Many Indian companies have not made adequate provisions for employee provident fund (PF) and pension, as per a survey by consulting firm Mercer. The survey showed that 88% of top Indian companies have not made required provisions for defined benefit PF scheme which is mandatory as per accounting standards laid down by ICAI.
Put simply, a defined benefit plan is where employee benefits are sorted out based on a formula using factors such as salary history and duration of employment such as the PF.
Companies either set up their own trust which manages the money deposited from employees PF or parks it with the employees provident fund organization (EPFO), the body which controls and regulates all PF trusts in the country.
The money deposited with the trust earns interest over a period of time and has to confirm to returns prescribed by EPFO. If the trust earns lower returns then the company has to cover the gap and make a provision in its accounts for such a liability.
The Mercer survey which studied 34 top Indian companies spread across sectors such as automobiles, banking, energy & power, engineering & manufacturing, FMCG, IT, petrochemical, pharma and telecom shows only 12% of companies have made adequate provisions for provident fund in their accounts.
Moreover, 40% of the companies which did not make provisions indicated that it is practically not possible to measure the liability associated with such schemes.
“Non-disclosure of liabilities arising out of employee benefits or not creating adequate provisions can have serious implications, especially in case of shrinking profits or collapse of businesses,” said Mercer India business leader for retirement, risk and finance management Gautam Kakar.
ICAI prescribes accounting standards and guidelines for treatment of employee retirement benefits under AS-15. The Mercer survey looked into the practices followed by top Indian companies in providing these benefits and their compliance to the accounting standards which were revised in 2005.