Advanced Accounting · AS 15 Employee Benefits

AS 15 Defined Benefit Plans: Recognition and Measurement

Updated 4 October 2026 · Fact-checked

A defined benefit plan promises a set benefit, so the employer bears the risk. Under AS 15 the liability is the present value of the obligation (PVO) less unrecognised past service cost less fair value of plan assets. Actuarial gains and losses go to the statement of profit and loss immediately.

Understand Defined Benefit Plans: Recognition and Measurement

In a defined benefit plan, the employer promises a specific benefit on retirement, such as gratuity based on salary and years of service. If the fund falls short, the employer must make up the gap. This is why the accounting is harder than for a defined contribution plan, where the expense is simply the contribution paid.

AS 15 asks you to measure the promise today. The present value of the defined benefit obligation (PVO) is the discounted value of benefits earned by employees for service up to the balance sheet date. The discount rate is based on the market yield on government bonds at the balance sheet date, with a term matching the obligation.

The projected unit credit method gives each year of service one unit of benefit entitlement. You project the final salary, work out the benefit for each unit, and discount it back. The obligation at a date is the benefit attributable to service up to that date, discounted at that date. Mortality, employee turnover, salary growth and the discount rate are actuarial assumptions. They must be unbiased and mutually compatible.

Plan assets are assets held by a long-term employee benefit fund, plus qualifying insurance policies. They are measured at fair value. The balance sheet liability is the PVO, less unrecognised past service cost, less the fair value of plan assets. If this gives an asset, it is limited to the ceiling in AS 15: the net total of unrecognised past service cost, plus the present value of available refunds and reductions in future contributions.

The expense in the profit and loss statement is made up of current service cost, interest cost, expected return on plan assets (deducted), actuarial gains and losses (recognised in full in the period), and past service cost to the extent it is recognised. Under AS 15 (revised 2005) actuarial gains and losses are not deferred and go to the statement of profit and loss. Under Ind AS 19, by contrast, they go to other comprehensive income.

Key rules to remember

Balance sheet amount: Liability = PVO − unrecognised past service cost − fair value of plan assets; Actuarial gains and losses are recognised immediately, so only unrecognised past service cost remains as an adjustment. A negative result is an asset, limited to the ceiling: the net total of unrecognised past service cost, plus the present value of available refunds and reductions in future contributions.
PVO reconciliation: Closing PVO = Opening PVO + Interest cost + Current service cost + Past service cost from plan amendments + Actuarial loss − Actuarial gain − Benefits paid; Past service cost arises when a plan is amended. It is recognised on a straight-line basis over the average period until the benefits become vested, and is recognised immediately to the extent the benefits are already vested. Actuarial gain or loss is usually the balancing figure.
Plan assets reconciliation: Closing fair value = Opening fair value + Expected return + Contributions + Actuarial gain − Actuarial loss − Benefits paid; Actuarial gain or loss on assets is the difference between actual and expected return.
Interest cost: Interest cost = Opening PVO × discount rate; Adjust for benefits paid or service cost added during the year only if the question gives timing or asks for it.
Expected return on plan assets: Expected return = Opening fair value × expected rate; Contributions and benefits paid during the year are weighted for time if dates are given.
Expense for the period: Current service cost + Interest cost − Expected return + Actuarial loss (or − gain) + Past service cost recognised; Show each item separately in the answer.
Unit credit for one year: Benefit per year of service = Projected final benefit ÷ Total years of service; Used in the projected unit credit method. Discount the benefit for service to date over the remaining years to payment.

How to solve Defined Benefit Plans: Recognition and Measurement questions

Use this order for any question on a defined benefit plan. Keep a separate working for obligation, assets and expense.

1Identify the plan type. If the employer's cost is fixed as a contribution, it is a defined contribution plan and this method does not apply.
2List the given data: opening PVO, opening plan assets, discount rate, expected return rate, contributions, benefits paid, current service cost and past service cost.
3Compute interest cost on the opening PVO and expected return on the opening plan assets, with time weighting where dates are given.
4Prepare the PVO reconciliation and find the actuarial gain or loss as the balancing figure against the closing PVO given by the actuary.
5Prepare the plan assets reconciliation and find the actuarial gain or loss on assets as actual return less expected return.
6Compute the expense: current service cost + interest cost − expected return ± actuarial items + past service cost recognised.
7Compute the balance sheet liability: closing PVO − unrecognised past service cost − closing fair value of plan assets. Pass journal entries if asked.
8Write the disclosures asked for, such as the reconciliation, expense components and principal assumptions.

Quickest way: Four-line reconciliation grid

When to use it: Use when the question gives opening balances, rates and closing actuarial figures and asks for expense or liability.

MCQs: first check whether the plan is defined benefit or defined contribution. Then remember that actuarial gains and losses go to profit and loss at once, which removes many options.
Draw two columns, PVO and Plan assets, with rows: opening, interest or return, service cost or contributions, benefits paid, actuarial gain or loss, closing.
Fill the known rows first, then get the actuarial figure by subtraction.
Written answers: show the formula in each row, label the actuarial gain or loss as balancing figure, then the expense table and the balance sheet figure. Step marks come from each labelled line.
Cross-check: closing PVO − closing plan assets must equal the liability, after any unrecognised past service cost.

Common mistakes in Defined Benefit Plans: Recognition and Measurement

Deferring actuarial gains and losses or taking them to other comprehensive income.
Students mix up AS 15 with Ind AS 19, where actuarial gains and losses go to other comprehensive income, or remember older deferral practice.
Fix: Under AS 15 recognise actuarial gains and losses in full in the statement of profit and loss of the period. Only under Ind AS 19 do they go to other comprehensive income.
Computing interest cost on the closing PVO.
The closing figure is the one given most prominently.
Fix: Use the opening PVO, adjusted only for items with given timing.
Using actual return on plan assets in the expense.
Confusion between actual and expected return.
Fix: Deduct expected return in the expense. Put the difference from actual return in actuarial gain or loss.
Adding plan assets to the PVO instead of deducting them.
Treating both as items on the same side.
Fix: Liability = PVO less fair value of plan assets. A negative result is an asset, subject to the ceiling.
Forgetting to deduct benefits paid in both reconciliations.
Payments are made from the fund, so students think only one side is affected.
Fix: Benefits paid reduce both PVO and plan assets by the same amount.
Discounting the whole final benefit instead of only the benefit for service to date.
Missing the unit credit idea.
Fix: Divide the projected benefit by total service years, multiply by years served, then discount over the remaining period.

Worked examples

Example 1

At 1 April 2026, PVO of a gratuity plan is ₹50,00,000 and plan assets have a fair value of ₹40,00,000. Discount rate is 8% and expected return is 10%. During the year, current service cost is ₹6,00,000, contribution is ₹5,00,000 and benefits paid are ₹3,00,000 (assume all at year end). At 31 March 2027 the actuary reports PVO of ₹58,00,000 and actual fair value of plan assets is ₹46,00,000. Find the actuarial gain or loss on each, the expense, and the balance sheet liability.

Show the solution

Interest cost = 50,00,000 × 8% = ₹4,00,000.
Expected return = 40,00,000 × 10% = ₹4,00,000.
PVO before actuarial item = 50,00,000 + 4,00,000 + 6,00,000 − 3,00,000 = ₹57,00,000. Closing PVO is ₹58,00,000, so actuarial loss on obligation = ₹1,00,000.
Assets before actuarial item = 40,00,000 + 4,00,000 + 5,00,000 − 3,00,000 = ₹46,00,000. Actual closing is ₹46,00,000, so actuarial gain or loss on assets = nil.
Expense = 6,00,000 + 4,00,000 − 4,00,000 + 1,00,000 = ₹7,00,000.
Liability = 58,00,000 − 46,00,000 = ₹12,00,000. There is no unrecognised past service cost.

Answer: Actuarial loss ₹1,00,000 on obligation and nil on assets. Expense charged to profit and loss ₹7,00,000. Balance sheet liability ₹12,00,000.

Example 2

An employee joins on 1 April 2024 and is expected to leave after 5 years of service. The expected final benefit is ₹5,00,000 (payable at the end of year 5). Using the projected unit credit method, find the benefit attributed to each year and the obligation at the end of year 2 (31 March 2026) with 10% discount rate. Use the discount factor 1 ÷ (1.10)³ = 0.7513.

Show the solution

Benefit attributed to each year of service = 5,00,000 ÷ 5 = ₹1,00,000.
Benefit earned for service up to end of year 2 = 2 × 1,00,000 = ₹2,00,000.
Remaining period to payment = 5 − 2 = 3 years.
PVO at end of year 2 = 2,00,000 × 0.7513 = ₹1,50,260.

Answer: Benefit per year is ₹1,00,000. PVO at 31 March 2026 is ₹1,50,260.

Exam tips

Always present the PVO and plan assets reconciliations in a table. Markers award step marks for each line.
State the AS 15 treatment in one sentence: actuarial gains and losses go to profit and loss in the period. Many MCQs test this.
Write the balance sheet figure as PVO less plan assets, and say whether it is a liability or an asset.
When dates of contributions or payments are given, weight the interest and return for time. When they are not, assume year end.

Practice questions from AS 15 Employee Benefits

Defined Benefit Plans: Recognition and Measurement in other exams

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

Defined Benefit Plans: Recognition and Measurement: frequently asked questions

What is the difference between a defined benefit and a defined contribution plan?

In a defined contribution plan, the employer's obligation ends with the contribution paid. In a defined benefit plan, the employer promises a benefit and bears the actuarial and investment risk. Only defined benefit plans need actuarial valuation.

How are actuarial gains and losses treated under AS 15?

They are recognised immediately in the statement of profit and loss for the period in which they arise. They are not deferred. Under Ind AS 19 they go to other comprehensive income instead.

Why is the projected unit credit method used?

It treats each year of service as earning one extra unit of benefit. This spreads the cost fairly across service years and gives the present value of the benefit earned to date.

How do I calculate the gratuity liability as per AS 15?

Take the actuarial present value of the gratuity obligation for service to date. Deduct the fair value of plan assets and any unrecognised past service cost. The result is the liability on the balance sheet.