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CA Intermediate · Advanced Accounting · AS 15 Employee Benefits

Rajan Steels Ltd. amends its defined benefit plan on 1 April, increasing benefits for past service. The present value of the additional benefits is Rs 12,00,000, of which benefits worth Rs 4,00,000 are already vested and the remaining Rs 8,00,000 will vest evenly over the next 4 years on average. Ignoring interest, what is the past service cost to be charged to profit and loss for the year ended 31 March?

The charge is Rs 6,00,000. Past service cost for already vested benefits, Rs 4,00,000, is expensed immediately, while the unvested Rs 8,00,000 is amortised straight-line over the 4 years until vesting, giving Rs 2,00,000 for the year. The total is Rs 6,00,000.

  1. ARs 2,00,000
  2. BRs 4,00,000
  3. CRs 6,00,000Correct
  4. DRs 12,00,000

Explanation

Past service cost is recognised immediately to the extent benefits are already vested, and amortised on a straight-line basis over the average period until the rest vests. Vested portion = Rs 4,00,000 immediately. Unvested Rs 8,00,000 / 4 years = Rs 2,00,000 per year. Total charge = 4,00,000 + 2,00,000 = Rs 6,00,000. Rs 4,00,000 omits the amortisation of the unvested part.

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