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FAS 87

FASB Requirements

by R. Krishnaswamy on April 5, 2010

Para 44 of FAS87 states that the assumed discount rates shall reflect the rates at which the pension benefits could be effectively settled.  FAS 87 recommends the following  approaches for estimating the discount rates
The rates  implicit in the current prices of annuity contracts that could be used to effect settlement of the obligation; (or)
The rates of return on high quality fixed income investments (double A rated bonds) currently available and expected to be available during the period to maturity of the pension benefits

If the second approach  is used for determining the assumed discount rates, then FAS87 (Para 44A) clarifies that these high quality debt instruments should be high quality zero coupon bonds whose maturity dates and amounts would be the same as the timing and amount of expected future benefit payments.

If coupon bearing bonds are used to determine discount rates, then these  discount rates must incorporate the expected reinvestment rates available in the future.

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