Defined benefit (DB) plans place the actuarial and investment risk on the employer, making their accounting significantly more complex than defined contribution plans. IAS 19 requires a specific measurement and recognition framework to capture the full economic obligation.

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Recognising the Net Defined Benefit Liability (or Asset)

The entity recognises a net defined benefit liability (NDBL) on the balance sheet, calculated as (IAS 19.8):

• The present value of the defined benefit obligation (DBO) — the actuarial estimate of future benefits earned to date
• Less the fair value of plan assets (if any held in a qualifying trust)

If plan assets exceed the DBO, a net defined benefit asset is recognised, subject to the asset ceiling — the lower of the surplus and the present value of future economic benefits available as refunds or reductions in future contributions (IAS 19.64).

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Measuring the Defined Benefit Obligation

The DBO is measured using the Projected Unit Credit method (IAS 19.67), which attributes benefit to each period of employee service. Key actuarial assumptions include:

• Discount rate (based on high-quality corporate bonds or government bonds in markets without deep corporate bond markets — IAS 19.83)
• Future salary increases
• Employee turnover, mortality rates, and retirement ages

Entities must use qualified actuaries for material plans (IAS 19.59).

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Components of Defined Benefit Cost

IAS 19 requires the total DB cost to be disaggregated into three components recognised in different locations (IAS 19.120):

• Service cost (including current service cost, past service cost, and any settlement gains/losses) — recognised in profit or loss
• Net interest on the NDBL/asset (discount rate applied to the opening net balance) — recognised in profit or loss
• Remeasurements — recognised immediately in Other Comprehensive Income (OCI) and never reclassified to profit or loss (IAS 19.122)

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Remeasurements in OCI

Remeasurements capture volatility that would otherwise distort profit or loss, and comprise:

• Actuarial gains and losses on the DBO (arising from experience adjustments and changes in actuarial assumptions)
• Return on plan assets, excluding amounts included in net interest
• Changes in the effect of the asset ceiling, excluding amounts in net interest

These are permanently parked in OCI but may be transferred within equity (IAS 19.122).

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Past Service Cost

When a plan is amended, past service cost is recognised immediately in profit or loss at the earlier of: when the plan amendment occurs, or when the entity recognises related restructuring costs (IAS 19.103). The previous practice of deferring past service cost over a vesting period was eliminated by the 2011 amendments.

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Disclosure Requirements

IAS 19 requires extensive disclosures to explain the characteristics, risks, and financial effect of DB plans (IAS 19.135–147), including:

• Reconciliation of opening and closing balances of the DBO and plan assets
• Sensitivity analysis for significant actuarial assumptions
• Description of asset-liability matching strategies and funding arrangements
• Maturity profile of the DBO

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Practical Implication

The three-bucket approach (P&L / P&L / OCI) is critical for financial statement preparers to master, as misclassification of remeasurements is a common area of error in practice.