AS 15: Past Service Cost, Curtailments and Settlements

Understand Past Service Cost, Curtailments and Settlements

Key rules to remember

Past service cost expense (non-vested part)

Annual charge = Non-vested past service cost ÷ Average period until benefits become vested

The vested part is charged immediately in full. Charge the non-vested part straight-line, not on a reducing basis.

Unrecognised past service cost

Unrecognised = Total past service cost − Amount already charged to profit or loss

It is deducted when you compute the balance sheet amount. It is not shown as a separate liability.

Balance sheet amount for a defined benefit plan

Liability (asset) = PV of DBO − Fair value of plan assets − Unrecognised past service cost

Actuarial gains and losses are recognised immediately in profit or loss under revised AS 15, so they are not carried as unrecognised items and do not appear in this formula.

Gain or loss on curtailment or settlement

Gain = Reduction in PV of DBO − Related unrecognised past service cost − Reduction in FV of plan assets (assets paid out or transferred). A negative result is a loss.

For a curtailment, plan assets are normally unchanged, so gain = reduction in DBO − related unrecognised past service cost. Recognise it when the curtailment or settlement occurs.

Transitional liability on first adoption

Transitional liability = PV of DBO − FV of plan assets − Past service cost to be recognised in later periods

Compare it with the liability already recognised under the previous policy.

Treatment of the transitional difference

If transitional liability > previous liability: charge the increase to opening revenue reserves in full, or to profit or loss straight-line over a period of up to 5 years. If it is lower: adjust (credit) the decrease against opening revenue reserves and surplus, not profit or loss.

The entity chooses between the two options for an increase. Under the second option any period up to 5 years is allowed, and 5 years is the maximum. The period runs from the date of adoption. A decrease is never credited to profit or loss.

Asset ceiling

Surplus = FV of plan assets − PV of DBO. The balance sheet formula gives Liability (asset) = PV of DBO − FV of plan assets − Unrecognised past service cost. If this is negative, its size is the net asset: (a) = Surplus + Unrecognised past service cost. Asset recognised = Lower of (a) and (b), where (b) = Unrecognised past service cost + PV of available refunds and reductions in future contributions

Figure (a) is the balance sheet formula turned into an asset. Unrecognised past service cost was deducted in the liability formula, so it is added back when the result is an asset. Figure (b) is what the entity can truly benefit from. Actuarial gains and losses are recognised immediately, so there are no unrecognised actuarial items in this test.

How to solve Past Service Cost, Curtailments and Settlements questions

1. 1Identify the event: new plan, plan amendment, curtailment, settlement, first-time adoption, or a plan surplus.
2. 2For a new plan or amendment, split the extra obligation into the vested part and the non-vested part.
3. 3Charge the vested part to profit or loss immediately. Divide the non-vested part by the average vesting period and charge one year's share.
4. 4Track the balance of unrecognised past service cost at each year end, because it enters the balance sheet figure.
5. 5For a curtailment or settlement, remeasure with current assumptions, then compute: reduction in DBO − related unrecognised past service cost − reduction in plan assets (if any). Recognise the net gain or loss at once.
6. 6For first adoption, compute the transitional liability, subtract the liability already recognised, and apply the relevant option (immediate charge to reserves, charge over up to 5 years, or, if the transitional liability is lower, a credit to opening revenue reserves).
7. 7For a surplus, apply the asset ceiling and recognise the lower figure.
8. 8Show the journal entry or balance sheet extract and write a one-line conclusion.

Quickest way: Vested first, then spread the rest

Common mistakes in Past Service Cost, Curtailments and Settlements

• Spreading the whole past service cost over the vesting period.

  Students remember straight-line spreading and forget that the vested part is not spread.

  Fix: Always split into vested and non-vested first. The vested part is charged immediately. Only the non-vested part is spread.

• Dividing by the wrong period, such as the employee's remaining service or the plan life.

  The word 'period' is read loosely.

  Fix: Use the average period until the benefits become vested, as given in the question.

• Treating the whole transitional liability as the adjustment.

  Students forget that part of it is already recognised under the old policy.

  Fix: Adjust only the excess of the transitional liability over the liability already recognised.

• Adding unrecognised past service cost to the balance sheet liability instead of deducting it.

  It is confused with a liability that is still to be charged.

  Fix: Balance sheet liability = PV of DBO − plan assets − unrecognised past service cost.

• Showing a curtailment gain without deducting the related unrecognised past service cost.

  Only the fall in the DBO is noticed.

  Fix: Net the reduction in DBO against the related past service cost not yet recognised before booking the gain.

• Recognising the full plan surplus as an asset.

  A surplus looks like an asset by itself.

  Fix: Apply the asset ceiling. Recognise the lower of (a) the net asset from the balance sheet formula (surplus + unrecognised past service cost, because the liability formula deducts it) and (b) the amount the entity can actually benefit from (unrecognised past service cost + present value of available refunds and reductions in future contributions).

Worked examples