Page 6 - 12. COMPILER QB - INDAS 19

MTPs QUESTIONS

Q4. (Oct. 18 – 8 Marks)

An employee Roshan has joined a company XYZ Ltd. in the year 2018. The annual emoluments of Roshan as
decided is Rs. 14,90,210. The company also has a policy of giving a lump sum payment of 25% of the last
drawn annual salary of the employee for each completed year of service if the employee retires after

completing minimum 5 years of service. The salary of the Roshan is expected to grow @ 10% per annum.

The company has inducted Roshan in the beginning of the year and it is expected that he will complete the
minimum five-year term before retiring.

What is the amount the company should charge in its Profit and Loss account every year as cost for the
Defined Benefit obligation? Also calculate the current service cost and the interest cost to be charged per year

assuming a discount rate of 8%.
(P.V factor for 8% - 0.735, 0.794, 0.857, 0.926, 1)

Solution

Calculation of Defined Benefit Obligation
Expected last drawn salary = Rs. 14,90,210 x 110% x 110% x 110% x 110% x 110%

= Rs. 24,00,000

Defined Benefit Obligation (DBO) = Rs. 24,00,000 x 25% x 5 = Rs. 30,00,000

Amount of Rs. 6,00,000 will be charged to Profit and Loss Account of the company every year as cost for

Defined Benefit Obligation.
Calculation of Current Service Cost

Yr Equal apportioned amount of Discounting @ 8% Current service cost
DBO [i.e. Rs. 30,00,000/5 years] PV factor (Present Value)
A B C d = b x c
1 6,00,000 0.735 (4 Years) 4,41,000
2 6,00,000 0.794 (3 Years) 4,76,400
3 6,00,000 0.857 (2 Years) 5,14,200
4 6,00,000 0.926 (1 Year) 5,55,600
5 6,00,000 1 (0 Year) 6,00,000

Calculation of Interest Cost to be charged per year
Yr Opening balance Interest cost Current service cost Closing balance
A B c = b x 8% d e = b + c + d

1 0 0 4,41,000 4,41,000
2 4,41,000 35,280 4,76,400 9,52,680

3 9,52,680 76,214 5,14,200 15,43,094
4 15,43,094 1,23,447 5,55,600 22,22,141
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