Corporate Accounting and Auditing · Employee Benefits (Ind AS 19)

Defined Benefit Plans: Projected Unit Credit Method and Measurement

Updated 10 October 2026 · Fact-checked

Under Ind AS 19, a defined benefit plan is measured by using the projected unit credit method to find the present value of the obligation. You deduct the fair value of plan assets to get the net defined benefit liability (asset). Service cost and net interest go to profit or loss. Remeasurements go to OCI.

Understand Defined Benefit Plans: Measurement and Actuarial Valuation

In a defined benefit plan, the employer promises a specific benefit, such as a lump sum on retirement based on salary and years of service. The employer carries the risk. So the cost is uncertain and may be paid many years later. Ind AS 19 therefore requires an actuarial estimate of what the employee has earned so far.

The standard requires the projected unit credit method (para 67). It treats each year of service as earning one extra unit of benefit. Each unit is measured separately, then discounted to present value. The sum of the discounted units for current and prior years is the defined benefit obligation (DBO). The units earned in the current year, discounted, give the current service cost.

The actuary also makes assumptions. Demographic ones cover employee turnover and mortality. Financial ones cover future salary increases and the discount rate (para 57). If an assumption turns out different from what was expected, the change in DBO is an actuarial gain or loss.

To get the balance sheet figure, deduct the fair value of plan assets from the DBO. Plan assets are held by a legally separate fund, or are qualifying insurance policies. They can be used only to pay employee benefits and are out of reach of the entity's creditors. The result is the net defined benefit liability (asset). A net asset is limited by the asset ceiling (para 64).

The cost splits into three parts (para 57). Service cost (current service cost, past service cost, gain or loss on settlement) and net interest go to profit or loss. Remeasurements go to other comprehensive income. Remeasurements are actuarial gains and losses, return on plan assets excluding interest, and changes in the asset ceiling effect excluding interest.

Key rules to remember

Net defined benefit liability (asset): Present value of DBO − Fair value of plan assets (adjusted for any asset ceiling); A positive result is a liability. A negative result is an asset, limited by the asset ceiling.
Current service cost (one-year unit): Benefit attributed to the current year ÷ (1 + r)^n; n is the number of years until the benefit is expected to be paid. r is the discount rate.
DBO roll-forward: Opening DBO + Interest cost + Current service cost + Past service cost − Benefits paid ± Actuarial (gain) loss = Closing DBO; Interest cost is the discount rate × opening DBO, adjusted for benefits paid or amendments during the year.
Plan asset roll-forward: Opening plan assets + Interest income + Contributions − Benefits paid + Return on plan assets excluding interest income = Closing plan assets; Interest income is the discount rate × fair value of plan assets at the start of the year, adjusted for contributions and payments (para 125).
Net interest: Interest cost on DBO − Interest income on plan assets; Same discount rate for both. Shown in profit or loss.
Return on plan assets for OCI: Actual return on plan assets − Interest income on plan assets; The difference is a remeasurement in OCI (para 125).
Past service cost: DBO after amendment or curtailment − DBO before it, remeasured on current assumptions; Arises from plan amendment or curtailment. Not an actuarial gain or loss (para 129). Remeasure as per para 99.

How to solve Defined Benefit Plans: Measurement and Actuarial Valuation questions

Use this order for any defined benefit question. Build the DBO and plan asset reconciliations first. Everything else follows from them.

1Write the opening DBO and opening fair value of plan assets. Opening net liability is the difference.
2Compute current service cost from the benefit attributed to the year, discounted if needed.
3Check for a plan amendment or curtailment. If there is one, the increase or decrease in DBO is past service cost, taken to profit or loss immediately.
4Compute interest cost on DBO and interest income on plan assets, both at the same discount rate. Adjust for contributions and benefit payments if the question gives dates.
5Find actuarial gain or loss as the balancing figure in the DBO reconciliation, using the closing DBO the question gives.
6Find return on plan assets excluding interest as the balancing figure in the asset reconciliation.
7Compute closing net liability (asset) = closing DBO − closing plan assets. Cross-check it against opening net liability + P&L cost + OCI − contributions.
8State clearly what goes to profit or loss (service cost and net interest) and what goes to OCI (remeasurements).

Quickest way: Two reconciliations and a cross-check

When to use it: Use this for any numerical question with plan assets, contributions and benefits paid.

Draw two columns on the page: DBO on the left, plan assets on the right.
Fill each line from opening to closing. Leave the balancing figures (actuarial loss, return excluding interest) for last.
Calculate net interest as discount rate × opening net liability, adjusted for timing of any amendment.
Add up profit or loss items. Add up OCI items.
Check: opening net liability + P&L cost + OCI remeasurement − contributions = closing net liability. If it does not tie, find the error before writing the answer.

Common mistakes in Defined Benefit Plans: Measurement and Actuarial Valuation

Putting actuarial gains and losses in profit or loss.
Students remember them as expenses and forget the OCI rule.
Fix: Remember the split: service cost and net interest in profit or loss, all remeasurements in OCI (para 57).
Treating a plan amendment as an actuarial loss.
Both increase the DBO, so they look alike.
Fix: Para 129 says changes from amendment, curtailment or settlement give past service cost or settlement gains or losses, not actuarial gains and losses. Past service cost goes to profit or loss.
Using different rates for interest cost and interest income on plan assets.
Students use the expected return on assets, which was the old approach.
Fix: Use the same discount rate for both. The gap between actual return and interest income goes to OCI (para 125).
Showing the whole DBO as the balance sheet liability.
Plan assets are forgotten or treated as a separate item.
Fix: Always deduct the fair value of plan assets first. Only the net amount is the liability (asset).
Counting interest on plan assets on the closing balance.
Students use the year-end figure because it is the one given.
Fix: Use the fair value at the start of the year, adjusted for contributions and payments during the year (para 125).
Taking benefit payments out of only one side.
Students forget a payment from the fund reduces both DBO and plan assets.
Fix: When the fund pays the benefit, deduct it in both reconciliations. The net liability does not change from it.

Worked examples

Example 1

Anand Textiles Ltd gives an employee a lump sum of ₹14,641 for each year of service, payable at the end of year 5, when the employee is expected to leave. The discount rate is 10% a year and assumptions do not change. Using the projected unit credit method, find the current service cost, interest cost and closing DBO for years 1 to 3, and the total employee benefit expense for year 3.

Show the solution

Year 1: benefit attributed is ₹14,641, payable in 4 more years. Current service cost = 14,641 ÷ 1.1^4 = 14,641 ÷ 1.4641 = ₹10,000. Opening DBO is nil and interest is nil. Closing DBO = ₹10,000.
Year 2: opening DBO = ₹10,000. Interest at 10% = ₹1,000. Current service cost = 14,641 ÷ 1.1^3 = 14,641 ÷ 1.331 = ₹11,000. Closing DBO = 10,000 + 1,000 + 11,000 = ₹22,000.
Check year 2: two years of benefit = 2 × 14,641 = 29,282, discounted 3 years = 29,282 ÷ 1.331 = ₹22,000. It matches.
Year 3: opening DBO = ₹22,000. Interest at 10% = ₹2,200. Current service cost = 14,641 ÷ 1.1^2 = 14,641 ÷ 1.21 = ₹12,100. Closing DBO = 22,000 + 2,200 + 12,100 = ₹36,300.
Check year 3: 3 × 14,641 = 43,923, discounted 2 years = 43,923 ÷ 1.21 = ₹36,300. It matches.
Year 3 expense = current service cost ₹12,100 + interest cost ₹2,200 = ₹14,300. There are no plan assets, so net interest equals interest cost.

Answer: Current service cost: ₹10,000, ₹11,000, ₹12,100. Interest cost: nil, ₹1,000, ₹2,200. Closing DBO: ₹10,000, ₹22,000, ₹36,300. Year 3 expense in profit or loss = ₹14,300.

Example 2

Kaveri Engineering Ltd has a funded defined benefit plan. On 1 April, DBO is ₹10,00,000 and plan assets at fair value are ₹8,00,000. The discount rate is 10%. On 1 April the plan is amended to raise benefits, increasing the DBO by ₹50,000 (past service cost). Data for the year: current service cost ₹1,20,000; contributions paid on 31 March ₹1,00,000; benefits paid by the fund on 31 March ₹60,000; actual return on plan assets ₹90,000; closing DBO is ₹12,55,000. Prepare the reconciliations, find the closing net liability and show the amounts for profit or loss and OCI.

Show the solution

Opening net liability = 10,00,000 − 8,00,000 = ₹2,00,000.
Past service cost = ₹50,000, recognised in profit or loss. DBO after amendment = 10,50,000.
Interest cost = 10% × 10,50,000 = ₹1,05,000. Interest income on plan assets = 10% × 8,00,000 = ₹80,000. Contributions and payments occur at year-end, so they do not affect interest.
Net interest = 1,05,000 − 80,000 = ₹25,000 (profit or loss).
DBO: 10,00,000 + 50,000 + 1,20,000 + 1,05,000 − 60,000 = 12,15,000 before actuarial items. Closing DBO is 12,55,000, so actuarial loss = ₹40,000.
Plan assets: 8,00,000 + 1,00,000 − 60,000 + actual return 90,000 = ₹9,30,000.
Return on plan assets excluding interest = 90,000 − 80,000 = ₹10,000 gain (OCI).
Closing net liability = 12,55,000 − 9,30,000 = ₹3,25,000.
Profit or loss: current service cost 1,20,000 + past service cost 50,000 + net interest 25,000 = ₹1,95,000.
OCI: actuarial loss 40,000 less asset return gain 10,000 = remeasurement loss ₹30,000.
Cross-check: 2,00,000 + 1,95,000 + 30,000 − 1,00,000 contributions = ₹3,25,000. It ties.

Answer: Closing DBO ₹12,55,000; closing plan assets ₹9,30,000; net defined benefit liability ₹3,25,000. Profit or loss charge ₹1,95,000. OCI remeasurement loss ₹30,000.

Exam tips

Draw both reconciliations even if the question asks for only one number. The balancing figures depend on both.
Always label each item as profit or loss or OCI. Step marks are often given for the classification.
For a one-line theory question, say that the standard requires the projected unit credit method (para 67) and that each year of service gives a unit of benefit measured separately and discounted.
Write the cross-check line. It catches slips in the roll-forwards and shows the examiner your logic.
In MCQs, watch for plan amendments. If benefits change, the answer is past service cost, not an actuarial loss.

Practice questions from Employee Benefits (Ind AS 19)

Defined Benefit Plans: Measurement and Actuarial Valuation 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: Measurement and Actuarial Valuation: frequently asked questions

What is the projected unit credit method in Ind AS 19?

It is the actuarial method Ind AS 19 requires to measure a defined benefit obligation (para 67). Each year of service earns a unit of benefit. Each unit is measured and discounted separately. The total gives the DBO, and the current year's unit gives the current service cost.

What is the difference between current service cost and past service cost?

Current service cost is the rise in the present value of the DBO from employee service in the current period. Past service cost is the change in the DBO for prior service caused by a plan amendment or curtailment. Both go to profit or loss.

How do you calculate the net defined benefit liability?

Take the present value of the DBO and deduct the fair value of plan assets. If the result is negative, it is a net asset. That asset is limited by the asset ceiling (para 64).

Where does the return on plan assets go?

Interest income on plan assets, at the discount rate, goes to profit or loss within net interest. The actual return less that interest income is a remeasurement and goes to OCI.