Discount rates (Agenda Paper 22)

As part of its project to make targeted improvements to IAS 37, the IASB is considering developing proposals to specify in IAS 37 whether and how discount rates for provisions should reflect non-performance risk.

At its July 2023 meeting, the IASB discussed the standardisation of discount rates for provisions. The IASB decided not to pursue the idea of including non-performance risk in the discount rate. The requirements would be drafted in a way that clarifies that the measure of a provision is adjusted to reflect one type of risk—the uncertainty in the amount or timing of the expenditure required to settle the liability.

The staff analysed two possible options, as requested by IASB members:

• Option 1, which aligns discount rates with IAS 19 and includes some non-performance risk; and
• Option 2, which requires discounting provisions based on the time value of money alone using a risk-free rate, such as a government bond yield.

Several concerns have been expressed by accounting practitioners on the practicability of determining discount rates for provisions applying the requirements in IAS 19 for defined benefit pension obligations.

Staff recommendation

The staff recommended that the IASB:

• Develop proposals to amend IAS 37 to specify more precisely the basis on which an entity determines the discount rate it uses in measuring a provision
• Propose to specify that an entity uses a rate that reflects the time value of money—represented by a risk-free rate—with no adjustment for non-performance risk (Option 2)

IASB discussion

During the discussion, IASB members acknowledged that guidance on the determination of the discount rate for provisions is helpful to improve consistency among preparers. Further, IASB members agreed that including the non-performance risk in the determination of the discount rate is not useful to represent the entity’s financial position. Finally, IASB members acknowledged that the use of risk-free rates compared to the ones used in IAS 19 will be easier, less onerous and it would not worsen the quality of financial reporting.

IASB decision

All 13 IASB members present (one absent) agreed to provide clearer guidance regarding the criteria to determine the discount rate used in measuring a provision.

12 out of 13 IASB members present agreed to specify that the discount rate should reflect the time value of money, based on a risk-free rate (government grant), without adjustment related to the non-performance risk.