For any employee, it would be prudent for a company to bear the cost of the employee’s eventual leaving service benefit or gratuity, from the start of the first day of employment. To develop that thought, the company should attribute the expected amount of that gratuity cost to the current year – as that cost is incurred. This cost to the company is known as Current Service cost.
To define more precisely, the Current Service Cost is the increase in the liability resulting from members serving an additional period (year or quarter or month) during the reporting period. An additional period of service increases their liability in proportion to their total liability and total service period (actual and expected) under the Projected Unit Credit Method.
For the technical minded, we calculate the annual Current Service Cost by dividing the total Lifetime Actuarial Liability of the employee by the total actual and expected years of service. This annual Current Service Cost is adjusted for non-annual reporting periods.
For clear calculative understanding, visit our illustration for different elements in calculation of current service cost, interest cost and others.