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CA Intermediate · Advanced Accounting · AS 15 Employee Benefits

Kaveri Engineering Ltd. has employees who earn paid compensated absences that accumulate and can be carried forward. At the year end, 200 employees each have 4 unused accumulating days. Based on past experience, 20% of the days are expected not to be used before they lapse on retirement or exit, and the company expects the rest to be availed. The average daily salary is Rs 1,500. What liability should be recognised at the year end?

For accumulating compensated absences, the company recognises the expected cost of unused entitlement that will be availed. Total unused days are 800, of which 80% (640 days) are expected to be used, giving 640 x Rs 1,500 = Rs 9,60,000 as the liability.

  1. ARs 12,00,000
  2. BRs 9,60,000Correct
  3. CRs 2,40,000
  4. DRs 3,00,000

Explanation

Accumulating compensated absences are recognised as the expected additional amount the entity will pay for unused entitlement. Total days = 200 x 4 = 800. Expected to be used = 80% x 800 = 640 days. Liability = 640 x 1,500 = Rs 9,60,000. Option A ignores the lapse expectation.

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