Manner Of Reporting by the Auditors On Prudential Regulatory Treatment Prescribed By RBI In Respect Of Pension And Gratuity Liability Of Public Sector Banks

1. As the members are aware, the Reserve Bank of India on 9^th February 2011 had issued a circular (no. DBOD.BP.BC.80/21.04.018/2010-11) on Re-opening of Pension Option to Employees of Public Sector Banks and Enhancement in Gratuity Limits – Prudential Regulatory Treatment. In terms of the said circular, “the banks may take the following course of action in the matter:

a. The expenditure, as indicated in paragraph 2 above, may, if not fully charged to the Profit and Loss Account during the financial year 2010-11, be amortised over a period of five years {subject to (b) and (c) below} beginning with the financial year ending March 31, 2011 subject to a minimum of 1/5th of the total amount involved every year.

b. Consequent upon the introduction of International Financial Reporting Standards (IFRS) from April 1, 2013 for the banking industry as scheduled, the opening balance of reserves of banks will be reduced to the extent of the unamortised carry forward expenditure.

c. The unamortised expenditure carried forward as aforementioned shall not include any amounts relating to separated/retired employees.

4. Appropriate disclosures of the accounting policy followed in this regard may be made in the Notes to Accounts to the financial statements. …………………………………”

2. The Council of the Institute of Chartered Accountants of India at its 304^th meeting held on 23^rd March 2011 considered the prudential regulatory treatment prescribed by the Reserve Bank of India vide its above mentioned circular vis a vis the impact thereof on the auditor’s report since the said treatment is a departure from the requirements of the Accounting Standard (AS) 15, Employee Benefits.

3. On a consideration of the matter, the Council of the Institute decided that since the accounting treatment for such expenditure is prescribed under the prudential regulatory framework of the Regulator, the auditors need not qualify their audit report on account of this. The matter should, however, be brought out by the auditors in the audit report by way of an “Emphasis of Matter Paragraph” in accordance with the Standard on Audit (SA) 706, “Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report, provided the matter of departure from the requirements of AS 15 pursuant to the aforesaid circular of RBI is appropriately disclosed, with quantification, by the bank by way of the notes to the accounts in the financial statements.2

4. An illustrative Emphasis of Matter Paragraph in the audit report is as follows:

“Emphasis of Matter

Without qualifying our opinion, we draw attention to Note X to the financial statements, which describes deferment of pension and gratuity liability of the bank to the extent of Rs. YYY pursuant to the exemption granted by the Reserve Bank of India to the public sector banks from of application of the provisions of Accounting Standard (AS) 15, Employee Benefits vide its circular no. DBOD. BP.BC/80/21.04.018/2010-11 on Re-opening of Pension Option to Employees of Public Sector Banks and Enhancement in Gratuity Limits –Prudential Regulatory Treatment. .”

5. Members may note that the aforesaid disclosure in the Notes to the Accounts would normally include:

· Quantification of the actual amount of pension liability arising on account of exercise of the pension option by the employees of the bank who had not opted for pension earlier;

· Quantification of the actual amount of additional liability arising on account of the amendment to the Payment of Gratuity Act, 1972; and

· Impact on the financial statements of application of the provisions of AS 15 in the given circumstances had such circular not been issued by RBI.

An illustrative Note to Accounts in this regard is as follows:

“During the year, the Bank reopened the pension option for such of its employees who had not opted for the pension scheme earlier. As a result of exercise of which by BBB (number of employees), the bank has incurred a liability of Rs. XXX. Further, during the year, the limit of gratuity payable to the employees of the banks was also enhanced pursuant to the amendment to the Payment of Gratuity Act, 1972. As a result the gratuity liability of the Bank has increased by Rs. ZZZ.

In terms of the requirements of the Accounting Standard (AS) 15, Employee Benefits, the entire amount ofRs. AAA (ie. Rs. XXX + Rs. ZZZ) is required to be charged to the Profit and Loss Account. However, the Reserve Bank of India has issued a circular no. DBOD.BP.BC.80/21.04.018/2010-11) on Re-opening of Pension Option to Employees of Public Sector Banks and Enhancement in Gratuity Limits – Prudential Regulatory Treatment, dated 9^th February 2011. In accordance with the provisions of the said Circular, the Bank would amortise the amount of Rs. AAA over a period of five years. Accordingly, Rs. CCC (representing one-fifth1 of Rs. AAA) has been charged to the Profit and Loss Account. In terms of the requirements of the aforesaid RBI circular, the balance amount carried forward, ie., Rs. YYY (Rs. AAA – Rs. CCC) does not include any employees relating to separated/ retired employees.

Had such a circular not been issued by the RBI, the profit of the bank would have been lower by Rs. YYY pursuant to application of the requirements of AS 15.”

¹ The said RBI circular requires that the amount of amortisation should be at least one-fifth of the total amount involved every year.