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CA Intermediate · Advanced Accounting · AS 15 Employee Benefits

Vardhan Foods Ltd. announced a detailed formal plan to close one plant and has communicated it to the affected employees. Under the plan, 50 employees will receive Rs 2,00,000 each as termination benefit, payable after 6 months. The discount effect is not material. Before the plan, the employees had not been offered anything under their service contracts. How should the company account for it under AS 15?

Recognise a liability and expense of Rs 1,00,00,000 immediately. Under AS 15, termination benefits are recognised once the entity is demonstrably committed through a detailed formal plan that is communicated to employees, so payment timing does not delay recognition.

  1. ARecognise a liability and expense of Rs 1,00,00,000 now, since the entity is demonstrably committed to terminateCorrect
  2. BRecognise Rs 1,00,00,000 only when the cash is paid after 6 months
  3. CRecognise Rs 50,00,000 now and the balance on payment
  4. DDisclose as a contingent liability only

Explanation

Under AS 15, termination benefits are recognised as a liability and expense when the entity has a detailed formal plan without realistic possibility of withdrawal and has raised a valid expectation in those affected. 50 x Rs 2,00,000 = Rs 1,00,00,000. Waiting for payment contradicts the recognition criteria.

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