Impact of Discount Rate on Actuarial Valuations as at 31st Mar 2020

Introduction:

The discount rate is a key assumption used in the Actuarial valuation of employee benefit liabilities. An actuarial valuation is a process of projecting the expected employee benefit liabilities and arriving at their present value at the valuation date. 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. Thus, it is important to understand the discount rate volatility and strategize ways to mitigate this impact.

Discount rate Comparison Table as at 31st Mar 2020

Study of the Impact of Discount Rate

Along with the change in the inter-valuation discount rate, even the maturity term of the liability leads to the change in Liability. An approximate way to gauge this impact is given by the formula below

Impact as a % of Liability = Approx. {Minus (Maturity Term * Change in Discount Rate)}

Let us study the impact of change in liability due to change in the discount rate with a simple example as below.

Example:

This means that, if there was a liability of Rs. 100 as at 31st Mar 2019, and the discount rate falls from 7.35% to 6.80% in Mar 2020, the liability will increase by approximately 5.50%, all other things being same

To know how to reduce the impact of discount rate on profit & loss account,
consult us on below lines: