29 November 2020
In a Pvt. Ltd. Say in FY 2019-20 director remuneration is paid Rs.1800000 annually and there is contract with director that he will be paid variable pay of 1% of profit greater than Rs.3.00 cr.
Now Profit came Rs.4.00 Cr for FY 2019-20 and Rs.100000 paid to director as a variable pay.
Now question is Rs.100000 provision to be done on 31/03/2020 and to be shown in Form 16 of Director for FY 2019-20 or it will be part of salary of FY 2020-21.
12 July 2024
The treatment of variable pay to directors, based on profit, typically depends on the terms specified in the contract and the accounting policies of the company. Here are some considerations:
1. **Accrual Basis vs. Cash Basis:** - If the company follows the accrual basis of accounting, the provision for variable pay should be recognized in the financial statements for the period to which it relates. In this case, since the profit threshold of Rs.3.00 crore was exceeded in FY 2019-20, and Rs.100,000 is payable as variable pay, a provision should be made for this amount in the financial statements of FY 2019-20. - The provision ensures that the expense is recognized in the same period in which the related revenue (profit) is recognized, following the matching principle of accounting.
2. **Form 16 Implications:** - Form 16 is the certificate of salary provided to employees (including directors) showing the details of salary paid and the tax deducted at source (TDS). - Variable pay accrued but unpaid by the end of the financial year (31st March 2020, in this case) should be included in the Form 16 of FY 2019-20. Therefore, the provision of Rs.100,000 for variable pay should be reflected in the Form 16 of the director for FY 2019-20.
3. **Confirmation and Disclosure:** - It's important to confirm the exact terms of the contract with the director and ensure that the provision for variable pay is made in accordance with those terms. - The provision should be disclosed appropriately in the financial statements and other relevant reports to reflect the liability as of 31st March 2020.
4. **Tax Treatment:** - From a tax perspective, the provision made for variable pay in FY 2019-20 would be deductible as an expense in that year, subject to tax rules and regulations applicable to director remuneration and variable pay.
**Conclusion:** Based on standard accounting practices and to comply with the accrual basis of accounting and tax regulations, the provision of Rs.100,000 for variable pay to the director should be made and shown in the financial statements and Form 16 of FY 2019-20. This ensures proper matching of expenses with revenues and accurate reporting of liabilities at the end of the financial year.
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