G-Sec Interest Rates for December and Consequent Impact on Actuarial Valuations
As per Para 83 of IND AS 19/IAS 19 (Revised) & Para 78 of AS 15 (Revised), the rate used to discount post-employment benefit obligations (both funded and unfunded) should be determined by reference to market yields at the balance sheet date on government bonds.
The discount rate is a key assumption used in the Actuarial valuation of employee benefit liabilities. Actuarial valuation primarily finds the Present value of the liabilities (or benefits), that are expected to be paid in the future. For this purpose, it is vital to use the appropriate discount rate. The various accounting standards have prescribed, for the purpose of Employee Benefit valuations, the basis for choosing the discount rate. It states that an entity should use the government bond yields (or corporate bond yields, where applicable) for a term that is equivalent to the maturity term of the liabilities. Because of the aforesaid Guidance, the year-on-year movement in the discount rate is reflected in the year-on-year fluctuations in the Company’s Profit and Loss and Balance sheet.
Key Observations: 9 monthly reviews
The bond yields for durations of less than 7 years have shown a substantial upsurge, with yields increasing between 60 basis points to 225 basis points in a 9-month period
An average increase of 20 basis to 50 basis points in observed for maturity periods of over 9 years
Entities could expect liabilities to reduce by 5% because of interest rate increase (assuming a 10-year term of obligation and a 50 basis points increase in interest rates)
Key Observations: 12 monthly reviews
The bond yields for durations of less than 13 years have shown a substantial upsurge, with yields increasing between 90 basis points to 238 basis points in a 12-month period
An average increase of 59 basis to 43 basis points in observed for maturity periods of over 13 years
Entities could expect liabilities to reduce by 8.8% because of interest rate increase (assuming a 10-year term of obligation and a 88 basis points increase in interest rates)
Key Observations: 3 monthly reviews
The rates are fairly consistent with a modest hike of around 5 to 10 basis points in a 3-month period