GLOBAL - The International Accounting Standards Board (IASB) has scrapped plans to widen the range of bonds which companies might use to calculate their discount rate under IAS19 to include government bonds, following polarised responses to a consultation.
The IASB released a fast-track consultation in August recommending an amendment be made to IAS19 which removes a requirement to use the market yields on government bonds as an appropriate discount rate where a jurisdiction lacks access to a suitably deep market in high-quality corporate bonds. (See earlier IPE story: IASB speeds up IAS19 discount rate review)
It is thought this change would have been beneficial to countries as Sweden and Norway, according to pensions consultancy firm Lane, Clark & Peacock, as it could have saved companies tens, if not hundreds, of millions of euros.
However, evidence from responses suggested companies in Latin America and Asia-Pacific in particular would be hindered further by the change, and documents posted by IASB staff stated "there are more practical problems in some jurisdictions than first envisaged", and all of the additional discussions and amendments required would then have meant the body would miss its December 2009 target for implementation.
"Entities in other parts of the world which have always used a government bond rate do not see the incremental benefit of comparability outweighing the cost of estimating an appropriate discount rate, especially if all neighbouring countries also use government bonds," said the IASB in its latest staff paper on discount rates for employee benefits.
"Many respondents also request that the fair value measurement guidance in IAS 39 Financial Instruments: Recognition and Measurement is supplemented by application guidance on how to apply IAS 39 in setting a discount rate or that IAS 19 include stand alone guidance without reference to IAS 39," it added.
One of the additional complications raised in this consultation was respondents could not agree whether the amendment should be seen as a change in accounting policy or a change in estimate, and whether it should therefore be shown in the actuarial gains and losses, or wthether it should be treated as retained earnings - a complication not envisaged by the IASB.
The IASB had hoped to finalise any amendments "in time for early adoption by entities with December 2009 year-ends", but members of an IASB committee reviewing IAS19 this week decided it was better to cancel the amendment.
"In paragraph 33 we recommend that the Board keep the existing requirement to refer to a government bond rate when there is no deep market in high quality corporate bonds, ie we recommend that the Board does not proceed with the project," said the committee.
The original exposure draft had suggested firms would instead be able to "apply the principles and approach in paragraphs AG69-AG82 of IAS 39 ... to estimate such rates by reference to yields on high quality corporate bonds denominated in the same currency and whose term is consistent with the currency and estimated term of the post-employment benefit obligations" - a move which consultants at the time said would act as a "sticking plaster" to an ongoing problem. (See earlier IPE story: Consultants see IAS19 sticking plaster as important first step)
Colin Haines, partner at LCP, has been following the IASB's progress and today said: "The IASB appears to have taken heed of the comments made by LCP and the many other respondents from around the world. The changes could have had a big impact in many countries, and it is essential that any amendment to IAS19 is workable around the world. As it happens, the proposed sticking plaster had a number of holes," added Haines.