What changed
RBI permitted banks to spread the extra liability from reopening pension options for existing employees and raising gratuity limits over five years, starting FY2010-11, instead of charging it all in one year. The unamortised portion must be adjusted against reserves when IFRS is implemented from April 2013, and cannot include amounts for separated or retired staff.
What it means for you
Banks get breathing room to manage large one-time pension and gratuity costs without a severe hit to annual profits. However, the unamortised balance will eventually reduce reserves under IFRS, impacting net worth. Since this expenditure is not deducted from Tier I capital, capital adequacy ratios remain unaffected in the interim.
What you must do
- Recognise the full additional pension and gratuity liability in P&L for FY2010-11, then amortise over five years if not fully charged.
- Ensure unamortised expenditure excludes amounts for separated or retired employees.
- Disclose the accounting policy for this amortisation in Notes to Accounts.
- Factor in the eventual reserve reduction under IFRS from April 2013 when planning capital augmentation, including Basel III requirements.
Who it affects
All Public Sector Banks, Bank finance and accounting teams, Bank treasury and capital planning departments
Can we charge the entire pension and gratuity cost in one year?
Yes, you may fully charge it to the P&L for FY2010-11. If not, you must amortise over five years with a minimum of one-fifth each year.
Does the unamortised amount affect our Tier I capital?
No, RBI explicitly states that this unamortised expenditure will not be reduced from Tier I capital due to its exceptional nature.
What happens to the unamortised balance when IFRS starts?
From April 1, 2013, the opening reserves will be reduced by the unamortised carry-forward amount, but this cannot include any amounts for employees who have already separated or retired.