## Post-Employment Benefits – Defined Contribution Plan (DCP)

### Definition

A post-employment benefit plan under which the enterprise pays fixed contributions to a separate fund. The fund then provides benefits to the employee on retirement.

Classic example: Provident Fund (PF)

### Key Characteristic – No Residual Risk on the Company

Once the contribution is paid to the fund:

Actuarial risk (longer life, lower returns) → falls on the fund / employee
Investment risk (poor fund performance) → falls on the fund / employee
Company has no further obligation

### Accounting Treatment

Step 1 – Accrue the contribution:

```

Dr PF Expense ×××

Cr PF Payable ×××

```

Step 2 – Pay to the fund:

```

Dr PF Payable ×××

Cr Bank ×××

```

### When Payment Falls After 12 Months (Discounting Required)

If the contribution is payable more than 12 months after the balance sheet date, recognize the liability at present value and unwind the discount (interest expense) each year until payment.

```

Dr PF Expense (PV amount) ×××

Cr PF Payable (PV) ×××

Each subsequent year:

Dr Interest Expense (unwinding) ×××

Cr PF Payable ×××

```

Worked example

### Example 1

Case A – Accrued in X1-X2, paid on 15/04/X2 (within 12 months):

PF contribution = ₹80,000 (no discounting needed).

```

X1-X2:

Dr PF Expense 80,000

Cr PF Payable 80,000

15/04/X2:

Dr PF Payable 80,000

Cr Bank 80,000

```

### Example 2

Case B – Accrued in X1-X2, payable on 01/04/X3 (>12 months), Discount Rate = 10%:

PV of ₹80,000 payable in 1 year = 80,000 ÷ 1.10 = ₹72,727

Interest for X2-X3 = 72,727 × 10% = ₹7,273

```

31/03/X2:

Dr PF Expense 72,727

Cr PF Payable 72,727

31/03/X3 (unwinding of discount):

Dr Interest Expense 7,273

Cr PF Payable 7,273

Total PF Payable = 72,727 + 7,273 = ₹80,000

01/04/X3:

Dr PF Payable 80,000

Cr Bank 80,000

```

⚠️ Common exam mistakes

Applying Defined Benefit Plan accounting (actuarial valuation, DBO) to a DCP – once the fixed contribution is paid, no further accounting is needed
Forgetting to discount the liability when payment falls beyond 12 months from the balance sheet date
Omitting the annual unwinding of discount (interest expense) in Case B-type scenarios

Bare-Act text Para 26 – Defined Contribution Plans · AS 15 (Revised 2005) – ICAI · click to expand

Under defined contribution plans, the enterprise's obligation is limited to the amount that it agrees to contribute to the fund. Thus, the amount of the post-employment benefits received by the employee is determined by the amount of contributions paid by an enterprise to a post-employment benefit plan, together with investment returns arising from the contributions.

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AS 15 – Post-Employment Benefits: Defined Contribution Plan (DCP)

Worked example

⚠️ Common exam mistakes