20/8/2009
By Sophie Baker
Proposals for amending the discount rate for measuring employee benefits have been published for comment by the International Accounting Standards Board (IASB), following calls from stakeholders to address a problem exacerbated by the global financial crisis.
Accounting standard IAS19, which requires an individual to determine the rate used to discount employee benefits with reference to market yields on high quality corporate bonds, has been affected by the crisis' effect of widening the spread between yields on corporate bonds and government bonds. This has led to different results from entities with similar employee benefit obligations.
The IASB has therefore proposed to eliminate the requirement to use yields on government bonds, and instead ask that the yield be estimated on high quality corporate bonds. This, if adopted, would ensure that the comparability of financial statements is maintained across authorities, eliminating the condition of the high quality corporate bonds market.
'In view of the urgency of the issue and the limited scope of the proposals the IASB has set a shortened period for comments on the exposure draft,' said the IASB statement. 'The IASB intends to permit entities to adopt the amendments that arise from this exposure draft in their December 2009 financial statements.'
Lane Clark & Peacock (LCP) has commented on the proposed amendments, warning that companies will have to consider the impact of these potential changes, which could be in place as soon as the end of 2009. Colin Haines, partner in LCP's International Practice, said: "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 with large pension plans in countries where there isn't a deep corporate 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."
He added that the elimination of 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."
Meanwhile, consulting actuaries Punter Southall said the amendments would simply act as a temporary measure. Simon Banks, principal, said: "What the IASB is proposing is a sticking plaster to the current regime, designed to eliminate the discrepancies (exacerbated by current markets) between the way pension liabilities are measured in jurisdictions where there are deep corporate bond markets and those where there aren't. This should not affect disclosures for UK pension schemes, but will affect disclosures by multinationals for some of their overseas schemes. It should be noted, however, that most of the jurisdictions where UK multinationals are likely to have significant pension liabilities already have deep corporate bond markets and the aggregate affect is likely to be small.
"By applying this sticking plaster the IASB has given itself more time for its detailed review of IAS19 which is ongoing. It has gone out of its way to say that this change in no way implies that the outcome of their detailed review will be to continue to use corporate bond-based discount rates."
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