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CA Intermediate · Advanced Accounting · AS 15 Employee Benefits

Vihaan Steels Ltd. announces on 1 January a restructuring of one plant and a detailed formal plan to terminate 50 employees, communicated to them before the year end of 31 March. Termination benefits will be Rs 2,00,000 per employee, payable on 30 June in the next financial year. Which statement correctly applies AS 15?

Recognise a liability and expense of Rs 1,00,00,000 at 31 March. AS 15 requires termination benefits to be recognised when the entity is demonstrably committed, through a detailed formal plan communicated to employees, to terminate them. Payment timing does not defer recognition; 50 employees times Rs 2,00,000 gives the amount.

  1. ARecognise a liability and expense of Rs 1,00,00,000 at 31 March, as the company is demonstrably committed and the plan is announcedCorrect
  2. BRecognise nothing until the benefits are actually paid on 30 June
  3. CRecognise the expense equally over the period until payment
  4. DDisclose Rs 1,00,00,000 as a contingent liability only

Explanation

Termination benefits are recognised when the entity is demonstrably committed to terminate employees under a detailed formal plan without realistic possibility of withdrawal. Here the plan is communicated before the year end, so 50 x Rs 2,00,000 = Rs 1,00,00,000 is recognised at 31 March. Waiting for payment or spreading the cost contradicts the commitment-based recognition.

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