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CA Intermediate · Advanced Accounting · AS 15 Employee Benefits

Kaveri Industries Ltd. has a profit-sharing plan under which it pays employees 4% of net profit for the year, provided they remain in service for the whole year. Net profit is Rs. 50,00,000. Based on past experience, the company estimates that staff turnover will reduce the payout by 5%. What amount should be recognised as the expense and liability for the year under AS 15?

The amount recognised is Rs. 1,90,000. The company has a present obligation under the profit-sharing plan and can reliably estimate it. Four percent of Rs. 50,00,000 is Rs. 2,00,000, reduced by the expected 5% shortfall from employees leaving before year end.

  1. ARs. 2,00,000
  2. BRs. 1,90,000Correct
  3. CRs. 2,10,000
  4. DRs. 1,00,000

Explanation

Gross obligation = 4% x 50,00,000 = Rs. 2,00,000. Expected turnover reduces the payout by 5%, i.e. 10,000, so the estimate is Rs. 1,90,000. Recognising Rs. 2,00,000 ignores the reliable estimate of staff leaving.

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