IASB Proposes Discount Rate Change For Measuring Employee Benefits

by Robin Pilgrim, LawandTax-News, London

24 August 2009

The International Accounting Standards Board (IASB) has published for public comment proposals to amend the discount rate for measuring employee benefits in response to a problem that the global financial crisis has made increasingly significant.

IAS 19 Employee Benefits requires the rate used to discount employee benefits to be determined with reference to market yields on high quality corporate bonds. However, when there is no deep market in corporate bonds, an entity is required to use market yields on government bonds instead. The global financial crisis has led to a widening of the spread between yields on corporate bonds and yields on government bonds. As a result, entities with similar employee benefit obligations may report them at very different amounts.

To address the issue expeditiously, the IASB proposes to eliminate the requirement to use yields on government bonds. Instead, entities would estimate the yield on high quality corporate bonds. This requires more judgement than using an observable government bond rate. However, the IASB regards consistency of objective as more important than minimising the use of judgement. If adopted, the amendments would ensure that the comparability of financial statements is maintained across jurisdictions, regardless of whether there is a deep market for high quality corporate bonds.

In view of the urgency of the issue and the limited scope of the proposals, the IASB has set a shortened period, that is until 30 September 2009, for comments on the exposure draft. The IASB intends to allow adoption of the amendments that arise from this exposure draft in December 2009 financial statements. The proposals are set out in the exposure draft Discount Rate for Employee Benefits (proposed amendments to IAS 19).

The accounting for post-employment benefits is an important aspect of financial reporting. Current accounting requirements have been criticized for failing to provide high quality, transparent information about post-employment benefit promises.

A comprehensive review of all aspects of post-employment benefits accounting will take many years because of the complexity of the issues involved. As a result the IASB decided to address in this project those matters that require the most urgent attention, with the objective of issuing an amended standard by 2011.

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