Section 170 in The Companies (Indian Accounting Standards) Rules, 2015
170. Because termination benefits are not provided in exchange for service, paragraphs 70-74 relating to the attribution of the benefit to periods of service are not relevant.
Example illustrating paragraphs 159-170BackgroundAs a result of a recent acquisition, an entity plans to close a factory in ten months and, at that time, terminate the employment of all of the remaining employees at the factory. Because the entity needs the expertise of the employees at the factory to complete some contracts, it announces a plan of termination as follows.Each employee who stays and renders service until the closure of the factory will receive on the termination date a cash payment of Rs 30,000. Employees leaving before closure of the factory will receive Rs.10,000.There are 120 employees at the factory. At the time of announcing the plan, the entity expects 20 of them to leave before closure. Therefore, the total expected cash outflows under the plan are Rs.3,200,000 (i.e. 20 × RS.10,000 + 100 × Rs.30,000). As required by paragraph 160, the entity accounts for benefits provided in exchange for termination of employment as termination benefits and accounts for benefits provided in exchange for services as short-term employee benefits.Termination benefitsThe benefit provided in exchange for termination of employment is Rs.10,000. This is the amount that an entity would have to pay for terminating the employment regardless of whether the employees stay and render service until closure of the factory or they leave before closure. Even though the employees can leave before closure, the termination of all employees' employment is a result of the entity's decision to close the factory and terminate their employment (i.e. all employees will leave employment when the factory closes). Therefore the entity recognises a liability of Rs.1,200,000 (i.e. 120 × Rs.10,000) for the termination benefits provided in accordance with the employee benefit plan at the earlier of when the plan of termination is announced and when the entity recognises the restructuring costs associated with the closure of the factory.Benefits provided in exchange for serviceThe incremental benefits that employees will receive if they provide services for the full ten-month period are in exchange for services provided over that period. The entity accounts for them as short-term employee benefits because the entity expects to settle them before twelve months after the end of the annual reporting period. In this example, discounting is not required, so an expense of Rs.200,000 (i.e. Rs.2,000,000 ÷ 10) is recognized in each month during the service period of ten months, with a corresponding increase in the carrying amount of the liability.Disclosure
