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

Rho Co's finance director proposes to raise the discount rate used for the defined benefit obligation from 4% to 6%, citing a high-yield corporate bond with weak credit quality, solely so that the reported net liability falls and loan covenants are met. Under IAS 19 and professional ethics, which statement is correct?

The proposal is inappropriate. IAS 19 requires the discount rate to reflect market yields on high quality corporate bonds at the reporting date, not weak-credit bonds or the expected asset return, and choosing a rate to meet covenants breaches the accountant's integrity.

  1. AThe rate should be based on market yields on high quality corporate bonds, so the proposal is inappropriate and raises an integrity concernCorrect
  2. BThe rate should be the expected return on plan assets, so 6% is acceptable if assets earn that
  3. CManagement may select any rate within a reasonable range to protect covenants
  4. DThe rate should be the risk-free rate only, so 4% is mandatory

Explanation

IAS 19 requires the discount rate to reflect market yields at the reporting date on high quality corporate bonds (government bonds only where no deep market exists). Choosing a rate to meet covenants is biased reporting and threatens integrity and objectivity. Using expected asset return was the old approach and is no longer allowed.

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