How finance teams and actuaries calculate the defined benefit obligation, current service cost, and interest cost — with a fully worked numeric example.

✓ Written by Prima Consulting’s advisory team · ✓ Serving GCC, Europe & APAC · ✓ Actuaries + CPAs + CFAs

TL;DR

The projected unit credit method IAS 19 is the only permitted actuarial approach under IFRS for measuring defined benefit obligations. It attributes one “unit” of benefit to each year of service, projects that benefit to retirement, then discounts it back to today. This article walks through every calculation step using a real numeric example: salary projection, PUC method actuarial attribution, current service cost, interest cost, actuarial gains and losses, and journal entries. Read it to understand exactly where IAS 19 actuarial valuation can go wrong and what to fix.

Most IAS 19 explainers stop at the theory. They tell you the projected unit credit method spreads benefit costs over an employee’s service period, and they leave it there. That’s not useful when you’re staring at a valuation report that your auditor is questioning.

The PUC method isn’t complicated once the numbers are in front of you. But when those numbers are wrong — wrong discount rate, wrong salary escalation, misattributed benefit — the defined benefit obligation on your balance sheet can be off by hundreds of thousands. A 1% change in the discount rate alone can shift obligations by 15–25%.

This guide runs the full calculation from scratch.

• Complete step-by-step IAS 19 worked example with real numbers
• Journal entries for DBO recognition, service cost, and OCI remeasurement
• Three common PUC method errors Prima’s team catches during reviews

Prima Consulting provides IAS 19 valuation tools built specifically for teams who need audit-ready outputs — not theory.

Already working on a valuation? See how Prima’s IAS 19 valuation team prepares audit-ready reports →

Why the PUC Method Is Mandatory Under IAS 19

Here’s something that surprises finance teams more often than it should: you can’t opt out of the projected unit credit method. It’s not a best practice. It’s not a preferred approach among several options. IAS 19 requires it, full stop.

The IASB’s position is explicit. IAS 19 mandates the projected unit credit method for determining the present value of defined benefit obligations and current service cost. There is no permitted alternative under IFRS. If a company applies a simpler shortcut — such as booking the full projected benefit in a single period or using an undiscounted cash basis — that’s a departure from the standard. Auditors will flag it. Regulators will flag it. And the financial statements won’t comply.

So why do companies try to simplify it? Usually because the PUC method actuarial calculation looks complex at first glance, and because the person preparing the valuation isn’t an actuary. That’s a fixable problem. The calculation, once you’ve seen it run through properly, follows a logical sequence.

How the Projected Unit Credit Method Works: Core Logic

The PUC method builds a defined benefit obligation one year at a time. Each year of service earns the employee one additional “unit” of benefit. The total obligation at any reporting date is the present value of all units earned so far — projected forward to retirement, then discounted back to today.

Let’s use a concrete employee. Call her Amina.

• Date of joining: age 25
• Current age: 35
• Expected retirement age: 60
• Current annual salary: AED 120,000
• Salary growth assumption: 4% per year (compound)
• Discount rate: 5% per year
• Benefit formula: one month’s final salary per year of service

At age 35, Amina has 10 years of service. She has 25 years left until retirement.

Step 1 — Project the Final Salary at Retirement

Take the current salary of AED 120,000 and compound it at 4% for 25 years (from age 35 to age 60).

Projected final salary = AED 120,000 × (1.04)^25 = AED 320,000 (rounded)

That figure, AED 320,000, is the salary used to calculate the total benefit at retirement. You’re not using today’s salary. That’s the whole point of “projected” — you’re valuing the obligation based on what it will actually cost, not what it costs now.

Step 2 — Calculate the Total Projected Benefit

Amina’s plan pays one month’s salary per year of service. At retirement, she’ll have 35 years of service (25 years joining to current age 35, plus 25 more years to retirement). Total service from joining to retirement is 35 years.

Total projected benefit = (AED 320,000 / 12) × 35 = AED 933,333

This is what she’ll receive at age 60 — assuming she stays in employment, which is where the attrition and mortality assumptions come in. For now, we’re ignoring those to keep the calculation clean.

Step 3 — Attribute the Unit Credit to Each Year of Service

Under the PUC method, each year of service earns an equal unit of the total projected benefit. Amina has a 35-year service period (age 25 to 60). Each year earns her 1/35 of AED 933,333.

Unit credit per year = AED 933,333 / 35 = AED 26,667

After 10 years (her current position), she’s earned 10 units. The benefit attributed to her service so far is 10 × AED 26,667 = AED 266,667.

This is the gross benefit. We haven’t discounted it yet.

Step 4 — Calculate the Defined Benefit Obligation (DBO)

The IAS 19 defined benefit obligation calculation requires us to discount the attributed benefit back from the expected payment date to today. Amina is 35. She retires at 60. That’s 25 years.

DBO = AED 266,667 × (1.05)^(-25) = AED 266,667 × 0.2953 = AED 78,741

That’s the present value of the obligation the employer carries on its balance sheet as at the current reporting date. It represents what Amina has earned so far, valued at today’s money.

Step 5 — Calculate Current Service Cost

Current service cost under the IAS 19 actuarial valuation is the present value of the benefit earned during the current year. One more year of service earns one more unit: AED 26,667. But that unit will be paid in 24 years (Amina will be 36 at year-end, 24 years from retirement).

Current service cost = AED 26,667 × (1.05)^(-24) = AED 26,667 × 0.3101 = AED 8,269

This amount hits profit or loss as part of employee benefit expense. Every year. Until Amina retires.

What’s interesting is that current service cost rises each year — not because the benefit formula changes, but because each successive unit credit has fewer years to be discounted. A unit earned at age 55 is discounted over only 5 years versus 24 years for the one earned at 36. The cost accelerates toward retirement. That’s the built-in dynamic of the PUC method actuarial calculation, and it’s also one of the reasons companies underestimate the liability in early years.

Step 6 — Interest Cost on the Opening DBO

IAS 19 requires you to recognise interest cost on the opening defined benefit obligation. This reflects the unwinding of the discount as time passes. Use the same discount rate.

Interest cost = Opening DBO × discount rate

If Amina’s opening DBO at the start of the year was AED 75,000, the interest cost for the year is AED 75,000 × 5% = AED 3,750. This also flows through profit or loss, typically within finance costs rather than operating expenses.

Step 7 — Identify Actuarial Gains and Losses

Actuarial gains and losses arise when actual outcomes differ from the assumptions. Discount rates move. Salary increases run higher or lower than forecast. Employees leave earlier than expected. Each of these creates a difference between the expected DBO and the actual DBO at year-end.

Under IAS 19, these differences — OCI remeasurement — go straight to other comprehensive income. They do not recycle back through profit or loss. That matters for financial statement users who separate operating performance from valuation volatility.

Suppose Amina’s closing DBO based on updated assumptions is AED 82,000 instead of the expected AED 82,510 (opening DBO + interest cost + current service cost). The AED 510 difference is an actuarial gain — DBO is lower than expected — and it’s recognised in OCI.

IAS 19 Journal Entries: What Goes Where

One of the most common areas of confusion is the split between profit or loss and OCI. Let’s be direct about it.

Recognising the DBO on the Balance Sheet

When the DBO first arises, or at period-end after the valuation update:

Dr  Employee Benefit Expense (P&L)        —  Current Service Cost
Dr  Finance Cost (P&L)                   —  Interest Cost
    Cr  Defined Benefit Obligation (B/S) —  Total movement

If there’s a plan asset, you offset the DBO against the fair value of plan assets to arrive at the net defined benefit liability on the balance sheet.

Profit or Loss vs OCI: Getting the Split Right

Service cost (current and past) and net interest cost hit P&L. Remeasurements — actuarial gains and losses on the DBO, and the difference between actual return on plan assets and the expected interest income — go to OCI. That split is IAS 19’s design choice, and it’s not optional.

Past service cost — which arises when a plan amendment retroactively changes benefits for prior years — is now recognised immediately in P&L following the 2018 amendments to IAS 19. Some companies still try to amortise it. That’s wrong under the current standard.

“In our IAS 19 reviews across the GCC, past service cost misclassification is one of the most persistent errors we encounter — and one of the most straightforward to correct once it’s identified.” — Prima Consulting Advisory Team. Read more about our approach to actuarial valuation across defined benefit plans.

What Happens When Companies Try to Simplify the PUC Method

You might think a simpler approach — booking the full end-of-service liability as a current obligation, or using undiscounted cash — would be close enough. It isn’t.

Consider what happens when a company uses today’s salary (AED 120,000) instead of the projected salary (AED 320,000) to calculate the benefit. The projected benefit drops from AED 933,333 to AED 350,000. The DBO falls from AED 78,741 to roughly AED 29,500. That’s a material understatement — one that creates a time bomb on the balance sheet, because the liability will need to be caught up as employees approach retirement.

That catch-up recognition looks like a sudden, unexplained spike in employee benefit expense. Auditors don’t like surprises. Analysts don’t either.

The risks of manual IAS 19 valuation are real, and salary assumption errors are only one of them. The discount rate is the other major lever — and in 2024, average rates moved materially across markets. IAS 19 actuarial assumptions need to be reset at each reporting date, not carried forward from last year.

Three IAS 19 Mistakes We See Most in Actuarial Reviews

Prima Consulting reviews dozens of IAS 19 valuations each year. The same errors come up repeatedly. Here are the three that create the most risk.

Mistake 1 — Using a Straight-Line Salary Escalation Instead of Compound Growth

A 4% salary increase applied as a simple linear addition produces a different projected salary than 4% compounded annually. Over 25 years, the difference is not trivial. AED 120,000 at 4% simple growth for 25 years = AED 240,000. At 4% compound = AED 320,000. That’s a 33% gap in the projected benefit before discounting.

IAS 19 requires compound assumptions. Salary growth is not linear in reality, and the standard reflects that.

Mistake 2 — Applying the Wrong Discount Rate

The discount rate must reference market yields on high-quality corporate bonds at the reporting date. In markets without a deep corporate bond market — which includes most of the GCC — entities use government bond yields as a proxy, adjusted for credit quality where appropriate.

What we see instead: internal hurdle rates. Management estimates. Rates unchanged from the prior year. Each of these is incorrect.

The sensitivity is real. A 1% shift in the discount rate changes the DBO by 15–25% on a typical long-duration plan. For Amina’s case, dropping the rate from 5% to 4% increases her DBO at age 35 from AED 78,741 to roughly AED 98,200. That’s a difference of nearly AED 20,000 on a single employee. Scale that across 200 employees with varying tenure and salary levels.

Mistake 3 — Misattributing Back-Loaded Benefit Plans

Some end-of-service plans in the GCC award disproportionately higher benefits in later years of service — for example, one month’s salary for years 1–5, but two months per year from year 6 onward. That’s a back-loaded structure.

IAS 19 says that if the benefit formula allocates materially more benefit to later service years, you use the straight-line attribution method rather than the benefit formula method. Companies miss this. They apply the formula directly, which means early service years look cheap and late service years look expensive. The obligation is still wrong — just in the other direction.

The good news: IAS 19 valuation tools built for GCC plan structures handle straight-line attribution automatically. Manual spreadsheets, in our experience, almost never do.

Actuarial Assumptions That Drive the Projected Unit Credit Calculation

Get the assumptions wrong and the rest of the calculation is precise but useless. The PUC method actuarial inputs break into two categories.

Financial assumptions include the discount rate, salary growth rate, and any inflation linkage in the benefit formula. These must be set at market rates at the reporting date. The IAS 19 actuarial valuation fails its purpose if financial assumptions are stale.

Demographic assumptions include employee turnover (the probability an employee will stay long enough to claim the benefit), mortality rates, and disability rates where relevant. In GCC plans covering expatriate workforces with high natural turnover, the withdrawal assumption is often the most material demographic input — and the one most frequently set at zero by teams who think conservative means higher liability. It doesn’t. Zero attrition means you’re assuming every employee will stay until retirement. That overstates the obligation for short-tenure workforces.

I won’t pretend there’s a universal right answer for withdrawal rates. That’s one area where company-specific experience data genuinely matters, and where a qualified actuary earns their fee.

What You Now Know

• The projected unit credit method IAS 19 is the only permitted approach under IFRS for defined benefit plans. It builds the DBO one year of service at a time, using projected salaries and a market-based discount rate.
• Current service cost and interest cost go through profit or loss. Actuarial gains and losses — OCI remeasurement — go through other comprehensive income and do not recycle.
• The three most common errors in IAS 19 actuarial valuation reviews are: linear instead of compound salary escalation, stale or wrong discount rates, and incorrect attribution for back-loaded benefit formulas.

Getting the PUC Method Right the First Time

The projected unit credit method IAS 19 calculation isn’t optional, and simplifying it incorrectly creates a liability that compounds over time — silently, until an auditor or restatement forces the catch-up. Every step matters: the salary projection, the unit credit attribution, the discount rate, the OCI split. Getting one wrong doesn’t just affect the current year. It distorts every year that follows.

If your team is running these calculations in Excel, or relying on a valuation prepared without a qualified actuary, the question isn’t whether errors exist — it’s whether they’re material enough yet for someone to notice. Most of the time, they are. Pension actuarial valuation software built for IFRS reduces that risk significantly. So does working with a team that reviews IAS 19 valuations every day.

The right IAS 19 actuarial valuation doesn’t just pass audit. It gives your finance team a number they can defend, a disclosure they can stand behind, and a liability that won’t surprise anyone next year.

Frequently Asked Questions

What is the projected unit credit method under IAS 19?

The projected unit credit method is the actuarial approach required by IAS 19 to measure defined benefit obligations. It attributes one unit of benefit to each year of service, projects the total benefit to the expected retirement date using salary growth assumptions, then discounts all attributed units back to their present value using a market-based discount rate.

How do you calculate current service cost under IAS 19?

Current service cost is the present value of the benefit earned during the current year. You take one unit credit — the benefit attributed to the current service year — and discount it back from the expected payment date to today. The IAS 19 current service cost increases each year as the payment date draws closer, because each successive unit has fewer discount years applied to it.

What is the difference between current service cost and interest cost under IAS 19?

IAS 19 current service cost is the new benefit earned during the year — one more unit credited. Interest cost is the unwinding of the discount on the opening defined benefit obligation. Both flow through profit or loss, but they measure different things: service cost measures new accrual, interest cost measures the time value of the existing obligation.

What actuarial assumptions does IAS 19 require for the PUC method?

IAS 19 actuarial assumptions fall into two groups. Financial assumptions — discount rate, salary growth, inflation — must reflect market conditions at the reporting date. Demographic assumptions — employee turnover, mortality, disability — should be based on company-specific experience where available. Both sets must be internally consistent and unbiased.

Where do actuarial gains and losses go under IAS 19?

Actuarial gains and losses arising from the IAS 19 defined benefit obligation calculation go directly to other comprehensive income (OCI). They are not recycled to profit or loss in future periods. This treatment separates operating performance from remeasurement volatility, which is one of the main design goals of the current IAS 19 standard.