BP.BC. 87 /21.04.018/2000-01

March 7, 2001

All Public Sector Banks

Dear Sir,

Voluntary Retirement Scheme (VRS) Expenditure -
Accounting and Prudential Regulatory Treatment

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Please refer to our circular DBOD. No. BP. BC. 73/21.04.018/2000-01 dated January 30, 2001 on the captioned subject. We have been approached for certain clarifications on the accounting issues in respect of VRS related expenditure. Our clarifications are as under:

2. With reference to para.2.1, it is clarified that the banks should ensure that wherever the employee has offered to avail of VRS before 31^st March 2001, the bank should consider such offer and communicate the same to the employee before 31^st March 2001 and the item should be treated as an expense or as Deferred Revenue Expenditure in the year ended 31^st March 2001.

3. With reference to para.2.2, it is clarified that in order to determine the excess of termination benefits payable over the provisions held, an actuarial valuation of the liability for termination benefits on the basis that the employee would have continued in service should be obtained as of the date VRS becomes effective and the excess of this actuarial provision over the provision held should be further provided and treated as an expense of the year. The excess of the termination benefit over the enhanced provision as on the date VRS becomes effective, can be treated as Deferred Revenue Expenditure.

4. With reference to para. 2.3, it is clarified that the period of deferment of Revenue expenditure should be determined by each bank having regard to the average period of balance service which would have been available to employees who opt for the VRS but such period of deferment cannot exceed 5 years in any case.

5. With reference to sub-para 2 of para 2.4, where a bank has not provided for encashment of leave salary on an actuarial basis and now chooses to make provision on that basis, the provision should be made for all employees and not merely for the employees who opt for the VRS and the provision so made should be treated as an expense of the year.

Yours faithfully,

(M. R. Srinivasan)
Chief General Manager-in-Charge