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Straight away
IFRS bulletin from PwC
25 November 2013
IFRS Interpretations Committee
concludes on IAS 19 discount rates
What is the issue?
The Interpretations Committee (‘the IC’)
has discussed the discount rate used to
measure employee benefit obligations
several times in the last year. The IC was
asked to provide guidance on how to
determine the discount rate and the
meaning of ‘high-quality’.
The IC has concluded that a project to
develop new guidance around the
discount rate would be too broad for it to
address efficiently. The issues should be
addressed as part of the IASB’s research
project on discount rates in general.
However, the IC’s agenda decision
included some helpful observations.
The IC noted that the discount rate:
a) reflects the time value of money but
not actuarial or investment risk;
b) does not reflect entity-specific credit
risk;
c) does not reflect the risk that future
experience may differ from actuarial
assumptions; and
d) reflects the currency and estimated
timing of benefit payments.
The IC also observed that the concept of
‘high-quality’ is an absolute notion. It is
not a relative notion, so the discount rate
should be determined by reference to the
yield on high-quality corporate bonds,
and not the ‘highest’-quality bonds. The
interpretation of ‘high-quality’ should
therefore be consistent over time, and it
is unaffected by a reduction in the
number of bonds with a particular rating.
This means that the concept of ‘highquality’ should be consistent across
currencies. Determination of whether
there is a deep market should be based
on international or global credit ratings,
and not local or national ones.
The IC observed that the determination
of the discount rate might be a significant
judgement. So, paragraph 122 of IAS 1
requires disclosure not only of the rate
used and a sensitivity analysis (both
required by paras 144–145 of IAS 19), but
also of the judgements made in
determining the discount rate. The IC
agenda decision observes that the
judgements would include details of how
the high quality corporate bond
population was chosen. This might be a
change in practice for some entities.
The IC’s discussions also addressed
whether discount rates reflect bond yields
in the relevant country or the relevant
currency. When IAS 19 was revised in
1998, the terms ‘country’ and ‘currency’
were considered interchangeable; it did
not anticipate the Eurozone and other
situations where several countries have a
common currency.
The IFRIC concluded in 2005 that IAS 19
could be interpreted as referring to a
regional currency market, such as the
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Eurozone. The IC and the IASB have now
decided to go a step further and amend
IAS 19 to clarify that it is the currency,
and not the country, that is considered
when determining whether or not there is
a deep market in high-quality corporate
bonds. An exposure draft is expected in
2014.
The amendment will confirm that as long
as there is a deep market in high-quality
corporate bonds denominated in Euros,
entities with benefits payable in Euros
should use those high-quality corporate
bond yields. This is in line with general
practice currently and we would not
expect this to change.
The amendment is not expected to
address the question of which
government bond rate(s) should be used
if there is no longer a deep market in
high-quality corporate bonds.
Am I affected?
Low interest rates and improving
longevity continue to increase pension
liabilities. The assumption-setting
process for many entities with significant
post-employment benefits is coming
under increasing scrutiny from regulators
and other users of accounts.
Entities reporting within the EU should
note that the European Securities and
Markets Authority (ESMA) have said that
its enforcement priorities for 2013 year
ends will include:
 the measurement and disclosure of
post-employment benefits
obligations; and
 disclosures related to significant
accounting policies, judgements and
estimates.
If you have questions on the application
of the proposals or require further
information, please speak to your regular
PwC contact.
The conclusions of the IC are relevant to
most entities with defined benefit plans.
This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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