Every company has obligations to its employees — salaries, gratuity, provident fund, leave encashment. AS 15 (Revised 2005) tells you how to recognise and measure these obligations in the financial statements. The core question it answers: when an employee works today, what is the true cost to the company, including benefits they will receive years later?
AS 15 classifies employee benefits into four buckets. Short-term benefits (wages, PF, ESI, earned leave expected within 12 months) are straightforward — recognise as expense when the employee renders service, no discounting needed. The exam-heavy bucket is post-employment benefits, split into two types. A Defined Contribution Plan (DCP) is simple: the employer promises a fixed contribution (e.g., 12% of basic to EPFO). Once paid, liability ends — no actuarial risk for the company. A Defined Benefit Plan (DBP) is complex: the employer promises a fixed outcome (e.g., gratuity = 15 days × last salary × years of service). The company bears actuarial and investment risk. Gratuity and pension are classic DBP examples in India.
For a Defined Benefit Plan, you must use the Projected Unit Credit (PUC) Method — the only method AS 15 permits. Under PUC, you project the total benefit the employee will earn at retirement (using future salary assumptions), then attribute the portion earned this year as Current Service Cost. The Net Defined Benefit Liability on the Balance Sheet = Present Value of Defined Benefit Obligation (PV of DBO) minus Fair Value of Plan Assets. The P&L charge has three components: (1) Current Service Cost, (2) Interest Cost (unwinding of discount on opening DBO), and (3) Actuarial Gains/Losses arising from changes in assumptions or experience adjustments. Other long-term benefits (leave encashable after 5 years, long-service awards) follow a simplified DBP approach. Termination benefits are recognised when the company is demonstrably committed to the retrenchment plan.