## Past Service Cost (PSC)

### When Does It Arise?

When a plan is amended – e.g., gratuity formula increased from 1/10 to 3/10 of final salary, or benefit percentage increased from 25% to 30%. This retroactively increases the DBO for service already rendered in prior years.

> Decrease in DBO due to plan amendment is rare but treated symmetrically.

### Two Types of PSC

Type	Definition	When Recognized
Vested PSC	Employees have already met vesting conditions	Immediately in P&L
Unvested PSC	Employees have NOT yet met vesting conditions	Amortized over average remaining vesting period

Intuition:

Vested PSC = cost that has already 'crystallized' for past service → recognize now
Unvested PSC = cost that will only materialize if the employee continues → spread over remaining period

### Journal Entries

Vested PSC (immediate):

```

Dr Past Service Cost – Vested (P&L) ×××

Cr DBO ×××

```

Unvested PSC – each amortization year:

```

Dr Past Service Cost – Unvested (P&L) ×××

Cr DBO ×××

```

Worked example

### Example 1

Plan amendment increases DBO by ₹10:

Of ₹10 increase: ₹7 is vested, ₹3 is unvested (average remaining vesting period = 3 years, so ₹1/year).

```

Immediate recognition (vested):

Dr PSC – Vested (P&L) 7

Cr DBO 7

Year 1 amortization (unvested):

Dr PSC – Unvested (P&L) 1

Cr DBO 1

[Same entry repeated for Years 2 and 3]

```

After 3 years, the full ₹10 will have been recognized in P&L and DBO will have increased by ₹10.

⚠️ Common exam mistakes

Recognizing all PSC immediately without splitting into vested (immediate) and unvested (amortized)
Amortizing vested PSC instead of recognizing it all at once
Confusing PSC (triggered by plan amendment) with actuarial gains/losses (triggered by changes in actuarial assumptions or experience)

Bare-Act text Para 96–99 – Past Service Cost · AS 15 (Revised 2005) – ICAI · click to expand

Past service cost is the change in the present value of the defined benefit obligation for employee service in prior periods, resulting from the current period from the introduction of, or changes to, post-employment benefits or other long-term employee benefits. An enterprise should recognise past service cost as an expense on a straight-line basis over the average period until the benefits become vested.

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AS 15 – Defined Benefit Plan: Past Service Cost (Plan Amendment)

Worked example

⚠️ Common exam mistakes