Gratuity Provision

This query is : Resolved

Amit (Querist)
Follow

03 August 2010 Hi,

I wanted to know the gratuity provision to be made in case of following

Company is in the business of manpower supply. so it has to take employees on its payroll. for those employees, company enters into an agreement with the customer that at the time of their retirement, if gratuity is payable then it will be fully reimbursed by that client. Now at the time of making provision as per AS 15, how the provision will be calculated. Company has to provide for its core employees which is ok. but for reimbursable part what treatment should be given in the accounts

VINOD ARORA

VINOD ARORA (Expert)
Follow

03 August 2010 See if these kind of employees are hired only for catering requirements of the client, then ofcourse there is no liability of the agency in this regard. Only principal is liable to make payment of gratuity so provision also should be made at his end.

In case these are regular employees of agency and are rotated among various clients, then agency has to make provision as per As 15.

Amit

Amit (Querist)
Follow

03 August 2010 Thanks Sir for your reply. But the emploees are on the comapny's payroll. If they are the employyes of the company then AS 15 applies to them also. AS 15 does not give any clarification for such employees.

Upgrade to CAclubindia Pro. Subscribe Now!

Rasesh

Rasesh (Expert)
Follow

04 August 2010 The Company has not make provision in its books. The agreement between the company and its clients is an issue between these two parties.

The responsibility lies with the Company only. The fact that the amount will be reimbursed by the client makes no difference.

Amit

Amit (Querist)
Follow

10 August 2010 Company has to make the provision but what is the accounting entry as the amount of gratuity payable to other staff is fully reimbursable

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
Follow

26 July 2024 When dealing with gratuity provisions in a situation where employees are on your payroll but their gratuity is reimbursed by a client, you need to follow the guidance of **Accounting Standard 15 (AS 15)** on employee benefits, as well as ensure proper accounting treatment for the reimbursed portion. Here’s a detailed explanation of how to handle this situation:

### **Provision for Gratuity under AS 15**

**1. **Accounting for Gratuity Provision for Core Employees:**
- **Gratuity Provision Calculation:** For your core employees, you need to calculate the gratuity liability as per AS 15. This involves estimating the gratuity liability based on factors like employee salary, years of service, and actuarial assumptions.
- **Accounting Entry:** The accounting entry for the gratuity provision would typically be:
```plaintext
Dr. Employee Benefits Expense (Profit & Loss Account)
Cr. Provision for Gratuity (Balance Sheet)
```

**2. **Accounting for Reimbursable Gratuity:**
- **Provision for Reimbursable Gratuity:** Even though the gratuity for employees is reimbursed by the client, you still need to make a provision for the gratuity liability as per AS 15. This is because the employees are on your payroll, and the obligation to pay gratuity exists regardless of the reimbursement arrangement.
- **Accounting Entry for Provision:** Similar to core employees, you need to make a provision for the reimbursable part:
```plaintext
Dr. Employee Benefits Expense (Profit & Loss Account)
Cr. Provision for Gratuity (Balance Sheet)
```

**3. **Accounting for Reimbursement:**
- **Recognition of Reimbursement:** Since the client will reimburse the gratuity expenses, you should recognize this as a receivable or asset in your accounts. The entry for this will be:
```plaintext
Dr. Receivable from Client (Balance Sheet)
Cr. Income (Profit & Loss Account) or
Cr. Gratuity Reimbursement Income (Balance Sheet)
```

- **Matching Expense and Income:** The reimbursement should be recognized in the same period as the gratuity expense to match the expense with its related income. This ensures that the financial statements reflect the correct net impact on profit.

### **Detailed Steps for Provision and Reimbursement Accounting**

1. **Calculate Gratuity Provision:**
- Use actuarial valuation or a suitable estimate to calculate the total gratuity provision required for all employees.

2. **Record Gratuity Provision:**
- Make the provision for gratuity for all employees, regardless of whether their gratuity will be reimbursed or not.

3. **Recognize Reimbursement:**
- Create a receivable for the reimbursable amount from the client and recognize this income in your accounts.

4. **Adjust for Reimbursements:**
- Ensure that the reimbursed amount is matched against the gratuity expense in your Profit & Loss account, resulting in the correct net impact on profit.

### **Example Entry:**

Suppose the total gratuity provision required is ₹1,00,000, and the amount to be reimbursed by the client is ₹60,000.

- **Provision for Gratuity:**
```plaintext
Dr. Employee Benefits Expense ₹1,00,000
Cr. Provision for Gratuity ₹1,00,000
```

- **Reimbursement from Client:**
```plaintext
Dr. Receivable from Client ₹60,000
Cr. Gratuity Reimbursement Income ₹60,000
```

### **Summary**

- **For Core Employees:** Make a provision for the full gratuity amount as per AS 15.
- **For Reimbursable Gratuity:** Recognize the reimbursed amount as a receivable and income, ensuring it offsets the gratuity expense appropriately.

By following these steps, you ensure compliance with AS 15 and proper accounting for both the gratuity provision and the associated reimbursement.