AS 15 – Defined Benefit Plan (DBP): Current Service Cost, Interest Cost & DBO

## Defined Benefit Plan (DBP) – Core: CSC, Interest Cost & DBO

### What Makes a Plan a DBP?

All post-employment benefit plans that are not Defined Contribution Plans are DBPs.

• Actuarial risk (employee lives longer, costs more) → borne by the company
• Investment risk (fund underperforms) → borne by the company
• Classic example: Gratuity

### 8 Key Elements of DBP Accounting

Accounting method: Projected Unit Credit (PUC)

### Step-by-Step Approach

#### Step 1 – Project the Total Benefit at Retirement

Use the expected final salary (current salary grown at expected increment rate for remaining years).

```

Final Salary = Current Salary × (1 + Increment Rate)^(Remaining Years)

Total Benefit = Formula × Final Salary × Total Service Years

```

#### Step 2 – Attribute Benefit to Each Year (Equal Attribution)

```

Annual Benefit = Total Benefit ÷ Total Service Years

```

#### Step 3 – Current Service Cost (CSC)

CSC is the present value of the benefit earned in the current year.

```

CSC (Year n) = Annual Benefit × Discount Factor for (Remaining Years to Retirement)

```

> Discount rate = market yield on high-quality corporate bonds (or government bonds if no active corporate bond market).

#### Step 4 – DBO Schedule

Interest Cost = Opening DBO × Discount Rate

### Journal Entries

```

End of each year:

Dr Gratuity Exp – CSC ××× (P&L)

Cr DBO ××× (B/S liability)

Dr Interest Expense ××× (P&L)

Cr DBO ××× (B/S liability)

On payment of gratuity:

Dr DBO ×××

Cr Bank ×××

```