GLOBAL – The International Financial Reporting Standards Interpretations Committee has rejected a concerted lobbying effort by leading European corporates to relax the discount-rate objective in International Accounting Standard 19 (IAS 19), Employee Benefits.
Had the bid proved successful, it could have allowed major corporates to discount their defined benefit (DB) pension liabilities with lower-quality corporate bond rates than is generally the case today.
Documents obtained by IPE show German energy concern E.ON and French IT and consultancy business Atos were at the heart of the bid to permit companies to determine a discount rate from a wider pool of corporate bonds than just AA or AAA-rated debt.
Alongside E.ON and Atos, 19 other unidentified European companies lobbied the committee's 16 July meeting to allow them to arrive at a discount rate using A-rated corporate debt alongside more highly rated bonds.
Together, in a submission to the committee dated 15 July, the 21 anonymous companies described themselves as the European Corporate Initiative.
The submission notes that: "European corporates started to discuss pension discount rate issues as of autumn 2011."
Neither E.ON nor Atos has responded to IPE's request for a statement on their involvement in the lobbying initiative.
The IASB has also declined to identify the 19 other lobbyists.
Among their key messages to the committee, the 21 corporates argue that quality is a relative measure, and its notion is dynamic and changes over time.
They claim the notion of a "high-quality corporate bond" (HQCB) should not be directly or indirectly linked to a narrow absolute credit rating like AA.
And they say the universe from which plan sponsors derive their discount rate should be large and stable enough to derive discount rates consistently going forward.
The committee's decision is set out in what the committee refers to as a tentative agenda rejection notice. The committee published the notice on 26 July in its official journal, IFRIC Update.
The tentative rejection notice notes that developing either guidance on the topic or amending IAS 19 "would be too broad for [IFRS IC] to address in an efficient manner".
"Consequently," it adds, "the Interpretations Committee [decided] not to add this issue to its agenda."
Prompting the decision was an October 2012 submission to the IFRS IC from Liesel Knorr, chairman of the German national standard setter, the DRSC, in which she wrote:
"In our jurisdiction and according to the prevalent opinion, listed corporate bonds are considered to be HQCB if they receive one of the two highest ratings given by a recognised ratings agency."
The DRSC intervention also notes the impact of the so-called sovereign ceiling, which has led to a situation where "the bonds of EDF were downgraded from AA to A", when French sovereign debt was cut from AAA to AA.
In separate correspondence with the IFRS IC, the Norwegian national standard setter explained its concerns about the requirement in paragraph 83 of IAS 19 to discount a DB liability with a government bond rate in the absence of a suitable pool of HQCBs.
"In countries where there is no deep market in such bonds, the market yield on government bonds shall be used," it said.
"There is no reference to a deep market for government bonds. The data … shows that the two methods, [which] are supposed to provide an expression of the time value of money, result in significantly different rates."
The Norwegians observe that, although some countries, such as the US, have experienced low interest rates, others such as Denmark and Switzerland enjoy negative interest rates on long-term government debt.
And within the euro-zone, the letter's author notes the widening negative spread of euro corporate bonds to Spanish Treasuries, as opposed to the slight move into positive territory of euro corporate bonds to German Treasuries.
The International Financial Reporting Standards Interpretations Committee first considered discounting a DB pension liability at its November 2012 meeting.
In its official journal, IFRIC Update, the committee noted "IAS 19 does not specify how to determine the market yields on HQC bonds, and in particular what grade of bonds should be designated as high quality.
"The Interpretations Committee considers that an entity shall apply judgement in determining what the current market yields on HQC bonds are, taking into account the guidance in paragraphs 84 and 85 of IAS 19 (2011)."
At a follow-up meeting in January, the committee instructed staff to take soundings from the IASB.
Committee staff reported in March that a majority of board members agreed that "the discount rate reflects the time value of money but not the actuarial or investment risk.”
The board also concluded: “Furthermore, the discount rate does not reflect the entity-specific credit risk borne by the entity's creditors, nor does it reflect the risk that future experience may differ from actuarial assumptions."
Finally, in May, the committee rejected a staff proposal to amend IAS 19 in order to remove paragraph 83, as well as clarify the discount rate objective under the revised standard.
Specifically, the committee's staff proposed that the discount rate objective reflects the time value of money, "at most very low credit risk", and the currency and estimated term of the post-employment benefit obligation.
The committee's July revisiting of the topic, together with the subsequent tentative agenda rejection notice, all but draws a line under the committee's efforts to move forward with either that or any other amendment to IAS 19.
Under the committee's due process, interested parties have at least 60 days from the publication of the July edition of IFRIC Update to make their views known to the committee.
The IFRS IC will revisit its tentative rejection wording at a follow-up meeting – most likely in November.
If the committee sticks with its refusal to add the item to its agenda, it will publish a confirmation notice in IFRIC Update.