Auditors force repricing of IAS19 discount rate
UK - Corporate executives are being put under pressure by auditors to reprice their apparent pension liabilities to more realistic levels, in light of the huge shift in recent months in corporate bond yields.
Officials at Hymans Robertson say they know of cases where companies have been asked to lower the value of the AA-rated corporate bonds they choose as their spot price on IAS19 pensions accounting because auditors believe the current price of bonds is not reflective of the true value of a pension fund's assets.
Clive Fortes, head of corporate consulting at Hymans Robertson, noted a company can choose whichever "high-quality corporate bond" price and time period they wish when deciding how they price their liabilities under IAS19 rules, so he therefore believes the accounting measure provides little true comparison of pension liabilities and provisions.
That said, companies are required in their profit and loss reporting (P&L) to explain how they reached the discount rate applied to their pension liabilities and assets.
In this process, not only is there evidence of auditors pressuring to reduce the corporate bond valuations presented on balance sheets but Fortes expects it to continue while corporate bonds spreads remain so wide of government bonds.
"Some companies want to de-risk but they can't because of the impact of IAS19 on the P&L," said Fortes.
"Auditors are not happy with the credit spread, so they are pressuring companies to reduce the spread. We'll see the pressure from auditors to keep the spreads down."
He continued: "Is a corporate bond with a 200bp spread price a high quality asset? It feels more like equity risk, which is why auditors are pressuring. And trustee demands are different again because the IAS19 surpluses are not going to bear any relation to the cash calls of the trustees," he added.
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