IAS 19 — Discount rates

Date recorded:

Discount rate - Agenda Paper 3


The Interpretations Committee was asked to consider the rate to use to discount post-employment benefit obligations (discount rate). The entity operates in Ecuador, a country that uses the US dollar as its official or legal currency without being part of a regional market. The submitter asked the following questions:

  • (a) If there is no deep market in Ecuador for US dollar denominated high quality corporate bonds (HQCB), should an entity in Ecuador that has US dollar denominated post-employment benefit obligations consider US dollar denominated HQCB in other markets or countries in which those bonds are issued such as the US?
  • (b) If an entity in Ecuador determines the discount rate by reference to market yields on US dollar denominated HQCB in another market or country such as the US (having concluded that there is a deep market in US dollar denominated HQCB), would this lead the entity to use actuarial assumptions would not be mutually compatible (contrary to the requirement in IAS 19.78)?

Staff analysis

The staff assessment was that in applying paragraph 83 of IAS 19:

  • (a) the entity assesses the depth of the market in HQCB denominated in US dollars and does not limit this assessment to the market or country in which it operates, but also considers other markets or countries in which US dollar denominated HQCB are issued.
  • (b) if there is a deep market in US dollar denominated HQCB, the entity determines the discount rate by reference to market yields at the end of the reporting period on HQCB. This is the case even if there is no deep market in such bonds in the entity’s country. In this situation, the entity does not use market yields on government bonds to determine the discount rate.
  • (c) if there is no deep market in US dollar denominated HQCB, the entity determines the discount rate using market yields on US dollar denominated government bonds.
  • (d) the entity applies judgement to determine the appropriate population of HQCB or government bonds to reference when determining the discount rate. The currency and term of the bonds must be consistent with the currency and estimated term of the pension obligations.

Given that there appears to be no clear link between the objective of the discount rate and the discount rate methodology, there is no basis to conclude that, in the fact pattern in the submission, the application of the methodology required by paragraph 83 of IAS 19 would result in the use of actuarial assumptions that are not mutually compatible.

The requirements in IAS 19 provide an adequate basis for an entity to determine the discount rate.

Staff recommendation

The Staff recommended that the IC not add this issue to its agenda. Instead, the Staff recommended publishing an agenda decision that includes educative guidance outlining how an entity applies the relevant principles and requirements in IAS 19 to the fact pattern in the submission.


The IC agreed with the Staff’s recommendation. The IC believes that the agenda decision should emphasise that:

  • The discount rate used for the obligation should be determined independently of the expected rate of return on the plan assets. This is because the nature of the assets does not affect the nature or amount of the obligation (IAS 19.BC129-BC139).
  • When an entity undertakes to settle a defined benefit obligation in a foreign currency, the local assumptions are not the only ones that are relevant. This is because even though the level of benefits to be provided to the employees are based on local assumptions (inflation, salary rates etc.), the liability must be discounted at a rate that reflects the risk of the currency in which it will be settled. In other words, the primary purpose of the discount rate is to calculate the present value of the liability. The assumptions (local and discount rate) serve different purposes and are used differently to value the liability as a whole. Accordingly, using a discount rate based on market yields on HQCB from another market would not be incompatible with the use of other actuarial assumptions based on local economics.

Some IC members also observed that the Staff’s analysis is consistent with current practice, especially in African countries where defined benefit obligations are often denominated in US Dollars and where there are hardly any long-term government bonds from which to derive the discount rate.

The rest of the session was spent debating how to word the tentative agenda decision so as to give educational guidance (as described above) without crossing the threshold to interpret IAS 19.

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