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IAS 19 - Determination of discount rate

Date recorded:

In November 2012, the Committee received a request for guidance on the determination of the rate used to discount post-employment benefit obligations. According to IAS 19 the discount rate should be determined by reference to market yields at the end of the reporting period on “high quality corporate bonds” (HQCB), however IAS 19 does not specify which corporate bonds qualify as HQCB. In practice, listed corporate bonds have usually been considered to be HQCB if they receive one of the two highest ratings given by a recognised rating agency. Due to the financial crises the rating of these bonds have decreased and therefore the issues arises if bonds falling below the “AA” rating can still be considered to be HQCB. After lengthy discussion, the Committee in July 2013 decided not to add this to its agenda because it noted that issuing additional guidance on, or changing the requirements for, the determination of the discount rate would be too broad for it to address in an efficient manner.

In this meeting Staff presented their analysis on the comment letters received on the tentative agenda decision and concluded that the Committee should finalise their decision not to add this issue to its agenda. Staff also presented the proposed changes to the wording of the tentative agenda decision.

The discussion began with a member agreeing with the recommendation presented by Staff. There was some concern raised by members on the concept of HQCB being referred to as an absolute notion.  A member asked a regulator (attending the meeting in an unofficial capacity) if they were happy with the wording. The Regulators were concerned with the wording and preferred the previous version presented.

A member said the paper presented by Staff does not answer the question of what is a HQCB. Another member said that the paper puts the minimum requirement for HQCB and therefore would restrict other bonds such as government bonds.

Another member asked if the use of the word of “significantly” (in the context of the change in measurement or discount rate) was necessary as it does not add clarity. Other members disagreed as they said that if the word “significantly” was not included then effectively a company would not be allowed to change its methodology at all. In determining the discount rate, usually entities would use an actuary’s assumptions, which may change from time to time. Therefore, the word “significantly” would be required to allow entities to adopt better methodologies.

A change in methodology would usually be captured under IAS 8 as a change of estimate. In addition, another member added that as the discount rate is an actuarial assumption and the bond used would be in accordance with management’s judgement, this would usually be disclosed as a significant judgment in the financial statements, which would be addressed in a different standard.

The Chairman summarised the Committee views as there was general agreement with the Staff recommendation with reservation on the “absolute notion”. The disclosure of the definitions or assumptions a company uses or makes in relation to what it considers high quality would not necessarily solve the underlying problem but it allows for more transparency in the financial statements. Therefore, he suggested that the agenda decision should include the requirement to disclose what an entity considers as being high quality. A few members volunteered to help Staff with drafting the final agenda decision.

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