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CA Final · Financial Reporting · Ind AS 19 Employee Benefits

Sundaram Textiles Ltd, an Indian company, has a defined benefit gratuity plan. Its finance head proposes to discount the post-employment benefit obligation, which is payable in Indian rupees, using the yield on AA-rated corporate bonds because the Indian corporate bond market is reasonably deep. Under Ind AS 19 as notified in India, which rate should be used for rupee-denominated obligations?

Under Ind AS 19 the discount rate for rupee post-employment benefit obligations is based on market yields on government bonds. This differs from IAS 19, which prefers high quality corporate bonds where a deep market exists. Depth of the Indian corporate bond market does not change the Ind AS requirement.

  1. AMarket yields on government bonds at the end of the reporting periodCorrect
  2. BMarket yields on high quality corporate bonds, since the market is deep
  3. CThe weighted average cost of capital of the entity
  4. DThe expected rate of return on the plan assets

Explanation

Ind AS 19 differs from IAS 19 in its Appendix 1 comparison: the discount rate for post-employment benefit obligations is determined by reference to market yields on government bonds. IAS 19 allows government bonds only where there is no deep market in high quality corporate bonds. Hence the corporate bond option, though valid under IAS 19, is wrong for rupee obligations under Ind AS 19.

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