Present value measurements — Discount rates

Date recorded:

Agenda Paper 15A: Summary of findings and next steps

The Director of Research opened the session by putting the project on discount rates into context of the overall research programme. The project is currently in the assessment stage, i.e. the staff are currently assessing and identifying the issues to determine whether a financial reporting problem exists. He told the Board that the staff had drafted a research paper for the session which was included in the subsequent agenda paper. As the Board had never published a research paper before, he wanted to ask some general questions around research papers. He said that the Due Process Handbook only required the Board’s approval for the publication of a research paper and did not require a ballot process as was required for discussion papers. He said that the research paper could still be balloted if circumstances required that. He asked if there should be a formal consultation process with a fixed comment period or if respondents should reply as and when they would like. He also asked whether questions for constituents should be embedded in the paper itself or whether they should be asked in a separate document. He conceded that not all of his questions had to be answered at this point. He also said that the research paper would likely be published after the comment period for the Agenda Consultation has expired.

One Board member pointed out that the draft research paper would already be in the public domain by including it as an agenda paper on the website. The Director of Research replied that the formal publication of the paper would be more prominent. Another Board member agreed that not all questions around research papers could be answered today but expressed support for discussing this on an actual research paper as the one prepared by the staff. She said that the research paper could be a stand-alone document owned by the staff but that the Board would have to consider how to weigh in, e.g., by way of a separate document. The Vice Chairman intervened and said that these discussions would have to be led at a later stage. One Board member asked if the Due Process Handbook should be amended as it did not cover research papers. The Director of Research replied that the Due Process Handbook was deliberately flexible and that more experience with research papers was needed before the handbook could be amended.

The Senior Technical Manager introduced the agenda papers by saying that normally, a draft research paper would not be presented to the Board at this stage but as this was the first research paper, the staff made an exception. She said that feedback on the 2011 Agenda Consultation had shown that different standards used different discount rates and that this presented an inconsistency within IFRSs. The staff had verified many inconsistencies within the standards. In the staff’s view, some of them were justified, e.g., when different measurement bases were used. However, the staff identified twelve issues where inconsistencies were not justified in their view. Examples included not discounting deferred tax liabilities, the lack of a measurement objective in IAS 19 and IAS 37 and the application of an entity perspective in measurement, e.g., in value in use.  Inconsistent disclosure requirements added to these problems.

One Board member asked the Senior Technical Manager to consider the discussions of the Emerging Economies Group in this project. The Senior Technical Manager said that those discussions were considered in the draft research paper but conceded that they were not included in the agenda paper.

One Board member expressed discontent about the staff drafting a research paper without Board input. For her, it was also unclear what the scope of the project was as the agenda paper concerned entity-specific current value measurements, which would typically be value in use or fulfilment value, as well as current entity-specific measurements, which could also include amortised cost measurements. Since the project aimed at cost-based, present value and current measurement, it would be difficult to identify one overarching objective as, for example, IFRS 13 had. She also said that in a potential consultation it should be made clear to constituents that the Board was looking for conceptual input, not, for example, which standard should use a particular discount rate. She said otherwise there would be the risk of initiating a volatility-focused debate instead of a present value technique-focused debate.

Another Board member welcomed the timing of the project as it overlapped with the project on the Conceptual Framework. He said that the findings of the discount rate project should be considered in the Conceptual Framework as well. He would therefore like to request views from constituents on how the issues should be addressed. The Vice Chairman said that it would be difficult to include findings in the Conceptual Framework as the project would be finalised in 2016. The Board member suggested leaving the deadline for the Conceptual Framework open. The Vice Chairman disagreed. One Board member added that the Framework examined the relationship between measurement and uncertainty in amounts of cash flows. He said the discount rate project should seek to examine the relationship between measurement and uncertainty in timing of cash flows as discounting was related to the timing. He said that where the uncertainty in timing of cash flows was too uncertain, discounting was prohibited.

For one Board member, the project was really about measurement bases. In a first step every discount rate requirement in each standard should be examined and inconsistencies identified. In a second step she would examine which explanations for inconsistencies were offered by the standards. She would like to have a narrower focus that was more data-based.

One Board member disagreed with the section on risk premiums in the draft research paper and asked whether the Board would have an opportunity to discuss this section. The Senior Technical Manager replied that the research paper would be redrafted based on the comments in this session and then would be presented to the Board for their review. The Director of Research added that the Board could make drafting comments but also raise discussion points if the Board expressed a need to discuss certain areas.

One Board member said that issues like risk-free rates, market rates, central bank intervention and negative interest rates should be considered as well. A fellow Board member agreed and said that he would prefer to talk about issues instead of inconsistencies. He also said that the lack of a measurement objective in a standard did not necessarily mean that the Board at that time did not have a measurement objective when deciding for a discount rate. A Board member agreed and said she would like to hear other Board members’ views. The former Board member suggested conducting the project in portions. This was supported by another Board member.

One Board member said that the Board would have to perform two steps for each discount rate. The first step was to identify a difference in a discount rate and the second was to decide whether the difference should be removed. Another Board member said that the discussions would take some time over several Board meetings.

The Vice Chairman reminded the Board that the included draft was not a draft discussion paper. He said, alternatively, it could be called a staff paper but the issue was too important for a mere staff paper. The Director of Research added that if the Board did not see an issue with discount rates, this conclusion could also be exposed for public comment.

The Vice Chairman concluded that the staff should bring back the issue in a future Board meeting.

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