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CA Final · Financial Reporting · Ind AS 19 Employee Benefits

Narmada Steels Ltd, an Indian company, has a defined benefit gratuity plan with obligations in Indian rupees. The finance head proposes to discount the obligation using the yield on AA-rated corporate bonds because the corporate bond market in India has some depth. Under Ind AS 19 as notified in India, what is the correct basis for the discount rate?

The discount rate should be based on market yields on government bonds. Ind AS 19 departs from IAS 19 here, which uses government bonds only where no deep market in high quality corporate bonds exists. The corporate bond approach therefore does not apply to rupee obligations.

  1. AMarket yields on high quality corporate bonds, since the Indian market is reasonably deep
  2. BThe entity's own weighted average cost of capital
  3. CMarket yields on government bonds, determined by reference to the reporting dateCorrect
  4. DThe expected return on plan assets

Explanation

Ind AS 19 differs from IAS 19. For rupee obligations the discount rate is determined by reference to market yields on government bonds, regardless of depth of the corporate bond market. IAS 19 allows government bonds only where there is no deep market in high quality corporate bonds, so option A reflects IAS 19, not Ind AS 19.

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