Companies can now write off VRS expenses

NEW DELHI: The Institute of Chartered Accountants of India (ICAI) has decided to allow business enterprises to the write off expenditure on voluntary retirement schemes over a period 3-5 years. This will be at variance with international practice.
An in-principle decision has been taken to revise the accounting standard that required companies to expense VRS expenditure in the quarter it was incurred.
The Institute will soon issue an exposure draft on the proposed limited revision, ICAI officials told ET. The revision is expected to be notified before the companies prepare their full year financial statements for 2003-04.
The revision to the accounting standard on intangibles (AS-26) will allow companies to treat termination benefits paid to employees on termination of employment ahead of normal retirement date or on accepting voluntary retirement as deferred revenue expenditure.
An immediate consequence of such accounting treatment of the VRS expenditure is that bottomline of companies will not take a one-time hit in the quarter or year in which massive job cuts were made.

The AS-26 required companies to immediately write off expenditure incurred on intangible items, including VRS, in the quarter in which it was incurred. The standard came into effect from April 1, 2003. The limited revision is also proposed to be made applicable with retrospective effect from April 1, 2003.
The revision follows lobbying by the affected companies and the Confederation of Indian Industry. They had represented to the government, National Advisory Committee on Accounting Standards (NACAS) —government’s advisor on accounting standards — and ICAI that such treatment of VRS expenditure would show mid-sized companies in the red in the quarter a VRS payout was made.
They said that the Indian conditions were very different to justify adoption of international practice on expensing VRS. Globally, companies in most developed countries take a one-time hit when VRS packages are handed out.
The industry had also pointed out the amounts involved were proportionately much larger. The CII had said in its representation that VRS should be treated as a restructuring exercise implemented by companies to emerge more competitive.
ET had reported earlier that NACAS had favoured relaxation of norms on expensing VRS payout and had suggested to the ICAI to consider a limited revision of AS-26.