Executive Overview: The Financial Significance of Employee Benefit Obligations
In modern corporate enterprises, compensation structures have evolved far beyond basic periodic wage disbursements. Today, an enterprise's commitments to its human capital encompass an intricate architecture of short-term incentives, long-term post-employment covenants, statutory terminal benefits, and equity-settled instruments. Under Indian Accounting Standards, the recognition, measurement, presentation, and disclosure of all forms of consideration given by an entity in exchange for service rendered by employees are governed by Indian Accounting Standard (Ind AS) 19, Employee Benefits.
Ind AS 19 represents one of the most intellectually rigorous and technically complex standards in the Ind AS suite. Unlike legacy Indian GAAP (AS 15, Employee Benefits), which allowed actuarial gains and losses to flow directly into the Profit and Loss Statement—causing substantial, unpredictable earnings volatility—Ind AS 19 establishes a clear structural bifurcation. It mandates that while current service costs, past service costs, and net interest expenses are recognized in Profit or Loss, all remeasurements of the net defined benefit liability or asset (comprising actuarial gains and losses and return on plan assets) must be recognized immediately in Other Comprehensive Income (OCI). Furthermore, Ind AS 19 enforces a strict statutory prohibition: remeasurements recognized in OCI shall never be reclassified (recycled) to Profit or Loss in subsequent periods.
For chief financial officers, corporate controllers, and statutory auditors, managing Ind AS 19 compliance requires bridging financial accounting with complex actuarial science. Establishing the Present Value of Defined Benefit Obligations (PVDBO) under the Projected Unit Credit (PUC) Method demands sophisticated modeling of demographic assumptions (mortality, employee turnover, attrition) and financial assumptions (discount rates derived from sovereign government bond yields, expected future salary escalation, inflation). Corporate reporting teams utilizing assureOffice, particularly its financial statement builder assureFinancials, must master the intricate balance sheet presentation rules, plan asset reconciliations, sensitivity analysis disclosures, and deferred tax interactions to deliver audit-proof financial statements under Schedule III of the Companies Act, 2013.
The Four-Tier Classification Framework of Ind AS 19
Ind AS 19 segregates all employee benefits into four distinct operational categories, each governed by specialized accounting treatments:
1. Short-Term Employee Benefits
These are benefits (other than termination benefits) that are expected to be settled wholly before twelve (12) months after the end of the annual reporting period in which the employees render the related service. Common examples include monthly wages, salaries, social security contributions, paid annual leave, sick leave, profit-sharing, and non-monetary perks (medical care, housing, cars). Because these liabilities are short-term, no actuarial assumptions are required, and obligations are measured on an undiscounted basis directly in Profit or Loss as an expense.
2. Post-Employment Benefits: Defined Contribution vs Defined Benefit Plans
Post-employment benefits are formal or informal arrangements under which an entity provides benefits to employees after the completion of employment (e.g., retirement, superannuation, statutory gratuity). Ind AS 19 divides these arrangements into two categories:
- Defined Contribution Plans (DCP): The entity's legal or constructive obligation is strictly limited to the amount it agrees to contribute to a separate fund (e.g., Employees' Provident Fund under EPFO, National Pension System - NPS). The actuarial risk (that benefits will be less than expected) and investment risk (that assets invested will be insufficient) fall entirely on the employee. The reporting entity simply recognizes the contribution payable for the period as an expense in Profit or Loss.
- Defined Benefit Plans (DBP): The entity's obligation is to provide the agreed benefits to current and former employees (e.g., Gratuity under the Payment of Gratuity Act, 1972, defined pension schemes). The actuarial risk and investment risk fall directly on the entity. If actuarial or investment experience is worse than expected, the entity's obligation may increase, requiring additional funding. Defined benefit plans mandate full actuarial valuation under the Projected Unit Credit (PUC) method.
3. Other Long-Term Employee Benefits
These are all employee benefits other than short-term benefits, post-employment benefits, and termination benefits. The most pervasive commercial example in India is Compensated Absences (Accumulated Earned Leave / Leave Encashment) that is not expected to be settled wholly within 12 months after the reporting date. While other long-term benefits require actuarial valuation under the PUC method, Ind AS 19 prescribes a simplified accounting treatment: all remeasurement gains and losses are recognized immediately in Profit or Loss; they are NOT recognized in OCI.
4. Termination Benefits
Benefits provided in exchange for the termination of an employee's employment as a result of either an entity's decision to terminate an employee's employment before normal retirement date, or an employee's decision to accept an offer of benefits in exchange for termination (e.g., Voluntary Retirement Schemes - VRS). Termination benefits are recognized as a liability and expense at the earlier of when the entity can no longer withdraw the offer or when the entity recognizes restructuring costs under Ind AS 37.
Actuarial Valuation Mechanics: The Projected Unit Credit (PUC) Method
Ind AS 19 strictly mandates the use of the Projected Unit Credit (PUC) Method (sometimes known as the accrued benefit method pro-rated on service) to determine the present value of its defined benefit obligations and the related current service cost.
Core Principles of the PUC Method
- Attribution of Benefit to Periods of Service: An entity attributes benefit to the current period (which generates current service cost) and the current and prior periods (which generates the present value of defined benefit obligations). The standard requires attributing benefit to periods of service under the plan's benefit formula, unless an employee's service in later years leads to a materially higher level of benefit than in earlier years.
- Projected Future Salaries: In defined benefit schemes linked to final pay (such as Indian statutory gratuity, which computes 15 days' last drawn salary for each completed year of service), the obligation is measured by projecting future salary increases up to the expected retirement date, incorporating promotional increments, general inflation, and career progression.
- Discounting to Present Value: The projected future cash flows payable upon retirement, resignation, death, or disability are discounted back to the reporting date using a discount rate determined by reference to market yields on Government Bonds having currency and term consistent with the estimated term of the post-employment benefit obligations.
Remeasurements: The OCI Mandate and Prohibition of Recycling
Under Paragraph 57 of Ind AS 19, the net defined benefit liability (asset) recognized in the Balance Sheet is adjusted through three distinct components:
| Component of Defined Benefit Cost | Specific Sub-Elements | Accounting Treatment under Ind AS 19 |
|---|---|---|
| 1. Service Cost | Current Service Cost, Past Service Cost (plan amendments), and Gains/Losses on Non-routine Settlements. | Recognized immediately in Profit or Loss (Operating Employee Benefit Expense). |
| 2. Net Interest Expense / Income | Net interest on the net defined benefit liability (asset) calculated by multiplying Net Liability by Discount Rate. | Recognized immediately in Profit or Loss (Finance Cost / Operating Expense). |
| 3. Remeasurements | (a) Actuarial gains and losses arising from changes in demographic and financial assumptions; (b) Experience adjustments; (c) Return on plan assets (excluding amounts included in net interest). |
Recognized immediately in Other Comprehensive Income (OCI). STRICTLY PROHIBITED FROM RECYCLING to P&L in future periods. |
The Non-Recycling Rule: Paragraph 122 of Ind AS 19 explicitly provides that remeasurements recognized in other comprehensive income shall not be reclassified to profit or loss in a subsequent period. However, the entity may transfer those amounts recognized in other comprehensive income within equity (e.g., from OCI reserve to Retained Earnings). This ensures that corporate bottom-line operating earnings are insulated from market-driven bond yield fluctuations and demographic variances.
8 Real-World Practical Case Studies & Numerical Illustrations
Case Study 1: Statutory Gratuity Valuation under the PUC Method (End-to-End Accounting)
Context & Facts: Horizon Infotech Ltd employs 500 professionals subject to the Payment of Gratuity Act, 1972. At the beginning of FY 2024-25 (1st April 2024), the opening Present Value of Defined Benefit Obligation (PVDBO) was ₹10,00,00,000 (₹10 Crores), and the Fair Value of Plan Assets (FVPA) held with a recognized gratuity trust managed by LIC was ₹8,50,00,000 (₹8.50 Crores). The Net Defined Benefit Liability was ₹1,50,00,000.
Actuarial Parameters for FY 2024-25:
- Discount Rate at beginning of year (10-year G-Sec yield): 7.20% p.a.
- Current Service Cost for FY 2024-25 (certified by Actuary): ₹1,20,00,000.
- Actual Gratuity Benefits Paid during the year: ₹80,00,000 (paid directly out of plan assets).
- Employer Contributions paid into the Gratuity Trust: ₹1,00,00,000.
- At 31st March 2025, closing discount rate dropped to 6.90% p.a., resulting in a closing PVDBO of ₹11,90,00,000.
- Closing Fair Value of Plan Assets at 31st March 2025 was ₹9,70,00,000.
Step-by-Step Accounting Computation:
- Net Interest Expense on Opening Net Liability:
- Interest on PVDBO: 7.20% × ₹10,00,00,000 = ₹72,00,000.
- Interest Income on Plan Assets: 7.20% × ₹8,50,00,000 = ₹61,20,000.
- Net Interest Expense in P&L: ₹72,00,000 - ₹61,20,000 = ₹10,80,000.
- Total Expense Recognized in Profit or Loss:
- Current Service Cost: ₹1,20,00,000.
- Net Interest Expense: ₹10,80,00,000.
- Total P&L Charge: ₹1,30,80,000.
- Remeasurement of Obligation (Actuarial Gain/Loss on PVDBO):
- Expected Closing PVDBO = Opening (₹10.00 Cr) + Current Service Cost (₹1.20 Cr) + Interest (₹0.72 Cr) - Benefits Paid (₹0.80 Cr) = ₹11,12,00,000.
- Actual Closing PVDBO = ₹11,90,00,000.
- Actuarial Loss on PVDBO (Liability Loss): ₹11,90,00,000 - ₹11,12,00,000 = ₹78,00,000 (Loss).
- Remeasurement of Plan Assets (Return on Plan Assets):
- Expected Closing FVPA = Opening (₹8.50 Cr) + Interest Income (₹0.612 Cr) + Employer Contribution (₹1.00 Cr) - Benefits Paid (₹0.80 Cr) = ₹9,31,20,000.
- Actual Closing FVPA = ₹9,70,00,000.
- Actuarial Gain on Plan Assets (Asset Return): ₹9,70,00,000 - ₹9,31,20,000 = ₹38,80,000 (Gain).
- Net Remeasurement Recognized in Other Comprehensive Income (OCI):
- Net Actuarial Remeasurement Loss = Actuarial Loss on PVDBO (₹78,00,000) - Actuarial Gain on Assets (₹38,80,000) = ₹39,20,000 (Debit to OCI).
- Closing Balance Sheet Net Liability at 31st March 2025:
- Closing PVDBO (₹11.90 Cr) - Closing FVPA (₹9.70 Cr) = ₹2,20,00,000.
- Reconciliation: Opening Net Liability (₹1.50 Cr) + P&L Expense (₹1.308 Cr) + OCI Loss (₹0.392 Cr) - Contributions (₹1.00 Cr) = ₹2,20,00,000 (Perfect Mathematical Match). Horizon models this schedule in assureFinancials.
Case Study 2: Compensated Absences (Leave Encashment) - P&L vs OCI Treatment
Context & Facts: Precision Engineering Ltd provides its 300 manufacturing employees with 30 days of annual privilege leave, of which unused days can be accumulated up to 120 days and encashed upon retirement or resignation. At 31st March 2025, an actuarial valuation determined the leave obligation at ₹1,80,00,000, which includes an actuarial remeasurement loss of ₹25,00,000 due to an increase in average factory wage rates.
Accounting Treatment under Ind AS 19 (Other Long-Term Benefits):
| Benefit Classification | Applicable Standard Clause | Accounting Treatment of Actuarial Loss |
|---|---|---|
| Post-Employment Gratuity | Ind AS 19 Paragraph 120(c) | Recognized in Other Comprehensive Income (OCI); No recycling to P&L. |
| Compensated Absences (Leave) | Ind AS 19 Paragraph 156 | Recognized ENTIRELY in Profit or Loss (P&L). OCI routing is strictly prohibited. |
Practitioner Insight: One of the most common auditing errors in Indian financial reporting is routing leave encashment actuarial losses through OCI alongside gratuity. Under Paragraph 156 of Ind AS 19, for other long-term employee benefits, the net defined benefit cost (including all service cost, interest, and remeasurements) must be recognized in Profit or Loss. CAs using assureFinancials automate this separation to avoid CARO and audit qualifications.
Case Study 3: Sovereign Bond Yield Volatility and Discount Rate Sensitivity
Context & Facts: During FY 2024-25, benchmark 10-year Indian Government Bond yields fluctuated sharply from 7.18% to 6.75% due to liquidity easing by the RBI. Bharat Automotive Ltd has an unfunded gratuity obligation with a weighted average duration of 12 years. The company's opening obligation was ₹20,00,000. The CFO inquires about the sensitivity disclosure required under Ind AS 19 Paragraph 145.
Sensitivity Modeling:
- A 100 basis points (1.00%) decrease in the discount rate (from 7.18% to 6.18%) increases the present value of the obligation by 8.5% (an increase of ₹1,70,00,000).
- A 100 basis points (1.00%) increase in the discount rate (to 8.18%) reduces the obligation by 7.8% (a decrease of ₹1,56,00,000).
- Under Ind AS 19 Paragraph 145, an entity must disclose a sensitivity analysis for each significant actuarial assumption showing how the defined benefit obligation would have been affected by reasonably possible changes in the relevant assumption at the reporting date. Bharat Automotive publishes this tabular sensitivity in its notes to accounts using assureFinancials.
Case Study 4: Asset Ceiling Limitation under Paragraph 64
Context & Facts: A legacy public sector enterprise, Sterling Heavy Engineering Ltd, holds a superannuation pension fund where plan assets are ₹50 Crores, while the present value of defined benefit obligations is ₹42 Crores, resulting in a gross plan surplus of ₹8 Crores. However, under the pension trust deed, the company cannot withdraw surplus funds, nor can it reduce future employer contributions below a fixed minimum statutory threshold. The present value of available future contribution reductions is calculated at ₹3 Crores.
The Asset Ceiling Test (Paragraph 64):
- Under Paragraph 64 of Ind AS 19, in the case of a surplus in a defined benefit plan, an entity shall measure the net defined benefit asset at the lower of:
- The surplus in the defined benefit plan (₹8 Crores); and
- The asset ceiling determined using the discount rate (₹3 Crores).
- Adjustment: The recognized net defined benefit asset on the Balance Sheet must be restricted to ₹3 Crores.
- The excess surplus of ₹5 Crores is derecognized through an Asset Ceiling Remeasurement charge recognized in Other Comprehensive Income (OCI).
Case Study 5: Past Service Cost Arising from Gratuity Ceiling Revision
Context & Facts: When the central government enhanced the statutory gratuity ceiling under the Payment of Gratuity Act from ₹10 Lakhs to ₹20 Lakhs, Zenith Infrastructure Ltd had to amend its gratuity rules to reflect the higher statutory payout across all 1,200 employees, creating an instantaneous retroactive jump of ₹2,40,00,000 in the present value of accumulated past service obligations.
Accounting Treatment under Ind AS 19 Paragraph 103:
- Under legacy AS 15, unvested past service costs were amortized over the remaining vesting period.
- Under Ind AS 19: An entity must recognize past service cost as an expense in Profit or Loss at the earlier of:
- When the plan amendment or curtailment occurs; and
- When the entity recognizes related restructuring costs or termination benefits.
- Zenith is strictly prohibited from amortizing the cost or routing it through OCI. The entire ₹2,40,00,000 is charged as an exceptional/operating employee expense in Profit or Loss in the period of amendment.
Case Study 6: Deferred Tax Accounting on OCI Remeasurements
Context & Facts: In FY 2024-25, Apex Pharma Ltd recognized a net actuarial remeasurement loss of ₹50,00,000 on its gratuity scheme in OCI. For tax purposes under Section 40A(7) and Section 43B of the Income-tax Act, 1961, provision for gratuity is disallowed; deduction is granted only upon actual payment or contribution to an approved gratuity fund. The applicable corporate tax rate is 25.168% (Section 115BAA). The CFO inquires how to account for deferred tax.
Ind AS 12 & Ind AS 19 Interplay:
| Element | Gross Amount | Tax Effect (25.168%) | Net OCI Presentation |
|---|---|---|---|
| Gross Actuarial Loss in OCI | (₹50,00,000) | - | (₹50,00,000) |
| Deferred Tax Asset (DTA) Created | - | ₹12,58,400 (Credit to OCI) | +₹12,58,400 |
| Net Remeasurement Loss in OCI | - | - | (₹37,41,600) |
Practitioner Insight: Under Ind AS 12, the tax consequence of items recognized in OCI must be recognized directly in OCI, not in Profit or Loss. The DTA of ₹12,58,400 is credited to OCI, and the balance sheet reflects the deferred tax asset under non-current assets. Tax teams manage this reconciliation using assureTax and assureFinancials.
Case Study 7: Settlement and Curtailment of Defined Benefit Scheme
Context & Facts: Solaris Power Ltd closed down its diesel generating plant and retrenched 80 employees, paying them an immediate lump-sum gratuity settlement of ₹1,80,00,000. The actuary confirmed that the proportionate present value of defined benefit obligations extinguished by this settlement was ₹2,10,00,000.
Curtailment Accounting:
- A settlement occurs when an entity enters into a transaction that eliminates all further legal or constructive obligations for part or all of the benefits provided under a defined benefit plan.
- Obligation extinguished: ₹2,10,00,000. Consideration paid: ₹1,80,00,000.
- Gain on Settlement = ₹2,10,00,000 - ₹1,80,00,000 = ₹30,00,000.
- Under Paragraph 109 of Ind AS 19, the gain of ₹30,00,000 is recognized immediately in Profit or Loss as part of employee benefit expenses upon settlement date.
Case Study 8: Schedule III Balance Sheet Current vs Non-Current Segregation
Context & Facts: At 31st March 2025, MedTech Innovations Ltd has an unfunded gratuity obligation of ₹4,00,00,000. The statutory auditor requests a breakdown between Current and Non-Current liabilities under Division II of Schedule III to the Companies Act, 2013.
Actuarial Cash Flow Projections:
- The actuary provides a cash payout projection table based on employee turnover and mortality rates.
- Gratuity payouts expected to be settled within the next twelve (12) months (due to anticipated retirements and resignations): ₹45,00,000.
- Gratuity payouts expected beyond twelve months: ₹3,55,00,000.
- Schedule III Balance Sheet Presentation:
- Under Current Liabilities > Provisions: Provision for Gratuity = ₹45,00,000.
- Under Non-Current Liabilities > Provisions: Provision for Gratuity = ₹3,55,00,000.
Practitioner Insight: Failing to bifurcate provisions into current and non-current based on actuarial cash flow schedules violates Schedule III Division II and attracts MCA CARO audit qualifications. Reporting controllers automate this disclosure via assureFinancials.
10-Step Operational Verification Matrix for Ind AS 19 Audit
Financial controllers and statutory auditors must execute the following 10-step verification protocol during annual Ind AS closing:
| Step | Audit Procedure | Ind AS 19 Citation | Key Risk / Verification Objective | assureOffice Tool |
|---|---|---|---|---|
| Step 1 | Census Data Reconciliation | Paragraph 56 | Match employee headcount, DOB, DOJ, and salary data between payroll ERP and actuary. | assureFinancials |
| Step 2 | Discount Rate Benchmark Check | Paragraph 83 | Verify discount rate matches market yield on 10-year G-Sec bonds on balance sheet date. | assureFinancials |
| Step 3 | Salary Escalation Reasonableness | Paragraph 87 | Compare actuarial salary increase assumption with actual corporate HR budget trends. | assureFinancials |
| Step 4 | Plan Asset Confirmation | Paragraph 140 | Obtain direct independent balance confirmation from LIC / fund manager for plan assets. | assureFinancials |
| Step 5 | Net Interest Math Verification | Paragraph 123 | Ensure Net Interest = (Opening PVDBO - Opening FVPA) × Discount Rate. | assureFinancials |
| Step 6 | Segregate P&L vs OCI Costs | Paragraph 120 | Route Service Cost & Net Interest to P&L; route Remeasurements strictly to OCI. | assureFinancials |
| Step 7 | Leave Encashment Routing Audit | Paragraph 156 | Confirm 100% of leave encashment actuarial changes are charged to P&L (not OCI). | assureFinancials |
| Step 8 | Deferred Tax OCI Symmetry | Ind AS 12 | Recognize deferred tax on OCI remeasurements directly in OCI, matching tax rates. | assureTax |
| Step 9 | Schedule III Current/Non-Current | Division II Schedule III | Bifurcate provisions based on actuary's 12-month expected cash outflow table. | assureFinancials |
| Step 10 | Sensitivity Analysis Disclosures | Paragraph 145 | Draft ±100 bps sensitivity disclosure tables for discount rate and salary escalation. | assureFinancials |
16 In-Depth Practitioner FAQs
1. What is the fundamental difference between AS 15 and Ind AS 19 regarding actuarial gains and losses?
Under legacy AS 15, all actuarial gains and losses were recognized immediately in the Statement of Profit and Loss, causing severe earnings volatility. Under Ind AS 19, all remeasurements (actuarial gains and losses and return on plan assets) are recognized immediately in Other Comprehensive Income (OCI) and are never reclassified (recycled) to Profit or Loss.
2. Can remeasurements recognized in OCI ever be transferred to Profit or Loss in future years?
No. Paragraph 122 of Ind AS 19 strictly prohibits the reclassification of OCI remeasurements to profit or loss. However, an entity may transfer those cumulative amounts within equity (e.g., from an OCI reserve into Retained Earnings).
3. Why must the discount rate be based on Government Bond yields in India?
Under Paragraph 83 of Ind AS 19, the discount rate must be determined by reference to market yields on high-quality corporate bonds. However, in countries like India where there is no deep market in high-quality corporate bonds, market yields on Government Bonds must be used.
4. How is leave encashment (compensated absences) classified under Ind AS 19?
Accumulated earned leave that is not expected to be settled wholly within 12 months after the end of the annual reporting period is classified as an 'Other Long-Term Employee Benefit'. All remeasurements must be recognized in Profit or Loss, not OCI.
5. What is the Projected Unit Credit (PUC) method?
The PUC method is an actuarial valuation technique that sees each period of service as giving rise to an additional unit of benefit entitlement and measures each unit separately to build up the final obligation, incorporating projected future salary increases and mortality.
6. What is the Asset Ceiling under Ind AS 19?
Under Paragraph 64, when a defined benefit plan is overfunded (assets exceed obligations), the net asset recognized on the balance sheet is capped at the present value of any economic benefits available in the form of refunds from the plan or reductions in future contributions.
7. How is past service cost accounted for under Ind AS 19?
Past service cost arising from a plan amendment or curtailment must be recognized as an expense in Profit or Loss immediately at the date of the amendment. Amortization over vesting periods is prohibited.
8. Does Ind AS 19 apply to Provident Fund obligations where the employer guarantees a minimum interest rate?
Yes. Where an employer manages an exempted Provident Fund Trust and guarantees a minimum statutory rate of interest (declared by EPFO), the fund is treated as a Defined Benefit Plan, requiring actuarial valuation under the Guidance Note issued by the Institute of Actuaries of India.
9. How is the net interest expense on defined benefit plans calculated?
Net interest is calculated by multiplying the net defined benefit liability (or asset) by the discount rate determined at the beginning of the annual reporting period, taking into account any changes during the period as a result of contribution and benefit payments.
10. What sensitivity analyses must be disclosed in the financial statements?
Under Paragraph 145, an entity must disclose a sensitivity analysis showing how the defined benefit obligation would be affected by reasonably possible changes in significant actuarial assumptions (such as a 1% increase/decrease in discount rate and salary growth rate).
11. How are defined benefit provisions presented on the Balance Sheet under Schedule III?
Under Division II of Schedule III to the Companies Act, 2013, defined benefit provisions must be bifurcated into 'Current Provisions' (amounts expected to be paid within 12 months based on actuarial cash flow projections) and 'Non-Current Provisions'.
12. How does deferred tax interact with OCI remeasurements?
Under Ind AS 12, the tax consequence of items recognized in OCI must be recognized directly in OCI. When an actuarial loss is debited to OCI, the resulting deferred tax asset is credited to OCI, ensuring symmetrical presentation.
13. Can a company use an informal or in-house estimate instead of an actuarial report?
For defined benefit plans, Ind AS 19 encourages but does not legally mandate the involvement of a qualified actuary. However, in practice, statutory auditors and ICAI guidelines require a comprehensive valuation report signed by an IBBI/IAI certified Fellow Actuary.
14. What are 'demographic assumptions' in an actuarial valuation?
Demographic assumptions include mortality rates (using Indian Assured Lives Mortality tables), employee turnover/attrition rates, disability rates, and early retirement trends.
15. What are 'financial assumptions' under Ind AS 19?
Financial assumptions deal with items such as the discount rate, future salary progression, inflation rates, and future medical costs (for post-employment medical plans).
16. What happens when an entity settles a defined benefit obligation early?
Any gain or loss arising on settlement (difference between the present value of the obligation extinguished and the settlement price paid) is recognized immediately in Profit or Loss when the settlement occurs.