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CA Intermediate · Advanced Accounting · AS 15 Employee Benefits

Narmada Pharma Ltd, on 1 April, introduced a change to its defined benefit gratuity plan that increases benefits for past service. The employees' benefits become vested immediately. The increase in present value of the obligation is Rs 12,00,000. How should the past service cost be treated under AS 15?

The Rs 12,00,000 past service cost is recognised immediately in the Statement of Profit and Loss. AS 15 requires immediate recognition to the extent benefits are already vested, and amortisation applies only to the unvested portion.

  1. ARecognised immediately in the Statement of Profit and Loss as the benefits are already vestedCorrect
  2. BAmortised over the average period until benefits become vested, which is nil here, so no amortisation applies and it is charged to reserves
  3. CRecognised over the remaining working life of employees
  4. DAdjusted against the plan assets without any charge to profit or loss

Explanation

Past service cost is recognised as an expense on a straight-line basis over the average period until the benefits become vested. To the extent benefits are already vested immediately following the change, it is recognised immediately in the Statement of Profit and Loss. Charging reserves is not permitted.

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