Accounting for employee benefits in defined benefit obligations (DBO) plans requires calculating the present value of future liabilities using a discount rate. Discount rate represents the time value of money. The benefits payable to an employee till a future date (for example date of retirement) should be discounted so that the present value can be estimated. The Discount Rate is one of the key actuarial assumptions used in employee benefits valuation.
TABLE OF CONTENTS
- Discount Rate in Ind AS 19
- Net Interest on Defined Benefit Liability
- Application to Various Employee Benefit Schemes
Discount Rate in Ind AS 19
Under IND AS 19 employers are required to account for their Post-Employment Defined Benefit Obligation plans in their annual statements. In the complex calculations, prescribed by IND AS 19, they are required to discount their future liabilities with reference to market yields at the end of the reporting period on government bonds. The Discount Rate guidance is as per Paragraph 83 of Ind AS 19. This brings the concept of yield curve on government bonds. Furthermore, IND AS 19 simplifies the calculation to an extent that instead of using the full yield curve, IND AS 19 allows the single weighted average discount rate, with the term of the government bonds being used consistent with the estimated term of the post-employment benefit obligations.
At regular intervals, we publish the Government of India Bond Rates as on the balance sheet dates, which is used as Discount Rates for the valuations and calculations. Govt of India Bond Rates as on 31st March 2020 can be found here.
Net Interest on Defined Benefit Liability
IND AS 19 now requires disclosure of the net interest on the defined benefit liability. The net interest on defined benefit liability includes Interest income on plan assets (which is a factor of the discount rate along with the fair value of the plan assets), the interest cost of the defined benefits obligation and interest on the effect of plan ceiling. The Net interest on the net defined benefit liability (asset) shall be determined by multiplying the net defined benefit liability (asset) by the discount rate and is charged or credited to ‘Finance costs’ in the Statement of Profit and Loss. Under AS 15(R), expected return was calculated using a separate assumption, however now it is linked to the discount rate.
Application to Various Employee Benefit Schemes
We shall briefly consider how the discounting rate is applied to various employee benefit schemes under Ind AS 19.
Defined Contribution Plans
In Defined contribution plans benefits accounting, when contributions do not fall due or are not expected to be settled wholly within 12 months after the end of the reporting period, they are discounted using the discount rate. When the contributions do outside the 12 months period after the end of the reporting period, then the obligations should be discounted using the discount rate.
Defined Benefit Plans
For valuation of DBO, the discounting rate factor is used to discount the obligations. The PUC method is used to arrive at the estimate of the obligations using the future salary.
Short Term Employee Benefits
Short Term Employee Benefits are accounted on a undiscounted basis because the settlement is expected to happen within the short term.