Accounting Treatment of Stressed Investments of PF Trust by the Company

Para 29 of Ind AS 19 provides examples where a defined contribution plan is extended to cover the benefit obligations. As per this para, one of the examples where an entity’s obligation is not limited to the amount that it agrees to contribute to the fund is when the entity has a legal or constructive obligation through a guarantee, either indirectly through a plan or directly, of a specified return on contributions. In the given case, a company has extended a guarantee to exempted PF trust to make good the loss suffered by the Trusts as a result of any fraud, defalcation, wrong investment decision and shortfall in earnings.

During earlier years, the PF Trusts made investments in certain companies which turned stressed during the past few years. Following the principles stated in para 29 of Ind AS 19, the company has accounted for the loss in fair value of the plan assets due to the re-measurement of the investments in OCI and any loss towards interest in profit or loss. However, the government auditor is of a different opinion in this regard. As per the auditor, a change in the fair value of plan assets is an actual loss and not an actuarial gain/loss due to the re-measurement of the PF liability or change in the fair value of plan assets. Loss in value of investments and interest needs to be made good by the company through actual payment and this loss needs to be recognised in profit or loss and not through OCI. The company sought the opinion of the Expert Advisory Committee on this behalf.

The Expert Advisory Committee (EAC) noted that PF trust is under obligation to pay interest at the rate declared by the GoI for the reasons that return on investment is less or for any other reason, then deficiency shall be made good by the company. That is company guarantees a specified rate of return on the contributions made and the Company’s liability is not restricted to the contribution it makes to the separate fund but also extends to any deficiency. Therefore, the PF benefit to the Company’s employees meets the definition of the Defined Benefit Plan (DBP) as enforced by para 29 of Ind AS 19. Accordingly, the accounting treatment made by the company for recognising the loss in respect of obligation arising out of the re-measurement of the plan including that of stressed assets would be in line with Ind AS 19.

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