## Curtailment & Settlement of DBPs

### Curtailment

Occurs when the entity significantly reduces the number of employees covered or curtails future benefits under the plan — without paying off the obligation.

Effect: DBO decreases → Gain on Curtailment recognized in P&L.

#### When Unvested PSC Exists

Any unamortized unvested PSC relating to the curtailed portion must be written off (reduces the gain):

```

Gain on Curtailment = Decrease in DBO − Proportionate Unamortized Unvested PSC

```

Journal Entry:

```

Dr DBO ××× (full decrease)

Cr Unamortized Unvested PSC ××× (proportionate share)

Cr Gain on Curtailment (P&L) ××× (balancing figure)

```

### Settlement

Occurs when the entity settles its obligation before the due date by making a lump-sum payment.

```

Gain on Settlement = DBO extinguished − Amount actually paid

```

Journal Entry:

```

Dr DBO ××× (obligation removed)

Cr Bank / Plan Assets ××× (amount paid)

Cr Gain on Settlement (P&L) ××× (balancing figure)

```

### Net Liability on Balance Sheet (Post-curtailment)

```

Net Liability = DBO (revised) − FV of Plan Assets − Unamortized Unvested PSC (remaining)

```

### Actuarial Valuation Frequency

> AS 15 states that actuarial valuation should be conducted at least once every 3 years, provided there are no major changes in estimates.

Worked example

### Example 1

Simple Curtailment (no PSC, no settlement payment):

Total DBO = ₹12,000. Company curtails DBO worth ₹1,000.

```

Dr DBO 1,000

Cr Gain on Curtailment (P&L) 1,000

```

### Example 2

Settlement – paying less than DBO:

DBO = ₹1,00,000. Settled for ₹90,000 (cash from plan assets).

```

Dr DBO 1,00,000

Cr Bank / Plan Assets 90,000

Cr Gain on Settlement 10,000

```

### Example 3

Complex Curtailment with Unvested PSC:

DBO = ₹18,000 | Plan Assets = ₹10,000 | Unamortized Unvested PSC = ₹1,200

Curtailment = 10% of DBO = ₹1,800 (no settlement payment)

Proportionate PSC derecognized = 10% × ₹1,200 = ₹120

Gain = 1,800 − 120 = ₹1,680

```

Dr DBO 1,800

Cr Unamortized Unvested PSC 120

Cr Gain on Curtailment (P&L) 1,680

```

Balance sheet after curtailment:

DBO remaining = 18,000 − 1,800 = ₹16,200
Plan Assets = ₹10,000
Unamortized PSC remaining = 1,200 − 120 = ₹1,080
Net Liability = 16,200 − 10,000 − 1,080 = ₹5,120

⚠️ Common exam mistakes

Ignoring unamortized unvested PSC when computing the gain on curtailment – it reduces the gain
Treating curtailment (no payment, just plan reduction) the same as settlement (actual payment to extinguish obligation)
Computing gain on settlement as DBO minus plan assets instead of DBO minus the actual settlement amount paid

Bare-Act text Para 111 – Curtailments and Settlements · AS 15 (Revised 2005) – ICAI · click to expand

A curtailment occurs when an enterprise either: (a) is demonstrably committed to making a material reduction in the number of employees covered by a plan; or (b) amends the terms of a defined benefit plan such that a material element of future service by current employees will no longer qualify for benefits, or will qualify only for reduced benefits. A settlement occurs when an enterprise enters into a transaction that eliminates all further legal or constructive obligation for part or all of the benefits provided under a defined benefit plan.

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AS 15 – Defined Benefit Plan: Curtailment & Settlement

Worked example

⚠️ Common exam mistakes