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CA Intermediate · Advanced Accounting · AS 15 Employee Benefits

Anand Pharma Ltd. contributes 8% of basic salary to a recognised provident fund trust for its employees and guarantees that the trust will pay a minimum interest rate of 8.5% p.a. If the trust's actual earnings are lower, the company must make up the shortfall. How should the company account for this provident fund under AS 15?

It is a defined benefit plan. Because the company guarantees a minimum interest rate and must cover any shortfall, it bears actuarial and investment risk, so its obligation is not limited to the fixed contribution. AS 15 therefore requires defined benefit accounting.

  1. AAs a defined contribution plan, since the contribution is a fixed 8% of basic salary
  2. BAs a defined benefit plan, since the company bears the shortfall risk on the guaranteed rateCorrect
  3. CAs a defined contribution plan, with the shortfall charged to reserves when paid
  4. DAs a termination benefit, since the guarantee arises on separation

Explanation

When the employer must meet a guaranteed return and so bears actuarial or investment risk, the plan is a defined benefit plan under AS 15. The fixed contribution rate does not make it defined contribution because the company's obligation extends beyond the contributions. Charging the shortfall to reserves is not permitted.

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