Determining Discount Rates for Employee Benefit Valuations

by R. Krishnaswamy on April 5, 2010

1.1    Discount rates are the heart of almost all actuarial and long term financial models.  In the recent times there has been growing interest in the theory and practice related to determination of discount rates.  One such recent development has been the decision of the Institute of Actuaries, UK to commission a thought – leadership
cross – practice research project on discount rates.  This research project is expected to (a) uncover the current practices related to determination of discount rates;
(b) provide an understanding of the existing research and debate on this subject;
(c) develop a common language for communicating current practices on discount rates and risk
1.2.    Likewise the Re Exposure Draft titled “Measurement of Liabilities for Insurance Contracts – Current Estimate and Risk Margins” issued by the International Actuarial Association carries a fairly comprehensive coverage of the conceptual issues and practical considerations related to the choice of discount rates.
1.3    The accounting profession has also been focussing on discount rates used in the context of employee benefit valuations in order to harmonise the accounting and reporting practices across jurisdictions.  A recent development in this regard has been the exposure draft issued by the IASB (International Accounting Standards Board)  which proposes an uniform basis for determining discount rates across entities
1.4    Given this back drop, this paper focuses on the conceptual issues and practical considerations related to determination of discount rates in the Indian  context with particular reference to employee benefit valuations
1.5    The main body of the paper is laid out as follows: Section 2 sets the background to the paper by considering the relevant provisions of the Indian, International and US GAAPs related to discount rates.  Section 3 describes the key conceptual issues related to the determination of discount rates used in employee benefit valuations.  Section 4 focuses on the practical issues in the Indian context which impact the determination of discount rates.  Section 5 summarises the key themes of this paper and  highlights the need for developing a practice standard on this subject.

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