Strategic Business Reporting (International) · Employee benefits

Past Service Cost, Curtailments and Settlements under IAS 19

Updated 11 October 2026 · Fact-checked

Past service cost is the change in a defined benefit obligation caused by a plan amendment or curtailment. A settlement is a transaction that removes the entity's obligation for some benefits. First remeasure the net liability using current assumptions at that date. Then the past service cost or settlement gain or loss goes to profit or loss immediately.

Understand Past Service Cost, Curtailments and Settlements

A defined benefit plan promises employees a future pension. The entity carries a net defined benefit liability: the present value of the obligation less the fair value of plan assets. Sometimes the plan itself changes during the year. These changes are not ordinary actuarial gains and losses. They are specific events, and IAS 19 gives them their own treatment.

Past service cost arises when a plan amendment or a curtailment changes the present value of the obligation. An amendment may introduce a new benefit or change existing benefits. If benefits improve, the obligation rises and you have a cost. If benefits are cut, the obligation falls and you have a negative past service cost, which is a gain. The cost is recognised in profit or loss at the earlier of two dates: when the amendment or curtailment happens, and when the entity recognises related restructuring costs or termination benefits. It does not matter whether the benefits have vested. There is no spreading over a vesting period.

A curtailment is a significant reduction by the entity in the number of employees covered by the plan, or a change to the plan terms so that future service earns reduced or no benefits. Typical causes are a plant closure or a large redundancy programme. Under IAS 19 the effect of a curtailment is treated as past service cost.

A settlement is a transaction that eliminates all further legal or constructive obligation for part or all of the benefits. An example is paying a lump sum to members in exchange for their rights, or buying an insurance policy that transfers the obligation. The gain or loss on settlement is the difference between the present value of the obligation settled, measured at the settlement date, and the settlement price, including any plan assets transferred and payments made directly by the entity. Paying benefits as they fall due under the plan terms is not a settlement.

The order matters. Before determining past service cost, or a gain or loss on settlement, the entity remeasures the net defined benefit liability using current assumptions and the current fair value of plan assets (IAS 19.99). The change this produces is a remeasurement and goes to OCI. Only then do you work out the past service cost or settlement gain or loss, which goes to profit or loss. Since the 2018 amendment, current service cost and net interest for the rest of the period are then calculated using the updated assumptions. The amendment also clarifies that past service cost and settlement gains or losses are recognised even if the plan was in surplus and an asset ceiling applied. The effect of the asset ceiling is dealt with separately afterwards.

Key rules to remember

Past service cost: Past service cost = PV of obligation after amendment or curtailment − PV of obligation before; Both values are measured at the date of the event using current assumptions, after the net liability has been remeasured. Positive is a cost, negative is a gain. Recognised in profit or loss.
Gain or loss on settlement: Gain or loss = PV of obligation settled − settlement price; Settlement price includes plan assets transferred and any direct payments by the entity. A positive result is a gain. Recognised in profit or loss.
Net interest after a remeasurement: Net interest = net defined benefit liability (asset) after the event × discount rate × remaining period; Use the updated discount rate and the updated net liability for the period after the event. Use the earlier figures for the period before it.
Timing rule: Recognise at the earlier of: (1) the event date; (2) when related restructuring costs or termination benefits are recognised; Applies to past service cost including curtailments. Vesting is irrelevant.
Net liability roll-forward: Closing net liability = opening + current service cost + net interest + past service cost + settlement loss (− settlement gain) + remeasurements in OCI − contributions − ordinary benefits paid directly by the entity; Ordinary benefits paid out of plan assets reduce the obligation and the assets equally, so they do not change the net figure. Ordinary benefits paid directly by the entity reduce the obligation only, so they reduce the net liability. The settlement gain or loss (obligation settled minus settlement price, including plan assets transferred and direct payments by the entity) captures the full net effect of a settlement. Do not deduct settlement payments again as contributions or benefits paid, or you will double count.

How to solve Past Service Cost, Curtailments and Settlements questions

Use this order for any question on plan changes. It follows the sequence in IAS 19, keeps the numbers tidy and picks up the discussion marks.

1Identify the event. Decide if it is a plan amendment, a curtailment or a settlement. Routine benefit payments are none of these.
2Find the date of the event and check whether restructuring costs or termination benefits are recognised earlier. Past service cost is recognised at the earlier date.
3Remeasure the net liability at the event date, before working out the cost or gain. Use current assumptions and the current fair value of plan assets. The change since the last measurement goes to OCI. OCI remeasurements are actuarial gains and losses, the return on plan assets excluding amounts in net interest, and changes in the effect of the asset ceiling excluding amounts in net interest.
4For an amendment or curtailment, take the obligation before and after the event on the current assumptions. The difference is the past service cost or the curtailment effect.
5For a settlement, compare the obligation settled with the settlement price. The difference is the gain or loss.
6Recognise the past service cost or settlement result in profit or loss. Do not put it in OCI and do not defer it.
7Calculate net interest and current service cost in two parts: before the event on the old figures, and after the event on the updated ones.
8Build the closing net liability and state the double entry and the effect on profit or loss.

Quickest way: Before and after table

When to use it: Use it when the question gives the obligation before and after a change and the time is short.

Write two lines: obligation before and obligation after, both at the event date.
Subtract to get the past service cost. Label it cost or gain.
For a settlement, write obligation settled and price paid. Subtract to get gain or loss.
Put the result straight into profit or loss.
Roll the net liability forward in one column and check that it ties to the closing figures given.

Common mistakes in Past Service Cost, Curtailments and Settlements

Spreading past service cost over the vesting period.
Older versions of IAS 19 allowed deferral for unvested benefits, and students remember that.
Fix: Recognise the full amount in profit or loss at the earlier of the event date and the date related restructuring costs are recognised.
Putting past service cost or settlement gains in OCI.
Students link all pension changes with OCI remeasurements.
Fix: Only remeasurements go to OCI: actuarial gains and losses, the return on plan assets excluding amounts in net interest, and changes in the effect of the asset ceiling excluding amounts in net interest. Past service cost and settlement gains or losses go to profit or loss.
Treating routine benefit payments as settlements.
Both involve cash leaving the plan.
Fix: A settlement removes the obligation outside the plan terms, such as a lump sum buyout. Payments under the plan terms are not settlements.
Ignoring the remeasurement at the event date.
Students keep the opening discount rate for the whole year.
Fix: Remeasure the net liability when the amendment, curtailment or settlement occurs, before working out the cost or gain. Use the new assumptions for the rest of the year.
Getting the sign wrong on a benefit cut.
Students assume past service cost is always an expense.
Fix: If the obligation falls, the past service cost is negative, which is a gain credited to profit or loss.
Calculating the settlement gain with the obligation at the year start.
The opening figure is the one printed in the question.
Fix: Use the present value of the obligation settled at the settlement date.

Worked examples

Example 1

On 1 July 20X5, Delta amends its defined benefit plan so that benefits for past service increase. At that date, after remeasurement using current assumptions, the present value of the obligation is $40 million before the change and $43.5 million after it. Plan assets are $38 million. Explain and quantify the accounting for the amendment.

Show the solution

The change is a plan amendment that improves benefits for past service, so it creates past service cost.
The figures given are already measured at 1 July on current assumptions. The net liability of $2.0 million (40.0 − 38.0) is therefore after remeasurement to 1 July, and any change from the opening position has already been recognised in OCI. No further remeasurement is needed.
Past service cost = 43.5 − 40.0 = $3.5 million.
It is recognised in profit or loss immediately on 1 July 20X5. No deferral applies even if employees are not yet vested.
The $3.5 million past service cost increases the net liability from $2.0 million (40.0 − 38.0) to $5.5 million (43.5 − 38.0).
Current service cost and net interest for the remaining six months use the updated assumptions and the updated net liability.

Answer: Delta recognises past service cost of $3.5 million in profit or loss on 1 July 20X5. The net defined benefit liability, already remeasured at $2.0 million, rises by that $3.5 million to $5.5 million. The entity then uses updated assumptions for the rest of the year.

Example 2

Echo pays a lump sum to some former employees in return for their pension rights. On the settlement date, after remeasuring the net liability with current assumptions, the present value of the obligation settled is $12 million. Echo pays $13 million, all from plan assets. Calculate the settlement gain or loss and explain the treatment.

Show the solution

Settlement price = $13 million, all plan assets transferred. There is no direct payment by Echo.
Gain or loss = obligation settled − settlement price = 12 − 13 = −$1 million.
The result is negative, so it is a settlement loss of $1 million.
The loss is recognised in profit or loss at the settlement date, after the net liability has been remeasured with current assumptions.
Effect on the net liability: the obligation falls by $12 million and plan assets fall by $13 million, so the net liability rises by 13 − 12 = $1 million. This equals the settlement loss.
In the roll-forward, add only the $1 million settlement loss. The settlement loss already captures the full net effect, so do not also deduct the $13 million as benefits paid or contributions.
Net interest and current service cost for the rest of the period use the updated figures.

Answer: Echo recognises a settlement loss of $1 million in profit or loss. The obligation falls by $12 million, plan assets fall by $13 million, and the net defined benefit liability increases by $1 million, which is the settlement loss and is not adjusted again.

Exam tips

Always say whether the event is an amendment, curtailment or settlement. Markers give a mark for the classification.
Link a curtailment to a restructuring or closure in the scenario. Say that past service cost is recognised at the earlier of the event and the recognition of restructuring costs.
State clearly that gains and losses go to profit or loss, not OCI, and that vesting does not delay recognition.
Mention the 2018 amendment on remeasurement when the scenario has a mid-year event. Show the split of interest and service cost before and after the event.
Keep a one-line explanation beside each number. Professional skills marks reward clear communication of the effect on profit and the net liability.

Practice questions from Employee benefits

Past Service Cost, Curtailments and Settlements in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

CA IntermediatePast Service Cost, Curtailments and Settlements

Past Service Cost, Curtailments and Settlements: frequently asked questions

What is the difference between a curtailment and a settlement under IAS 19?

A curtailment is a significant reduction in employees covered or in future benefits, and its effect is treated as past service cost. A settlement is a transaction that eliminates the entity's obligation for some benefits, such as a lump sum buyout. Curtailments change the obligation. Settlements pay it off.

Where is past service cost recognised?

It is recognised in profit or loss. This happens at the earlier of the date of the amendment or curtailment and the date the entity recognises related restructuring costs or termination benefits. It is not spread over any vesting period.

What did the 2018 amendment to IAS 19 change?

It requires the entity to remeasure the net defined benefit liability when a plan amendment, curtailment or settlement occurs. Current service cost and net interest for the rest of the period then use the updated assumptions. It also clarifies that past service cost and settlement gains or losses are recognised even if an asset ceiling applies.

Can past service cost be a gain?

Yes. If an amendment or curtailment reduces the present value of the obligation, the past service cost is negative. You credit the gain to profit or loss.