T2C, I am totally appalled that your fil thinks he has any say in how YOUR children are disciplined. It should be his privilege to have some time having fun with them. If he feels he gets to the point of needing to smack someone elses child then he must be under pressure and therefore should not be put in that situ. Does he want his grandchildren to have fun and think he's great or does he want them to be scared of him?
IMO anyone, anyone, anyone who looks after your children should be keeping them safe and happy and, if things got tricky, they should handle it by saying something like "oh I don't think your mummy would like that, that's a shame, lets do something else", and not get involved in serious disciplining issues. Your boys trust you and how confusing to be smacked when you have left them to have fun. And what a shock for them especially if its not something they have witnessed before! My mum always just said "we don't do that here, granny doesn't like it".
I have IL issues too and my MIL once said in front of me "oh I don't want to have to smack your little bottom" I said in a very clear, stern voice to my dd that she was only joking and that no one except mummy or daddy are allowed to do anything like that.
Its really hard to keep cool about these things when you will be touchy about the situation anyway but I do think that on this one they play your way or not at all and thank god your dh agrees. Maybe they should have a date in a public place? Or with you around a few times so you can observe how a tricky situation is handled and keep out of it for a while before showing the IL how you would verbally handle it. I direct my chat to my dd and say "what granny means is....". Its sad to have to teach both age groups!!!
I find it hard to be near my MIL but I can do it for a short while when I know that I'm doing it for my dd.
Keep it light but keep it firm. They are playing by your rules not their own. I wish you lots of luck. Keep us posted.
Sorry for the length of this message. I am an opinionated girl, esp about how kids are respected!! They are people, just small. Your fil would be mad as hell if someone punched him because they didn't like his behaviour.
I hope I'm not speaking out of turn but if you don't have confidence in the situ then bollocks to it. Your kids come first and they trust you.