## Termination Benefits

### Definition

Benefits payable as a result of:

An employer's decision to terminate an employee before normal retirement, OR
An employee's decision to accept voluntary redundancy (e.g., VRS)

Examples: Voluntary Retirement Scheme (VRS), Retrenchment Scheme, Golden Handshake.

### Recognition Criteria – BOTH must be satisfied:

1. A detailed formal plan for the termination has been duly approved

2. A reliable estimate of the amount of obligation can be made

### Measurement

When is payment due?	Measure at
Within 12 months of Balance Sheet date	Undiscounted value
After 12 months from Balance Sheet date	Discounted (present) value; unwind discount annually

If discounted, unwind each year:

```

Dr Interest Expense ××× (unwinding of discount)

Cr VRS Payable ×××

```

Worked example

### Example 1

Case A – Payable within 12 months (undiscounted):

VRS benefit accrued 31/03/X2, payable 30/06/X2 = ₹80,000.

```

31/03/X2:

Dr VRS Expense 80,000

Cr Payable 80,000

30/06/X2:

Dr Payable 80,000

Cr Bank 80,000

```

### Example 2

Case B – Payable after 12 months (discounted at 10%):

VRS benefit accrued 31/03/X2, payable 01/04/X3 = ₹80,000.

PV = 80,000 ÷ 1.10 = ₹72,727. Interest = 72,727 × 10% = ₹7,273.

```

31/03/X2:

Dr VRS Expense 72,727

Cr Payable 72,727

31/03/X3 (unwinding of discount):

Dr Interest Expense 7,273

Cr Payable 7,273

Total Payable = 72,727 + 7,273 = ₹80,000

01/04/X3:

Dr Payable 80,000

Cr Bank 80,000

```

⚠️ Common exam mistakes

Recognizing termination benefits before a detailed formal plan is approved – both conditions must be met simultaneously
Applying discounted value when payment is due within 12 months (use undiscounted in that case)
Forgetting to unwind the discount in Case B – each year, interest expense accretes the liability toward the final cash payment
Classifying VRS / retrenchment as post-employment benefits – they are termination benefits, a separate category

Bare-Act text Para 133 – Recognition of Termination Benefits · AS 15 (Revised 2005) – ICAI · click to expand

An enterprise should recognise termination benefits as a liability and an expense when, and only when, the enterprise is demonstrably committed to either: (a) terminate the employment of an employee or group of employees before the normal retirement date; or (b) provide termination benefits as a result of an offer made in order to encourage voluntary redundancy.

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AS 15 – Termination Benefits (VRS, Retrenchment)

Worked example

⚠️ Common exam mistakes