AS 15 and IAS 19 Requirements

by R. Krishnaswamy on April 5, 2010

Para 78 AS15R [Accounting Standard 15 (Revised)] states that the rate used to discount post employment benefit obligations (both funded and unfunded) should be determined by reference to market yields at the balance sheet date on government bonds.  The currency and term of the government bonds should be consistent with the currency and estimated term of the post employment benefit obligations.

On the other, hand Para 78 of IAS 19 states that the rate used to discount post employment benefit obligations (both funded and unfunded) shall be determined by reference to market yields at balance sheet date on high quality corporate bonds subject to the following considerations:
In countries where there is no deep market in such high quality corporate bonds, the market yields (at the balance sheet date) on government bonds shall be used.
The currency and term of the corporate bonds or government bonds shall be consistent with the currency and term of the post-employment benefit obligations

Both AS15R and IAS 19 add the following corollaries to the choice of discount rate:

The discount rate reflects the time value of money but not the actuarial or investment risk
The discount rate does not reflect the enterprise specific credit risk borne by the enterprise’s creditors
The discount rate does not reflect the risk that future experience may differ from actuarial assumptions
The discount rate reflects the estimated timing of benefit payments.  In practice, this is often achieved by applying a single weighted average discount rate that reflects the estimated timings and amount of benefit payments and the currency in which the benefits are to be paid.

If there are no government bonds with a sufficiently long maturity to match the estimated maturity of all benefit payments, the enterprise can use current market rates of the appropriate term to discount shorter term payments and estimate the discount rate for longer maturities by extrapolating current market rates along the yield curve.

In August 2009, IASB proposed an amendment to IAS 19 whereby the discount rate should in all cases be based on market yields on high quality corporate bonds at the end of the reporting period .  According to IASB, the merits of this amendment are as follows:
The amendment will reduce the range of discount rates used and this would improve the comparability in financial statements across entities and through time for the same entity.
In jurisdictions that do not have a deep market in high quality corporate bonds, entities would no longer systematically report liabilities that are higher than equivalent obligations in other jurisdictions
Entities would no longer need to assess whether a particular corporate bond market is deep

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