Govt may relax expensing of VRS payouts

NEW DELHI: India, Inc. need not worry about its bottomline being hit by a new accounting regulation insisting on immediate expensing of payouts on voluntary retirement schemes. The government and its advisor, the National Advisory Committee on Accounting Standards (Nacas), have taken a sympathetic view of industry’s concern that such treatment of VRS expenditure in the books of accounts could present a severely distorted picture of a company’s actual financial strength and its valuations.
The Nacas had, at its last meeting, concurred with the industry view that relaxation should be given for a short term from compliance with the new standard set by the Institute of Chartered Accountants of India (Icai), although the committee favours harmonisation of Indian accounting standards with International Accounting Standards.
The requirement to write off VRS expenditure in the quarter it was incurred in is a result of accounting standards on intangible assets (AS-26) issued by Icai. The accounting standard was applicable to all VRS packages announced after April 1, ‘03.
Mandatory compliance with the accounting standard was required for accounting years starting April ‘03. The move was in conformity with International Accounting Standards, which require companies to expense their payouts on VRS immediately. India Inc, led by the Confederation of Indian Industry (CII), had represented to the government, Nacas 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 Indian conditions were very different to justify adoption of the international practice on expensing VRS. Also, the amounts involved were proportionately larger. The CII had said, in its representation, that VRS should be treated as a restructuring exercise implemented by companies in a bid to emerge more competitive. The gain from the move would accrue to the company after a lag as seen with expenditure on advertising and brand-building.
The Nacas had, at its last meeting, felt the mandatory requirement should be relaxed for a couple of years to allow companies to follow the earlier practice of writing off expenditure over three to five years or as deferred revenue expenditure.
Icai is now considering a limited revision of AS-26 to allow companies to treat the VRS payouts as deferred revenue expenditure that can be written off over three to five years.
However, the decision on this revision has to be taken by the Accounting Standards Board and then endorsed by the central council. The institute was initially reluctant to revise the accounting standard as it would be a setback to efforts to harmonise domestic accounting standards with international ones.
The concession may be allowed for VRS implemented in the next two years only. Thereafter, VRS expenses would have to be treated as revenue expenditure.
Nacas, chaired by well-known chartered accountant Yezdi Malegam, advises on central government formulation and laying down of accounting policies and accounting standards. It can also advise the central government on matters pertaining to accounting policies and standards and auditing that may be referred to it. Mr Malegam is a strong votary of harmonisation of Indian accounting standards with global practices.