Till the year 2001, there was no regulatory obligation on a company to provide for defined retirement plan, namely the gratuity payment, by private colleges. From the year 2001, it was made compulsory for each private college to provide for gratuity to each employee and also recognize it as liability in the annual accounts. The scheme is as follows:

(i) Each employee is to be paid gratuity equal to half months salary for each completed year of service.

(ii) Salary (basic pay plus dearness allowance only) for this purpose shall be the last salary drawn by the employee retiring from the service.

(iii) Maximum gratuity to each employee shall not exceed ₹10 lac.

(iv) The appropriate discount rate for the calculation should be 8% per annum BGS College has 20 staff members who are eligible for the payment of gratuity at the end of 2011, i.e., after 10 years with maximum amount as specified above to each of the employee. The college wants to provide for the gratuity payment as liability in the annual accounts from the year 2001 onwards. The salary bill for these twenty employees is ₹1.5 crore per annum at present that is likely to rise to ₹5 crore per annum by the end of 2011.

Discussion Question

You are an expert and have been roped in by BGS College to help the college. Show how gratuity should be recognized during all the accounting years as liability for post-retirement employee benefits as provided in accounting standards. Show all the working.