Blog

FAQ: Setting the discount rate for actuarial valuation

Posted by Anuradha Sehgal on 07-Aug-2017 10:36:00

Setting the discount rate is considered to be the most important aspect of any actuarial valuation. In this post, we have summarised some of the most common questions our clients and their auditors ask about choosing the right discount rate.

1) What is the correct way to set discount rate for AS 15, Ind AS 19 and IAS 19 valuations?

Setting the discount rate involves constructing yield curves from the raw trading data. As an overview, this involves calculating the yields-to-maturity using traded Government Securities. Different traded bonds will have different YTM, depending on the term of each bond and therefore yields would be different for each term. They would then need to be smoothed, interpolated and extraopolated to produce the full yield curve. The discount rate can be read off for the specific duration of Defined Benefit Obligation.

Read More

Topics: Actuarial valuation, Discount rate, Actuarial assumptions

Discount rate for actuarial valuation as at 30 June 2017

Posted by Anuradha Sehgal on 10-Jul-2017 09:20:00

For many companies, this is the time to finalise their interim accounts for the first quarter of the current financial year. It is important to understand the movement in discount rate during this period to make an appropriate provision towards employee benefits liabilities.

Interim reporting is a standard exercise for most companies, either for internal purposes and, for listed companies, also to report to the Securities and Exchange Board of India (SEBI).

In order to make an appropriate provision at 30 June 2017 in respect of the employee benefit liabilities, it is essential to understand how the discount rate would have changed since the last actuarial valuation.

Read More

Topics: AS 15, Ind AS 19, Discount rate, Actuarial assumptions, Economic update

How to set the employee attrition assumption for actuarial valuation

Posted by Nasrat Kamal on 01-Jun-2017 10:30:00

Employee attrition rate is an important assumption that can have significant impact on the actuarial liability of employee benefit schemes. An incorrect assumption will invariably lead to erroneous liability to be recorded in the balance sheet.

In our last post, considerations for setting the salary escalation rate were discussed. In the same post, we also provided some context about the roles and responsibilities in regard to setting actuarial assumptions and owning the process of actuarial reporting in general. In a nutshell - prior to 2005, actuarial valuation, including the assumptions, was largely controlled by the actuary. This situation changed when AS 15 was revised in 2005 and the responsibility for all aspects of actuarial valuation was shifted to the reporting companies.

Read More

Topics: Actuarial valuation, AS 15, Ind AS 19, Actuarial assumptions

How to set the salary escalation assumption for actuarial valuation

Posted by Nasrat Kamal on 29-May-2017 10:45:00

Salary escalation rate is the second most significant assumption used in an actuarial valuation after the discount rate. However, unlike the discount rate, the reporting enterprise has a much greater role to play in setting this assumption. It is important to understand the complexities involved.

Actuarial reporting requirements for employee benefit schemes in India, such as gratuity and leaves (also known as compensated absences), have evolved rapidly over the last few years. Prior to 2005, before AS 15 was revised, the actuary had the overall responsibility for many important aspects of actuarial valuation. 

When the AS 15 was revised, the responsibility for actuarial valuation was shifted from the actuary to the reporting enterprise. All the amendments to AS 15 since then, and the introduction of Ind AS 19, have only increased the responsibility on the reporting enterprise.

Read More

Topics: Actuarial valuation, AS 15, Ind AS 19, Actuarial assumptions

Governance framework to set actuarial assumptions

Posted by Nasrat Kamal on 16-May-2017 09:15:00

Setting the right actuarial assumptions is central to the accuracy of any actuarial valuation. However, there is a general lack of understanding among the stakeholders about how the assumptions should be set.

No matter how much care is taken in doing an actuarial valuation, the results could still be useless if assumptions are not set correctly. For certain companies, choosing the wrong assumptions could mean that he liability in the books of accounts could be understated or overstated by as much as 50% or even more. From our own experience, accountants and auditors, irrespective of the size or reputation of their firms, have misconceptions about several key aspects.

Read More

Topics: Actuarial valuation, AS 15, Ind AS 19, Actuarial assumptions

How to select discount rate for actuarial valuation

Posted by Megha Agarwal on 06-Mar-2017 11:00:00

There is more to selection of discount rate than simply looking up the interest rates on internet. Many companies don't realise the complexities involved and need to do more than they are doing currently.

Any actuarial valuation involves the use of a 'discount rate', which is used to calculate the present value of future benefits promised by an employee benefit scheme.


This post only covers the selection of discount rate. Details on other topics related to actuarial valuation of employee benefits can be found here.


Accounting standards, such as AS 15, Ind AS 19, IAS 19 and US GAAP have prescribed rules on how the discount rate should be selected.
 
The significance of discount rate in any actuarial valuation cannot be over-estimated. It has a significant direct impact on the liability. T his is one assumption that can be validated by looking at publicly available information and therefore undergoes the maximum scrutiny of the auditors and external analysts. 
 

whose responsibility is it?

Many companies have a perception that it is alright to leave the decision to set the discount rate to their actuaries. In the past, such an approach has led companies into severe problems. If an error or discrepancy in choosing the discount rate is revealed, companies cannot pass on the consequences to the actuary.
 
Discount rate, as with all other actuarial assumptions, remains the responsibility of the Board of the reporting enterprise. It is their responsibility to ensure that they have done enough to ensure the actuarial assumptions were set correctly with due attention to the work done by the actuary. Of course, this responsibility can be delegated by the Board to the managers in the company. In case of any issues, the Board and the delegated personnel will be held accountable. In most cases, the consequences on the actuary would be a disciplinary action by the Institute of Actuaries of India, which is unlikely to be of any significant benefit to the company.
 

WHAT IS PRESCRIBED UNDER the ACCOUNTING STANDARDS?

Most accounting standards prescribe that the discount rate should be set equal to the yield to maturity on Government bonds (Government securities, or GSecs) having term consistent with the term of liabilities, as at the date of valuation.

Read More

Topics: Employee benefits, Actuarial valuation, AS 15, Ind AS 19, Discount rate, Actuarial assumptions

Post a Comment