Defined contribution and defined benefit plans can both fund retirement or other post-employment benefits, but AS 15 does not classify them by the scheme’s name, the existence of an insurance policy, or whether money is paid into a separate fund. Classification follows the economic substance of the employer’s obligation. That matters because defined contribution accounting normally starts with the contribution due for the period, while defined benefit accounting requires measurement of the promised benefit obligation, actuarial assumptions, discounting and plan assets.
ICAI’s current official AS 15 text contains the detailed rules, and ICAI also maintains a dedicated AS 15 Employee Benefits publication page. This guide is for entities applying the Accounting Standards framework; Ind AS reporters should use the corresponding Ind AS requirements.
Start with the employer’s obligation, not the plan label
AS 15 defines a defined contribution plan as a post-employment plan under which the employer pays fixed contributions into a separate entity and has no obligation to pay further contributions if the fund does not have enough assets to pay employee benefits relating to current and prior service. A defined benefit plan is any post-employment benefit plan that is not a defined contribution plan.
The practical dividing line is who bears the shortfall risk. In a true defined contribution plan, the employer’s obligation is limited to the agreed contribution; actuarial and investment risk fall on the employee. In a defined benefit plan, the employer is committed to the agreed benefit and, in substance, bears actuarial and investment risk if the ultimate cost is higher than expected.
Provident fund, pension, gratuity and insurance labels are not enough
AS 15 includes gratuity, pension and other retirement benefits within post-employment benefits, but the accounting classification still depends on the actual terms. A scheme requiring only fixed employer contributions with no further obligation may qualify as defined contribution. A scheme that promises a benefit formula, guarantees a specified return, or otherwise leaves the employer responsible for a shortfall can be defined benefit even when contributions are paid to a fund or insurer.
Insured arrangements need the same substance test. AS 15 says paying insurance premiums does not automatically make a plan defined contribution. If the employer remains obliged to pay benefits directly or make good amounts the insurer does not pay, the arrangement is treated as defined benefit. Funding and accounting are separate questions.
Defined contribution accounting: contribution due is the starting point
For a defined contribution plan, no actuarial assumptions are normally required and there is no actuarial gain or loss. When an employee renders service, the employer recognises the contribution payable for that service as a liability after deducting amounts already paid, and as an expense unless another Accounting Standard permits or requires inclusion in the cost of an asset. AS 15 also requires disclosure of the amount recognised as expense for defined contribution plans.
Simple illustration
Assume an employer owes ₹60,000 of fixed contributions for employees’ March service and has paid ₹45,000 by year-end. Ignoring any asset-cost allocation, the period expense is ₹60,000 and the unpaid ₹15,000 is accrued as a liability. The year-end market value of the fund does not change that accounting if the employer genuinely has no obligation beyond the fixed contribution.
Defined benefit accounting: measure the promise, not just the contribution
A defined benefit plan is more complex because the period expense is not necessarily equal to cash contributed. AS 15 requires actuarial techniques to estimate benefits earned from current and prior service, the Projected Unit Credit Method, discounting to determine the present value of the obligation and current service cost, determination of the fair value of plan assets, and recognition of the applicable actuarial and other components.
The reporting enterprise remains responsible for measuring the obligation, although AS 15 recognises that a qualified actuary would normally be used. The valuation uses demographic assumptions such as employee turnover and mortality and financial assumptions such as future salary increases and the discount rate. The standard says the discount rate for post-employment benefit obligations is based on market yields at the balance sheet date on government bonds, with currency and term consistent with the obligation.
Why a funded plan can still show a liability
Suppose a defined benefit obligation has a present value of ₹1.20 crore and qualifying plan assets have a fair value of ₹1.05 crore. Before other adjustments required by AS 15, a fund does not eliminate the obligation: there is a ₹15 lakh gap between the measured obligation and plan assets. Contributions paid during the year also do not by themselves establish the benefit expense because service cost, interest cost, actuarial gains or losses and other applicable components can change the result.
A five-question classification framework
- What has the employer promised? Read the plan terms, employment arrangements, trust or insurance documents and established practices.
- Is the obligation capped at fixed contributions? If the employer can fulfil its obligation simply by paying the agreed contribution even when the fund performs poorly, defined contribution treatment may fit.
- Who bears actuarial and investment risk? If poor investment performance, salary growth, longevity or another variable can require the employer to pay more, that points toward defined benefit accounting.
- Does an insurer or fund actually remove the employer’s obligation? Check whether the employer must make good a shortfall or remains responsible for the promised benefit.
- Do informal practices create an additional obligation? AS 15 also considers practices where the enterprise has no realistic alternative but to provide the benefit.
Year-end review checklist
- Confirm the applicable reporting framework and any entity-level AS 15 exemptions or relaxations.
- Obtain current plan rules, trust deeds, insurance contracts and contribution schedules.
- Document the defined contribution or defined benefit conclusion plan by plan rather than by scheme name.
- For defined contribution plans, reconcile contribution expense, payments and accruals to payroll and plan schedules.
- For defined benefit plans, reconcile employee data, the actuarial report, obligation, plan assets and ledger balances.
- Review key actuarial assumptions, including the government-bond-based discount-rate requirement.
- Check whether insurance policies qualify as plan assets or create reimbursement rights instead of automatically netting them against the obligation.
- Complete applicable disclosures and investigate unexplained movements in employee-benefit balances.
Common mistakes
- Assuming every monthly contribution arrangement is defined contribution without checking for a guaranteed benefit or return.
- Treating a funded or insured plan as defined contribution simply because assets sit outside the company.
- Booking cash contribution as the entire defined benefit expense and ignoring the valuation.
- Using an actuarial report without reconciling employee data, plan terms and plan assets to company records.
- Applying one model to short-term, post-employment, other long-term and termination benefits even though AS 15 treats them separately.
Practical takeaway
Under AS 15, identify what the employer is ultimately obliged to provide and who bears the risk if the cost of that promise exceeds the contributions or assets set aside. If the obligation genuinely ends with fixed contributions, defined contribution accounting is generally the relevant model. If the employer remains responsible for the promised benefit or a shortfall, the plan is defined benefit and measurement starts from the benefit obligation rather than cash paid into a fund. Documenting that conclusion before year-end measurement prevents a major source of employee-benefit accounting errors.
