IASB speeds up IAS19 discount rate review (updated)
GLOBAL - The International Accounting Standards Board (IASB) has confirmed it wants to amend the source of the discount rate used for measuring post-retirement benefits, and has issued a shorter than usual timeframe on the consultation in the hope of signing off the change by the end of this year.
A statement released today by the IASB said its proposals concerning paragraphs 78 and 81 of IAS19 have been issued in response to comments from stakeholders who say the current system of measuring pensions liabilities against a corporate bonds-related discount rate may not be appropriate to all pension funds.
At the same time, the problem of trying to value pensions assets against government bonds has heightened apparent problems with valuations in recent months as the yields on corporate bonds and governments bonds had for a time widened but are now returning to lower levels, which in turn has lowered the valuation of underlying pension assets.
The actual change to the discount rate removes a requirement to use the market yields on government bonds as an appropriate discount rate when making these calculations, as certain countries do not have access to a deep corporate bonds market and cannot therefore accurately value a fund's assets.
Instead, firms will be allowed to "estimate" the corporate bonds yield so financial statements can be compared regardless of jurisdiction and the depth of its corporate bonds market.
The method adopted by the IASB until now had courted criticism as the gap between government and corporate bonds has meant two entities with similar profiles could appear to have very different employee benefits liabilities, largely because they could be reported completely differently.
The IASB had also hoped to agree the change last month at an earlier board meeting, however officials ran into trouble when finalising transitional arrangements so the final decision was postponed until earlier this month. (See earlier IPE story: IASB trips up in corridor)
The IASB said it wants to wrap up the consultation quickly given the limited scope of the proposals and allow firms to adopt the changes in their December 2009 financial statements.
The consultation - Discount Rate for Employee Benefits: proposed amendments to IAS19 - is therefore only open until 30 September.
Have Your Say: Colin Haines, partner in Lane Clark & Peacock's International Practice, commented:
"Higher corporate bond yields have led to generally reduced reported IAS19 pension liabilities for companies with large pension plans in the USA, UK and Euro-zone. However those companies who have pension plans in countries where there isn't a deep corporate-bond market such as Sweden, Norway, South Africa, India and many countries in Asia and South America have not been able to benefit. This is because IAS19 currently requires them to value pension liabilities using government bond yields which have not increased to the same extent.
"The change to IAS 19 eliminating the requirement to use yields on government bonds to determine discount rates removes this potential handicap faced by some companies valuing their pension accounting liabilities at December 2008 year-ends. For example, large Swedish multinationals can expect to benefit from this change, as well as any multinational with large pension plans outside the UK, Euro-zone and North America. We could see reported IAS19 pension liabilities for some plans reducing by as much as a third, or moving from deficit to surplus as a result of this technical change.
"As the IASB hopes to have changes in place in time for 2009 year-ends, multinationals with global pension plans will need to consider the impact of these potential changes. They will need to assess suitable methods to determine discount rates under the new rules. Companies will also need to consider how they will communicate these changes to shareholders. If reported pension liabilities in these countries go down, shareholders will need to understand why especially at a time when pension costs in most other countries are going up."