because I have of many companies sir I agree with you but practically what is happening is that do you do from registered valuation or do you take LICs valuation registered valuation do you ask him to do valuation as per AS 15 I have not checked it because I have joined recently you check the entire report it will be a detailed report it will show you calculation it will show you assumptions the assumptions which go behind it is how many leaves is expected to be taken how many people are expected to design because when he designs he will encash how many people are expected to join mortality rate so there are various assumptions discounting rate even the rate of funds which are going on because if you have a set how much return you will get so there are various assumptions which we consider before arriving at this one lakh or one lakh ten thousand if it is done on year to year basis then it is fine it has to be done year to year basis okay so leave encashment is fine see compensated absences or leave encashment can leave can be of two types accumulating non accumulating like we said that CL is non accumulating so ignore that so that is short term and you account for it immediately how do you account when you account for salary account for that 8 days leave okay accumulating can be wasting or non wasting wasting is something which can be encashed non wasting is something which cannot be encashed so let us talk about wasting because that is important for us wasting can be two things short term or long term short term means something which can be encased in next 12 months okay but we have majorly long term wasting thing which can be encased at retirement so for long term wasting leaves you have to go for actual valuation and whatever actually does calculation you have to then account for it in your books as provision for leave and cash clear okay we are through with short term because short term as I said no discounting and no actual valuation we will go for post employment post employment there are two types defined contribution plan defined benefit plan okay defined contribution as the name suggest contribution is defined benefit is not defined I will repeat defined contribution plan means contribution is defined benefit is not defined what I mean to say is if I am an employer I know how much is going from my pockets because that is fixed year on year it is fixed how much benefit can be absorbed by the employees or will be passed on to the employees that is not fixed that means how much ever they can get benefit out of this fund is the max they can get their benefits is not defined that is why I am saying contribution is defined given example defined contribution is where do you have a fixed contribution year on year and you do not have to make good any balance see I will give two comparisons I will take two things gratuity on one side and provident fund on another side fine gratuity on one side provident fund on another side how do you calculate the gratuity to be payable 15 years when I design so last salary basically last salary whenever I design okay today do I know today what will be the last salary of the employee who will resign then I don't know it might be anything right so benefit here is fixed what is the benefit whatever you draw last last salary your gratuity will be based on that right so benefit to the employee is fixed last whatever you draw on the basis you will get gratuity today's contribution not fixed because I don't know what will be the benefit I do okay provident fund how do you calculate it is today's salary it is based on today's salary so whatever is the annual salary a percentage of that is given as provident fund right and when you give it to a recognized provident fund they give you a fixed percentage interest on it so interest is also fixed gross amount is also fixed interest is also fixed so whenever you will design or whenever you will take out of that provident fund my contribution is fixed today whatever I have given today is what max you will get at that time the value of the money at that time the inflation that is your headache that is not my headache I am paying you today into a fund how much ever you can get benefit out of that fund whenever you withdraw that fund is your headache it's not my headache as an employer so it is a defined contribution plan dcp here benefit is fixed inflation will be your salary will be your percentage that means benefit is fixed my today's contribution is not fixed this is defined benefit plan logic or principle is fine then we will extrapolate into the various benefits that you get okay now there are two types of risk actually in any of these plans whether it is defined contribution or defined benefit plan the two risk which we always take into consideration is one is actual risk and one is investment risk your actual valuation whether it is for gratuity or leave encashment or pension or anything these two risk is considered which is actual risk investment risk what is an actual risk see I don't know what his gratuity will be when he will resign when he will resign I don't know so there are two things which I have to do one is I have to estimate what will be his final salary based on whatever will be his final salary or final gratuity that is an estimate that final salary suppose I say monthly salary say 1 lakh per month so 12 lakhs will be his final salary that is an estimate for 12 lakhs what I have to do suppose I have to invest 50,000 rupees per annum today so that 50,000 and interest someday whenever he resigns the fund which I have created for that employee will come to 12 lakhs are you getting my point so there are two risk which are those two risk one is the risk that it may be more than 12 lakhs his final salary might be more than or less than 12 lakhs that is one risk which is called as actual risk sorry right but my estimate is see the ceiling is applicable only when he crosses the ceiling everyone might not cross that ceiling ceiling change ceiling change also so my risk is whether this 12 lakhs is the final number it can be more it can be less that risk is called as actual risk I am investing 50,000 today so that it becomes 12 lakhs after x number of years when they will resign that 50,000 per annum will give me a return which will make it 12 lakhs this risk is an investment risk because I might not get 12 lakhs or I might not get that percentage of return on this 50,000 so there are two risk which is involved in actual valuation which is investment risk and actual risk when it is a defined contribution plan there is no such risk there is no actual risk there is no investment risk because I know exactly what I am paying today and that is all which I have to pay when it is a defined benefit plan I have to consider these two things estimates and hence these two risk will be there in any actual valuation in any defined benefit plan now as I said defined contribution plan fixed contributions into a separate entity or fund see you might contribute or you might just create a liability it depends now PF is a thing wherein you contribute to a PF fund recognize PF fund so you have a fund sometimes in some of the defined contribution plan which your company might have see it can be anything I might give some year on year fixed bonus okay which I know that this is the fine bonus but you will get it at the time of retirement some company might have it that can be a defined contribution plan without fund so fund is optional no legal or constructive obligation so there is no obligation to pay further contribution contribution is fixed whatever I am paying today is fixed even if the fund does not hold sufficient assets to pay of that liability it is fund responsibility it is recognized provident fund which is there of the government it is that funds responsibility to pay to the employee my responsibility as a employer is over when I pay every year that PF contribution every month that PF contribution when I pay my responsibility is over that is defined contribution plan in defined contribution plan it is very simple whatever you pay every month you recognize as expense no discounting no actual valuation nothing to be done simple whatever I contribute to the recognized provident fund I recognize as expense very simple any questions on this defined benefit plan defined benefit plan I said benefits are fixed contributions are not fixed okay do you have a fund in which you deposit gratuity or pension do you have a pension fund do you have a gratuity fund do you give it to anyone or you just create in your balance sheet just create in the balance sheet there is no fund okay some of the companies private companies they give it to LIC there are various funds which they create they might create trust so there are various plans which they create but anyways now if you do not have any plans we create just liability in our balance sheet okay now if that liability is not enough that fund which we have created in our balance sheet itself that account which we have created in our balance sheet itself suppose it is not enough that means the calculation of that liability is not perfect then whatever is the deficit in that liability fund I have to make good right so hence my benefit is fixed my contribution is not fixed and obligation to pay further contribution is still with me so if that liability is not enough whatever excess has to be paid has to be paid by me gratuity pension these are some of the examples of defined benefit plan any questions on this how do you account for this plan basically you go for actual valuation you give all the details to the actually actually we will calculate and give you the amount which you should provide for the provision entry will be expense account debit to liability and whenever you pay off that liability to the employees the entry will be liability debit to bank this is what you do currently suppose every year we are creating liability by debiting by doing it after some years we will create thousand thousand crores of liability without having any money because government does not accept it and they will not provide fund they provide only at the time of retirement not before that we are going on making provision every year every year every year after 10 to 15 years this balance it become just aggregation of some figures but will not match with the actual statement in your balance sheet because what happened just I am telling one thing one year back when this thing was started in UGC I started this question and asked from financier of UGC or MHRD whether we will provide fund to us for the mechanism provision it was denied category no we are not going to provide any fund for the provision we will provide you fund only at the time of actual retirement of the employee concern that is why private companies go for this LIC fund or some trust so that they can earn interest fixed interest and they make payments every year so that in a particular year there is no huge problem sector and corporate sector they are making provision and they are it seems reasonable government organization only this figure calculations and figure put in balance sheet and this and that were but no fund is being provided by the government for balancing these things it is almost 100 we are creating provision for this but if government will not provide any fund against this provision then what is the government will have to provide because government is not providing government is only providing when any employee is going to retirement so at that time government will provide whenever the employee will retire it is there responsibility to provide you pension it is not yet settled number of time I asked this question in UGC also these are autonomous bodies but they feel they are handicapped sir is present and future these are the three call we always talk about past, present and future today we are standing at present today we are talking about actuary liability these are that 10 years back even 2 years back did anybody talk about it so we are looking forward future after doing actuary every year we start creating a provision and transfer a bit of your fund to that fund budget to that fund it is a percent is 5 percent 2 percent, 3 percent or maximum 5 percent why are you looking to government for everything why do you know you are autonomous body walk sir, sir, sir Baxi sir what we are going to tell you sir Baxi sir look to the present and future sir Baxi sir autonomy you know autonomy only for academics this is going to happen not autonomy for finance and finance and food past government will take over but present and future sir, finance there is no autonomy standing on your legs sir, finance there is no autonomy no autonomy for finance sir you will see this is telling from this part there are so many things with you I know and from that you can do so many things what are you doing in the field you also do a little bit you can take fund, you can tell this is fund we are maintaining for this we just will not cut it out sir it is not going today when there was a conversion from CPF to GPF in the year probably last was 97 and UGC had instructed that we should create a fund out of the employer's contribution of CPF so accordingly a pension fund was created subsequently there was clear instruction from UGC to dissolve the fund and use it as a non-plan expenditure so that no fund should be created for pensionary benefits this is another problem, yes this is practical problem okay okay if you take the responsibility we have no objection sir in case of old pension scheme in case of in case of old pension schemes there is a certainty that these are the terminal benefits we should provide to the employee but in case of NPS the people who have joined after 2004 what are the terminal benefits we should provide for in our balance sheet that is not clear so for that what sort of provision we have to make I can talk about accounting I cannot talk about creation of funds in provision sir problem problem is that in case of sales efficient body like CVAC there is absolutely no problem because we have we are managing with our own funds we can create any fund but in case of grants when the organization is depending on the grants of the government there is no scope for creating this liability because the limited funds are there and another peculiar thing is that government follows cash accounting and autonomous body follows accrual accounting this is also a big mismatch so government is also in process of shifting to accrual system so they don't recognize the accrual accounting the point is that now suppose you say there is no provision what are the use of use of this actual valuation go to the government see this is the liability for you you should create a fund that is the use of this actual valuation that is true that's what I am telling government is following cash accounting they can't create that kind of fund yes they are also slowly shifting towards accrual wait for some time it's a slow change it cannot happen overnight so it might take time parts and pieces of government will move towards accrual basis any particular defined benefit plan or any particular employee benefit you want me to discuss hello sir education is treated as a service sector right this is our government is treated as a accounting standards treated as a business accounting standards are equally applicable to service sector and manufacturing sector or any sector it is applicable to any organization which is not for profit my question is is it correct or not what accounting standard treated in service sector business sector manufacturing sector all are treated is equal is it correct or not it is equal accounting standards are applicable to all of them is it correct or not your opinion yes why not my my opinion is different no we will discuss such things later on let's discuss the topic first okay see this is this is an example of actually report how I am just I have just taken extracts of an actually report you can see first one is present value of defined benefit obligation defined benefit plan defined benefit obligation is same so first they are defining what is defined benefit obligation then they are discounting it and bringing up a present value okay if you have any assets in front of it they will do a fair value if you don't have any fund or assets in front of it there is no fair value whether there is any fund or no fund if there is no fund then funded status will show a deficit equivalent to defined benefit obligation okay then there is past service cost what is past service cost past service cost is when a plan changes so suppose you had a pension plan which is a new pension plan old pension plan the pension plan changed okay now was that what this past service cost says is when a plan changes and because of change in plan the effect is retrospective that means even the existing employees will be paid more benefits because of the services which have been already provided in previous years that will go into past service cost so past service cost if I if you want me to repeat okay a plan changes so suppose previously I was giving 5% of the salary I will change the plan and I make it 5.5% of the salary so say 5% of your last salary was the previous plan okay now I will pay 5.5% of your last salary okay so I am changing the plan and changing the plan is applicable even to existing employees say okay so employees who have already provided service till this date okay for every year I should accrue some portion so that at the end of the year I can pay off from the fund now these years have already elapsed so whatever of this 5.5% I should have accrued in these years that portion will go into past service cost so there is current service cost there is past service cost which you call as earlier side so that past service cost is used for that portion so that you show it separately that this portion is not because of current service it is because of past service and then you get net asset or liability which you have to recognize in the balance sheet similarly for income and expenditures you have current service cost interest cost expected return on assets if you have any okay curtailment or settlement does not happen in government sector so we can ignore that then this past service cost okay actual gains and losses what is actual gains and losses you have seen on your actual report actual gains and losses no there is no actual gains and losses in your actual report have you have you gone through your actual report in detail yes they do not have the actual gains and losses they have right have you wondered what it is no many of them said they do actual valuation every year the actual concept came only in 2003 when the acrual accounting system came in existence 2003 only actually we have shifted from cash to acrual only in 2003 government sector at that time actual also in the government sector they just gave the percentage every year this much percentage is the you know actual value of the implies based on certain data which were provided to the actually and simply 11 percent or 12 percent or whatever percentage they have told that much fund is being created here so why do you need actually report if you know the percentage that's what I'm telling in our case we are not receiving any actual actual report okay how many of you all receive actual report only one or two okay so this actual valuation is required as per year 15 mandatory every year for all of you all wherever there is leave encashment gratuity which is there with all of you all pension is there with all of you all so you have to get this done actual valuation I showed samples or extracts of the report this is how it looks you have to provide for those expenses based on actual valuation report that is mandatory okay actual valuation will have this actual gains and losses I said there is something called as actual risk okay actual risk is how much amount will be my liability will be whenever that liability arises that risk or that value is based on certain assumptions now if those assumptions change those assumptions are bound to change because these are estimates whenever those assumptions change you will find an amount in actual gains and losses actual gains and losses are created because of change in assumptions variations from the estimates that goes to actual gains and losses okay these are the normal assumptions discount rate expected return on assets salary escalation rates mortality rates withdrawal rates these are the basic assumptions which actually takes to arrive at the value which they will give it to you and these assumptions can change like if you see discount rate 8% to 9.25% so that change will get you actual gains and losses okay there are two questions suppose employee has not completed 5 years of service should I go for actual valuation of that employee also for gratuity yes yes you should because when he completes 5 years he will get for previous 5 years also it is not that it starts from 6th year in private sector also it is not payable my point is if he completes 5 years suppose he is in the 6th year will you pay for 6 years or will you pay for only 1 year I will pay for 6 years right so I do not want that liability of all the 6 years coming in 1 year hence I should create every year even though he has not completed 5 years yes there will be some estimates whether that employee will stay there for 6 years or more than 5 years if my estimate is that employee will stay there for more than 5 years I should start charging my PNL for gratuity sorry right gratuity is defined under the gratuity at payable only after 5 years now it will be due after 5 years so if it is not due then how we can provide the liability see there is difference between accrual and due what is difference between accrual and due one second one second what is difference between accrual and due no difference sir in accrual basis we are doing only that if it is due or not let me answer ok if you borrow funds ok and you have to pay interest when is the interest due interest due after every month say 1st of every month or 6th of every month yes yes the due date of interest suppose your electricity bill or your telephone bill when is the bill due on the last date on the last date say 31st of 1st of every month right when does it accrue from the day one it accrues daily during that period accrual is daily accrual accrual means daily you can have even easily accrual you can have even minute accrual accrual is point by point yes yes yes due is when after every month yes sir yes so there is difference between accrual and due in that sense it is difference in any sense it is different accrual is different from due due is when there is a due date which can be defined by you and me suppose I give you loan I define that you have to pay interest after every year so due date is after every year it is understanding between two people due date can be anything but it will accrue every day for both of us if that sir institute closed before 5 years then what happened regarding that gratuity see there are there are two things one is if he leaves before 5 years first of all I am saying when I create a provision for gratuity I have to estimate how many people will leave before 5 years sir so suppose say I say 70% of people will stick for 5 years 30% let me complete 30% will leave before 5 years that is my estimate I create provision based on this estimate ok suppose 40% leave before 5 years my estimate was 30 40 people leave before 5 years that means I created excess provision I do not have to pay that I reverse that provision and suppose only 20% leave before 5 years that means my estimate was 30% will leave only 20% left that means my provision is short I create more provision so these are estimates it can go wrong it can estimates are actually never perfect right so I will never come to know how many people will leave but it is an estimate it is bound to change and bound to change every year not only after 5 years every year you have to reestimate will this 70% hold 2 or 65 or 75 and that work will be done by actually not you so when I say that these are the assumptions see this mortality rate there is something also called as how many people will leave every year that is also estimated by the actually so it is not to be done by you they will do it based on the past experience in the government sector or in your organization they will estimate future so that's how you do it so even if it is not 5 years even if the employee has just joined you should start thinking whether I should create a provision for that employee one question sir no in private sector also it is not payable before 5 years no even after 5 years till the time he retires but it is one second but it is payable when he retires and it is payable for the entire service years so if he gives service for 30 years after 30 years I have to pay him for the 30 years gratuity ok sir the computation what you have told is acceptable but the payment of gratuity I was referring to I understand payment is after 30 years but if I don't create a provision every year see I am paying him why am I paying him gratuity because he has provided me service in that year say first year or say second year I am paying him gratuity for that year now he has provided me service out of that service as I said when he provided me service he creates revenue for me and if I am paying him for creating that revenue in that year I should make a provision in that year they are not paying you gratuity for the 30th year they are not paying you gratuity for the 6th to 30th year they are paying gratuity from 1st to 30th year hence cost should be debited in that year's account that is why we create provision excuse me sir I have read the reports of the actuary though there are certain places that I do not understand this is an expertise work so alright we employees all the recruits details are provided DA orders we got in March raised to 100% but it accrues from January so we are provided at 100% DA though we have not paid we have provided the details at 100% DA but then my doubt is on the pensioners how other benefits would accrue to the pensioners except dearness relief so what would the actuary evaluate for the pensioners when they will not earn anymore service benefits see you have to go to the basic of it that how does it's only the dearness allowance that accrues to them from January that is has to be evaluated my question is how do you calculate the pension liability as an employee when he has not retired I am talking about a pensioner when he has pension off he has no more salary benefits except pension and dearness relief so when he provided the services I created a liability so see forget the past let's talk about future so now suppose I have joined government service I provide service for 30 years and then I leave that service so every 15 years even after that I will keep on getting my pension now when I provide service for 30 years a liability is created every year and the fund is created whether funded or not but at least the amount is there in my balance sheet I will keep on disbursing that amount to that pensioner from this fund hence there is a requirement to create fund so that when he becomes a pensioner he gives us amount using this fund it is not a burden on me in the year when he becomes pensioner it becomes burden on me when he earns it's like if I earn today and I take care of my retirement I am creating a fund today onwards for my retirement after retirement I cannot think I should start creating fund for my retirement today onwards that's what government should do that's what any company should do to take care of a retirement from today when I am earning and healthy still sir I am not clear anyway because about pensioner does not earn any more service benefits pension and dearness relief only see pensioner gets money because he provided me service in a particular year pensioner gets money because he provides me he has already provided me service in a particular year that is why he is getting pension today so he has earned that pension when he provided me service see that's why I said it is a defined benefit benefit is fixed that I have to take care of that pensioner throughout his life contribution is not fixed but then longevity does not matter no sir here because we are ascending for valuation accrued us at 31st March 2014 so it is us at that date it's not for the future to that no we create liability for future in the current year you are okay all right you are not creating provision for pension provision should be created for pension pension is also a defined benefit plan yes pension is also a defined benefit plan see whatever benefits you give to an employee you have to first list down like we did today okay then you have to define it whether it is a defined contribution plan whether it is a defined benefit plan whether it is long term benefit short term benefit you have to define that in case of new pension scheme what are the provision we are supposed to take that is leave in cashment gratuity what are the provisions we are supposed to take see understand you have to first list down what is the benefits you are providing to the employee whether it is leave in cashment pension gratuity any whatever benefits you provide to the employee then you have to classify it whether it is a defined benefit plan or defined contribution plan defined benefit plan because new pension is a defined benefit plan if it is a defined benefit plan you have to give details of the plan and details of the employee to the actuary then actuary will calculate how much provision you should create and give it to you that much provision you should make in your accounts yes but my question is whether gratuity fund or leave in cashment whether this provision will be accounted for new pension or not yes it will be that means gratuity will be accounted for all of them yes all in pension okay pension is also defined benefit plan yes yes so we send for valuation for the NPS we send for valuation only gratuity and the leave in cashment you have to do also for pension that is what I am saying because it is a contribution it is a contributory fund pension is a contributory okay why do you say it is a contributory fund how do you calculate pension that is taken care by a central regulatory agency sir so in new pension scheme you just make contribution to the government and whatever is the pension liability government will take care after your retirement okay then in new pension scheme it is a defined contribution plan hello sir actually her question was actually whether gratuity is entitled under new pension scheme or not oh that I do not know this is the question because somebody's I can answer your accounting related queries I cannot answer your operations related then it is a question to Mr. Bokshi whether it is because I have to provision for gratuity or not I have to take provision for gratuity or not sir any operations related query Mr. Bokshi will answer tomorrow last session okay let's talk about accounting now thank you but sir but in new pension scheme also leave in cashment is payable by the department so provision is made so what see leave in cashment is not a post employment benefit it is either short term or other long term so it cannot be defined contribution or defined benefit plan it can leave in cashment is either short term or other long term in our case it will be other long term benefits and you have to go for actual valuation and provide in the life regarding this NPS thing NPS thing is not defined benefit neither it is a defined benefit nor defined contribution the actually the money is getting deposited to NSDL whatever is the loss will go to the employee account so that year itself it will get charged no actual provision is required that's what we just discussed that you know when you pay to the government and the final it's not going to government it's not going to government NSDL is investing in stock market whatever is the loss employee has to bear so no provision is required for that so fine it becomes then defined contribution plan hello yes yes please clear me one thing whether gratuity provision is required under the employees who are covered under NPS new pension scheme act so because we have to if it is covered then we have to consider in the accounts as a provision otherwise not so it is it is clear clarity new pension scheme gratuity will be paid off by the government you will pay your institute will pay some amount every year to the government and the final payment will be made by the government exactly then it is a defined contribution plan for you so as your contribution is fixed okay you don't have to make good if any shortage or excess you don't have to take care of that right then it is a defined contribution plan for you okay so I've explained you what is defined contribution plan it you don't have to go for actual valuation you just have to account for only whatever you pay every year sir presently very unique situation is prevailing because the government has not come out with the detailed payment pension payment plan under NPS what they have told that organizations where retirement cases are there or death cases are there they have to pay from their own sources despite the fact that payments have been made towards NPS to the agencies NSDL and Axis Bank that is a unique situation prevailing it's a temporary phase in future all the payments will be clarified then you can rethink whether it is a defined contribution or defined benefit is defined but the government has not come out with the detailed pension payment plan how much benefits will be paid so temporarily they are telling the organizations to make the payment let's take one last question then we take a break for tea suppose the institute itself has not completed five years do you still need to make a provision for gradually yes the answer will remain same whether it is employees completed five years or not or institute has completed five years or not you have to create provision for gradually let's move for a break and then we join again