ACCOUNTING   TR-28

GOLDEN HANDSHAKE – ACCOUNTING FOR

1.         To restructure the organisations, a number of banks, financial institutions and public and private sector corporations and companies are offering golden handshake to their employees. Large amounts are involved in the golden handshake incentives. A question has arisen whether the entire amount of golden handshake be accounted for as a period cost or be treated as a deferred cost.

2.         It is stated that the objectives of these restructuring are to rationalise the personnel strength so as to reduce the surplus staff and its associated costs resulting in increase efficiency, the future benefits of which are likely to accrue to the organisation in the shape of improved profits.

3.         The matter has been examined by the Council of the Institute and it has been decided to issue following guidance in this respect:

(a)        In case the organisation is being closed down, all such expenses will have to be treated as period cost.

(b)        In case the purpose of golden handshake is downsizing / right-sizing, the management of the organisation concerned may treat such expenses as period cost or deferred cost in the manner provided below.

(c)        In case such expenses are treated as period cost then these should be shown separately as line item in the profit and loss account with appropriate disclosure in the notes to the accounts.

(d)        Such expenses may be treated as deferred cost only when it is probable that future economic benefits associated with the scheme will flow to the enterprise and:-

(i)   those benefits can be quantified as far as possible;

(ii)  the period in which these benefits will flow can also be determined reasonably; and

(iii) the Golden Handshake scheme showing the above elements has been approved by the board of directors.

(e)        These deferred expenses should be amortised over the period the benefits are expected to accrue restricted to a maximum period of five years including, the year in which these are incurred and complete disclosure about such treatment should be made in the notes to the financial statements, until such time the deferred cost is fully amortised.

(f)         Subject to the limit of 5 years amortisation as stated in the preceding paragraph, the carrying amount of deferred cost should be reviewed at every balance sheet date and approved by the board of directors in order to assess whether the future economic benefits as envisaged in the original scheme, approved by the board of directors, are still available tot he enterprise. When a decline has occurred the carrying amount should be reduced to the recoverable amount, which should be amortised over the balance period. Hence, the amount of reduction should be recognised as an expense immediately.

4.         The auditor while reporting on the financial statements which contain the treatment of golden handshake expenses in either way should consider para 30 of IAS 13 The Auditor’s Report on Financial Statements, which is reproduced below:

In certain circumstances, an auditor’s report may be modified by adding an emphasis of matter paragraph to highlight a matter affecting the financial statements which is included in a note to the financial statements that more extensively discusses the matter. The addition of such an emphasis of matter paragraph does not affect the auditor’s opinion. The paragraph would preferably be included after the opinion paragraph and would ordinarily refer tot he fat that auditor’s opinion is not qualified in this respect.

5.         EXPLANATION

Expenses mean the liability relating to golden handshake offer accepted by the employees or the mandatory golden handshake announced by the management as on the close of financial year.

(Approved by the Council through circulation

on March 13, 1998 under CA Bye-Law 55)