How is the projected unit credit method applied under IAS 19?

Under IAS 19, the Projected Unit Credit (PUC) method is the mandatory actuarial technique for measuring defined benefit obligations (DBO), attributing one unit of projected benefit entitlement to each year of employee service and discounting that unit to its present value. - Attribution of benefit to service periods (IAS 19.67–70): Each period of service gives rise to one additional unit of benefit entitlement. The PUC method projects the final salary or final average salary (using actuarial assumptions) and works backwards to determine how much benefit is earned each year — this is current service cost. Where the benefit formula attributes a disproportionate share of benefit to later years, IAS 19.70 requires that attribution to follow the plan's formula, not a straight-line basis. - Key actuarial assumptions (IAS 19.75–98): Assumptions must be unbiased and mutually compatible. The discount rate is set by reference to high-quality corporate bond yields (or government bonds in thin markets) matching the currency and duration of the obligation (IAS 19.83). Financial assumptions include salary growth, inflation, and benefit indexation. Demographic assumptions include mortality rates, employee turnover, and disability rates. - Measurement of the DBO (IAS 19.67): The DBO is the present value of projected future benefit payments earned to date, discounting at the IAS 19.83 rate. The net defined benefit liability (asset) equals DBO minus fair value of plan assets (IAS 19.63), subject to the asset ceiling test (IAS 19.64, IFRIC 14).

How does the asset ceiling under IAS 19.64 and IFRIC 14 limit recognition of a net defined benefit asset, and how is the effect measured?

- Components of defined benefit cost (IAS 19.120): Three components flow through the financial statements: - P&L: Service cost (current + past) and net interest on the net DBO/asset. - OCI (not recyclable): Actuarial gains and losses — remeasurements — arising from changes in demographic/financial assumptions and experience adjustments (IAS 19.127). - Remeasurements (IAS 19.127–128): These include actuarial gains/losses on the DBO, the return on plan assets excluding amounts in net interest, and any change in the asset ceiling effect. They go directly to OCI and are never reclassified to P&L (IAS 19.122(c)). - Disclosure (IAS 19.135–147): Entities must disclose a sensitivity analysis for each significant actuarial assumption, showing how the DBO would change with reasonably possible movements — a practical governance tool for the CFO's board pack. Scenario: A company has a final-salary pension plan. At 31 December 20X4: - DBO (opening) = €5,000,000; Plan assets (opening FV) = €4,200,000 - Current service cost = €320,000 - Discount rate (1 Jan 20X4) = 5%; Net interest = €40,000 (net liability €800,000 × 5%) - Actuarial loss on DBO during year = €150,000; Actual return on assets exceeded expected by €30,000 (remeasurement gain) - Contributions paid = €250,000; Benefits paid = €180,000

When a plan amendment occurs mid-year, how is past service cost recognised and how does it interact with the remaining current service cost under IAS 19.99–101?

| Component | € | |---|---| | Current service cost | 320,000 | | Net interest cost | 40,000 | | Total P&L charge | 360,000 | | Component | € | |---|---| | Actuarial loss on DBO | (150,000) | | Remeasurement gain on assets | 30,000 | | Net OCI charge | (120,000) | | Account | Dr (€) | Cr (€) | |---|---|---| | Employee benefit expense (P&L) | 360,000 | | | OCI — Remeasurement loss (equity) | 120,000 | | | Cash (contributions) | | 250,000 | | Net defined benefit liability | | 230,000 | (Net liability moves from €800k opening to €1,030k before contributions, then €780k closing.)

How should a company determine the discount rate for its DBO when operating in a country without a deep market in high-quality corporate bonds (IAS 19.83)?

- Using the wrong discount rate: Applying a risk-free government bond rate in markets where deep corporate bond markets exist (or vice versa) misstates the DBO. Auditors will benchmark the rate against published indices for matching duration — a frequent audit adjustment in jurisdictions with thin corporate bond markets. - Incorrect attribution under back-loaded plans: Where benefits vest or accelerate in later service years, straight-lining the benefit ignores IAS 19.70's requirement to follow the plan formula. This understates early-year service cost and overstates later years. - Recycling remeasurements through P&L: IAS 19 explicitly prohibits reclassification of OCI remeasurements to profit or loss (IAS 19.122(c)). Entities transitioning from local GAAP sometimes mistakenly amortise actuarial gains/losses through P&L (the old "corridor method"), which is no longer permitted under current IAS 19. - IAS 19.67–70 — Attribution of benefit to service periods; the projected unit credit method defined. - IAS 19.83 — Discount rate determination: high-quality corporate bonds, matching currency and duration. - IAS 19.120–122 — Components of defined benefit cost and their presentation in P&L vs OCI. - IAS 19.127–128 — Remeasurements: actuarial gains/losses, asset return adjustments, asset ceiling changes. - IAS 19.135–147 — Disclosure requirements including sensitivity analysis on actuarial assumptions.

IAS 19 Projected Unit Credit Method

IAS 19 Projected Unit Credit Method — Core Rule

Under IAS 19, the Projected Unit Credit (PUC) method is the mandatory actuarial technique for measuring defined benefit obligations (DBO), attributing one unit of projected benefit entitlement to each year of employee service and discounting that unit to its present value.

How IAS 19 Projected Unit Credit Method Works

Attribution of benefit to service periods (IAS 19.67–70): Each period of service gives rise to one additional unit of benefit entitlement. The PUC method projects the final salary or final average salary (using actuarial assumptions) and works backwards to determine how much benefit is earned each year — this is current service cost. Where the benefit formula attributes a disproportionate share of benefit to later years, IAS 19.70 requires that attribution to follow the plan's formula, not a straight-line basis.

Key actuarial assumptions (IAS 19.75–98): Assumptions must be unbiased and mutually compatible. The discount rate is set by reference to high-quality corporate bond yields (or government bonds in thin markets) matching the currency and duration of the obligation (IAS 19.83). Financial assumptions include salary growth, inflation, and benefit indexation. Demographic assumptions include mortality rates, employee turnover, and disability rates.

Measurement of the DBO (IAS 19.67): The DBO is the present value of projected future benefit payments earned to date, discounting at the IAS 19.83 rate. The net defined benefit liability (asset) equals DBO minus fair value of plan assets (IAS 19.63), subject to the asset ceiling test (IAS 19.64, IFRIC 14).

Components of defined benefit cost (IAS 19.120): Three components flow through the financial statements:

- P&L: Service cost (current + past) and net interest on the net DBO/asset.

- OCI (not recyclable): Actuarial gains and losses — remeasurements — arising from changes in demographic/financial assumptions and experience adjustments (IAS 19.127).

Remeasurements (IAS 19.127–128): These include actuarial gains/losses on the DBO, the return on plan assets excluding amounts in net interest, and any change in the asset ceiling effect. They go directly to OCI and are never reclassified to P&L (IAS 19.122(c)).

Disclosure (IAS 19.135–147): Entities must disclose a sensitivity analysis for each significant actuarial assumption, showing how the DBO would change with reasonably possible movements — a practical governance tool for the CFO's board pack.

IAS 19 Projected Unit Credit Method — Practical Example

Scenario: A company has a final-salary pension plan. At 31 December 20X4:

DBO (opening) = €5,000,000; Plan assets (opening FV) = €4,200,000
Current service cost = €320,000
Discount rate (1 Jan 20X4) = 5%; Net interest = €40,000 (net liability €800,000 × 5%)
Actuarial loss on DBO during year = €150,000; Actual return on assets exceeded expected by €30,000 (remeasurement gain)
Contributions paid = €250,000; Benefits paid = €180,000

P&L charge

Component	€
Current service cost	320,000
Net interest cost	40,000
Total P&L charge	360,000

OCI (remeasurements)

Component	€
Actuarial loss on DBO	(150,000)
Remeasurement gain on assets	30,000
Net OCI charge	(120,000)

Journal entries (year end)

Account	Dr (€)	Cr (€)
Employee benefit expense (P&L)	360,000
OCI — Remeasurement loss (equity)	120,000
Cash (contributions)		250,000
Net defined benefit liability		230,000

(Net liability moves from €800k opening to €1,030k before contributions, then €780k closing.)

IAS 19 Projected Unit Credit Method — Common Pitfalls

Using the wrong discount rate: Applying a risk-free government bond rate in markets where deep corporate bond markets exist (or vice versa) misstates the DBO. Auditors will benchmark the rate against published indices for matching duration — a frequent audit adjustment in jurisdictions with thin corporate bond markets.

Incorrect attribution under back-loaded plans: Where benefits vest or accelerate in later service years, straight-lining the benefit ignores IAS 19.70's requirement to follow the plan formula. This understates early-year service cost and overstates later years.

Recycling remeasurements through P&L: IAS 19 explicitly prohibits reclassification of OCI remeasurements to profit or loss (IAS 19.122(c)). Entities transitioning from local GAAP sometimes mistakenly amortise actuarial gains/losses through P&L (the old "corridor method"), which is no longer permitted under current IAS 19.

IAS 19 Projected Unit Credit Method — Key Paragraphs

IAS 19.67–70 — Attribution of benefit to service periods; the projected unit credit method defined.
IAS 19.83 — Discount rate determination: high-quality corporate bonds, matching currency and duration.
IAS 19.120–122 — Components of defined benefit cost and their presentation in P&L vs OCI.
IAS 19.127–128 — Remeasurements: actuarial gains/losses, asset return adjustments, asset ceiling changes.
IAS 19.135–147 — Disclosure requirements including sensitivity analysis on actuarial assumptions.