Ind AS 19 Defined Benefit Plans: Recognition and Measurement

Understand Defined Benefit Plans: Recognition and Measurement

Key rules to remember

Net defined benefit liability (asset)

Net DBL (asset) = PV of DBO − Fair value of plan assets (asset recognised limited to asset ceiling)

A positive figure is a liability. A negative figure is a surplus, recognised as an asset only up to the asset ceiling.

Present value of one year's benefit

PV = Benefit attributed to the year ÷ (1 + r)ⁿ

r is the discount rate, based on market yields on high-quality corporate bonds (government bond yields if there is no deep market for them). n is the number of years from the reporting date to the expected payment date.

Benefit attributed per year of service

Benefit per year = Expected total benefit ÷ Total years of service (where the benefit formula is the same each year)

If later years of service lead to a materially higher benefit, attribute on a straight-line basis from the date service first leads to benefits.

Net interest

Net interest = Opening net DBL (asset) × Discount rate

Adjust for contributions and benefit payments during the period, weighted for timing. It is the sum of interest on the DBO less interest on plan assets.

Components of defined benefit cost

Profit or loss: current service cost + past service cost + gain or loss on settlement + net interest. OCI: remeasurements

Remeasurements are actuarial gains and losses, return on plan assets excluding net interest amounts, and asset ceiling changes excluding net interest amounts.

Roll-forward of the DBO

Closing DBO = Opening DBO + Current service cost + Interest cost + Past service cost − Benefits paid ± Actuarial (gain) loss

Settlements and acquisitions or disposals are further items if they occur.

Roll-forward of plan assets

Closing assets = Opening assets + Interest income + Contributions − Benefits paid ± Return on assets excluding interest income

Actual return = interest income at the discount rate + return excluding interest income.

How to solve Defined Benefit Plans: Recognition and Measurement questions

1. 1Identify the plan type. If the employer's obligation ends with the contribution, it is defined contribution. If the employer promises a benefit and bears the risk, follow the steps below.
2. 2List the actuarial data: salary, years of service, benefit formula, expected exit date, discount rate and salary growth. Check that the discount rate is based on high-quality corporate bond yields, or government bond yields where there is no deep market for such bonds.
3. 3Project the final benefit at the exit date. Attribute it to each year of service using the benefit formula, then discount each year's attribution to the reporting date at (1 + r)ⁿ.
4. 4Build the DBO roll-forward: opening balance, interest cost, current service cost, past service cost, benefits paid, and the actuarial gain or loss as the balancing figure.
5. 5Build the plan asset roll-forward at fair value: opening balance, interest income at the discount rate, contributions, benefits paid, and return excluding interest.
6. 6Compute the net DBL (asset) as DBO less plan assets. Apply the asset ceiling if the result is a surplus.
7. 7Split the cost. Take current service cost, past service cost and net interest to profit or loss. Take actuarial gains and losses and return on assets excluding interest to OCI.
8. 8Reconcile: opening net liability + P&L cost + OCI remeasurements − contributions should equal the closing net liability. Then prepare the journal entries or disclosure asked for.

Quickest way: Net liability reconciliation shortcut

Common mistakes in Defined Benefit Plans: Recognition and Measurement

• Using a government bond yield as the discount rate by default

  Students assume government bonds are the standard benchmark, or mix up the fallback with the main rule.

  Fix: Ind AS 19 bases the rate on market yields on high-quality corporate bonds at the reporting date, with a term matching the obligation. Only if there is no deep market for such bonds do you use government bond yields. Check what rate the question gives and use it.

• Taking actuarial gains and losses to profit or loss

  The old AS 15 took them to the P&L, and the habit stays.

  Fix: Under Ind AS 19 all remeasurements go to OCI and are not reclassified to profit or loss. Only service cost and net interest go to P&L.

• Calculating interest on the DBO and assets with different rates

  Students use the expected return on assets as in old standards.

  Fix: Use the same discount rate for both. The difference between actual return and interest income at the discount rate is a remeasurement in OCI.

• Discounting the benefit without attributing it to years of service

  Students discount the whole final benefit and treat it all as current service cost.

  Fix: Under the projected unit credit method, the benefit is spread over service years. The DBO at any date covers only the service rendered so far.

• Treating the employer's own investments as plan assets

  The word 'fund' in the question is read as 'plan assets'.

  Fix: Plan assets must be held by a legally separate fund or qualifying insurance policy, usable only to pay benefits. Anything else is not netted against the DBO.

• Recognising the full surplus as an asset

  Students stop at DBO minus assets and ignore the ceiling.

  Fix: If the result is a surplus, limit the asset to the present value of refunds or reductions in future contributions. The change in the effect of the asset ceiling, excluding amounts included in net interest, is recognised in OCI.

Worked examples