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IPE special report May 2018

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IFRS rejects call for guidance on foreign-currency discounting

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The International Financial Reporting Interpretations Committee (IFRS IC) will not introduce new rules for discount rates relating to use of foreign currencies.

The IFRS IC tentatively concluded at a meeting this month that existing pensions accounting literature already provides sufficient basis for defined benefit plan sponsors to determine discount rates.

The decision means that the IFRS IC will not to add the issue to its standard-setting agenda. 

The decision affects sponsors that are currently applying International Accounting Standard 19, Employee Benefits (IAS 19), in countries that have adopted another country’s currency as its official currency.

Committee member Bruce Mackenzie said: “Each time we had to assess a discount rate in Africa, whatever the currency, we always managed to find a solution.

“So, I think what is proposed by the staff seems consistent with what we usually practiced in the past, even in [regions] where you sometimes don’t have a deep market in corporate bonds [or] even in government bonds.”

Interested parties have 60 days to comment on the decision.

Debate during a meeting on 14 March concerned a request from an entity based in Ecuador, which uses the US dollar as its official currency.

The submitter argued that that there was no deep market for US dollar-delimited high quality corporate bonds in Ecuador. It asked if it should look instead to other markets such as the US where those bonds are issued in order to calculate its discount rate.

Where there are no high-quality corporate bonds in a jurisdiction, IAS 19 requires entities to revert to government-issued bonds.

The submission also asked the committee to rule on whether it would be appropriate to fall back on yields on Ecuadorean government debt or instead use market yields on US dollar debt issued in another market or country.

The committee also said that an entity should apply “judgement to determine the appropriate population of high quality corporate bonds or government bonds to reference when determining the discount rate.”

In addition, the committee tentatively concluded that the “currency and term of the bonds must be consistent with the currency and estimated term of the post-employment benefit obligations.”

The IFRS IC has also noted that the discount rate did not reflect the expected return on plan assets.

Meanwhile, the International Accounting Standards Board (IASB) has concluded work on its research project into discount rates and said it would not seek public feedback on a discussion paper dealing with the topic.

In a paper presented to the board’s 21 March meeting, however, staff noted that the board “will be addressing project findings relating to existing requirements in its work on individual projects as appropriate.”

IASB staff presented a draft research paper to the board on 21 January last year. The paper provided a summary of discounting across the whole of International Financial Reporting Standards (IFRS).

Together with pensions accounting, discounting ranked as a priority for the board’s constituents during the board’s 2011 agenda consultation process, as well as during its latest consultation.

The two main outputs from the project, staff said during the 21 March meeting, had been to provide a summary of discounting under IFRS and also to compile a list of issues for staff to consider when developing accounting requirements that involve discounting.

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