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CA Intermediate · Advanced Accounting · AS 15 Employee Benefits

Orion Auto Ltd. contributes 12% of basic salary to a recognised provident fund for its employees. Basic salary for the year was Rs 50,00,000. The company paid Rs 5,00,000 during the year and the rest is outstanding at the year-end. The fund is a defined contribution scheme with no further obligation on the company beyond the contribution. What should be charged to profit and loss and what liability remains?

Charge Rs 6,00,000 to profit and loss and show Rs 1,00,000 as outstanding liability. In a defined contribution plan, AS 15 requires expense equal to the contribution due for the period, regardless of the amount actually paid, with the unpaid part accrued.

  1. ACharge Rs 6,00,000; liability Rs 1,00,000Correct
  2. BCharge Rs 5,00,000; liability nil
  3. CCharge Rs 6,00,000; liability nil
  4. DCharge Rs 1,00,000; liability Rs 1,00,000

Explanation

Under a defined contribution plan the expense equals the contribution payable for the period: 12% x Rs 50,00,000 = Rs 6,00,000. Only Rs 5,00,000 was paid, so Rs 1,00,000 is an accrued liability. Charging only the amount paid ignores accrual.

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