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ACCA Strategic Professional · Strategic Business Reporting (International) · Employee benefits

Kappa Co's directors wish to raise the discount rate used for its defined benefit obligation from 4% to 5.5%, based on yields on lower-rated corporate bonds, so that profit targets linked to their bonuses are met. Under IAS 19, the discount rate should be determined by reference to:

The discount rate must be based on end-of-period market yields on high-quality corporate bonds, or government bonds if there is no deep market. Choosing a higher rate from lower-rated bonds to meet bonus targets is not permitted and is an ethical breach.

  1. AMarket yields at the end of the reporting period on high-quality corporate bonds, or government bonds where no deep market existsCorrect
  2. BThe expected return on the plan assets
  3. CThe entity's own weighted average cost of capital
  4. DThe rate that achieves the entity's target profit for the year

Explanation

IAS 19 requires the discount rate to reflect market yields at the reporting date on high-quality corporate bonds (government bonds if no deep market). Selecting a rate to hit bonus targets is biased and raises integrity concerns. Plan asset returns and WACC are not the basis.

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