Most Accounting Standards, such as IAS 19, US GAAP, Ind AS19 and others, require the Projected Unit Credit method.
The PUC prescribes the method to value accrued benefits, by reference to their projected amount at the date of payment.
This involves projecting each unit of benefit earned over a period plus earlier periods, to leaving service, retirement, death or other future exit states, allowing for probabilities of reaching those states, also allowing for salary escalation over time, and then discounting those benefits to the valuation date.
The resultant estimated liability amount reflects full expected service to each of leaving service, retirement or death, or other exit states.
The Current Service Cost is determined by dividing, for each employee, their total liability by total expected service and then aggregating the Current Service Cost for all members. The Current Service Cost can be viewed as the cost accruing over the next year, allowing for escalation and discounting to the different possible dates of payment.
To determine the Defined Benefit Obligation (“DBO”), we subtract from the total estimated liability the Current Service Cost multiplied by expected future service. This is, in effect, the liability that should be held at the date of the valuation, for service and benefits accrued up to the date of the valuation.
Differences between expectations and fact emerge as actuarial gains or losses and are amortised immediately the next year.