Practical Accounts And Taxation
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A company called Z Ltd., is covered by the Payment of Gratuity Act, 1972. On March 29, 2018, the Government has increased the ceiling of gratuity from Rs. 10 lakhs to Rs. 20 lakhs. Due to the above-mentioned change, the gratuity liability of Z Ltd. has got increased considerably for the year ended on March 31, 2018. The management of the Company wants to know whether the increased liability should be accounted for in the financial statements of 2017-18 or there is any exemption available?
The Gratuity benefit is covered under AS 15, Employee Benefits or Ind AS 19, Employee Benefits as it is an employee benefit.This gratuity benefit is treated as post-employment defined benefit obligation which is recognised at the present value. Any amendment in the employee benefit plan is known as past service cost and under AS 15 and Ind AS 19, past service cost should be recognised as an expense.
There is no exemption available under both, AS 15 and Ind AS 19, for the accounting of such type of increase gratuity liability.Therefore, the increase in liability of gratuity due to the amendment to the Payment of Gratuity Act, 1972 is a past service cost and, hence, should be recognised in the statement of profit or loss as an employee benefit expense.
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