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IAS 19 — Determination of discount rate

Date recorded:

In October 2012, the Committee received a request for guidance on the determination of the rate used to discount post-employment obligations. In particular, the Committee was asked to interpret the term ‘high quality corporate bonds’. This is of pertinence since IAS 19 requires the rate used to discount post-employment benefit obligations (both funded and unfunded) is determined by reference to market yields at the end of the reporting period on high quality corporate bonds. In countries where there is no deep market in such bonds, the market yields (at the end of the reporting period) on government bonds shall be used. IAS 19 does not specify which corporate bonds qualify to be high quality corporate bonds.

The staff proceeded to make an assessment of the issue and further make a recommendation that the Committee should not take this issue onto its agenda. The staff noted according to prevailing opinion, listed corporate bonds are considered to be high quality discount bonds if they receive one of the two highest ratings given by a recognised rating agency (e.g., ‘AAA’ and ‘AA’ from Standard and Poor’s);

The staff presented two views for the Committee to consider:

View 1only AA-Bonds are considered. This is the predominant approach used in practice and it is consistent with guidance in US GAAP.

View 2corporate bonds with a rating lower than ‘AA’ can be considered. Those supporting this view claim that there are no significant differences between corporate bonds rated ‘AA’.

Despite this, the staff believed paragraphs 83-86 of IAS 19 provided sufficient guidance for determining the discount rate. In its view, entities should apply their judgement in determining a rate that complies with this guidance taking into account the characteristics of their capital markets.

The Committee were all in agreement as to the implications of disparity in the use of different discount rates, especially considering the size of the pension funds in which the discount rate is applies. The Committee noted that there were many stakeholders who are potentially critical with regard to the diversity of practice. They further noted the implications of using government bonds since IAS 19 was written before the financial crisis and how this may not be the best benchmark to use.

The Committee agreed with the staff that this was a matter of judgement and agreed with staff that given the effect that choosing the discount rate will have on the value of defined benefit obligations, an entity should disclose how it has determined the rate (e.g., using government bonds, considering only AA-Bonds, etc.).

Following further discussion, the Committee proceeded to consider two alternatives:

  • Alternative 1: Communicate that a) the Committee is aware of the issue, b) intends to further consider the issue at a future meeting and c) in the interim:
    • Remember disclosure requirements in IAS 8 regarding changes in estimates or policies
    • Remember disclosure requirements in IAS 19 regarding discount rate used
    • There is no reason to expect significant differences between what you considered to be ‘high quality’ in the prior year and what you consider it to be in the current year (i.e., however you thought about ‘high quality’ in the prior year has not significantly changed)
  • Alternative 2: Communicate only that the Committee is aware of the issue and will consider further at a future meeting.

Most believed the absence of providing any ‘guidance’ would result in significant diversity in practice, and therefore, preferred at least some direction (as set forth above). Conversely, some Committee members believed the issue had not yet been adequately debated, and therefore, preferred to ‘do nothing’ at this stage. This group of Committee members believed that any tentative agenda decision would not effectively resolve practice issues, and likewise, given due process requirements, would not formalise into an agenda decision until March 2013.

When put to a vote, the Committee supported Alternative 1. The staff will work on drafting a tentative agenda decision for approval offline.

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