The discount rate

Learning objectives

• Identify the reference for the discount rate and the date at which it is determined.L2
• Calculate the effect of a change in the discount rate on the present value of a benefit from the data of a case.L2

Normative references

• IAS 19 §83The rate used to discount post-employment benefit obligations (both funded and unfunded) is determined by reference to market yields at the end of the reporting period on high quality corporate bonds; in currencies for which there is no deep market in such bonds, the market yields on government bonds denominated in that currency are used; the currency and term of the bonds used are consistent with those of the benefit obligations. The Committee (November 2013) noted, as explanatory material, that paras. 84 and 85 should also be read and that high quality refers to an absolute level of credit quality.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

3 questions

• The plan of Ismar SA must pay {amount} in {years} to a cohort of members (benefit attributed to services rendered, case data). The entity has selected a discount rate of {rate_initial}, based on the market yield on high-quality corporate bonds at the reporting date (case data). An analyst simulates a rate of {rate_new}. Calculate the present value at the initial rate, at the new rate, then the decrease in the cohort's obligation.L2
• A trainee justifies the discount rate selected for the obligation of a defined benefit plan of Mirel SA at the reporting date. Which of his justifications is wrong?L2
• At the reporting date, the finance director of Nolane SA proposes to use for the pension obligation a rate of 5.2%, the yield on A-rated corporate bonds, on the grounds that they are more liquid. AA- and AAA-rated corporate bonds yield 4.3% at the reporting date. In its documented analysis, Nolane judges that only AA and AAA ratings meet the notion of high quality (entity judgement adopted for the case). Write a note that concludes on the rate to use, distinguishing rule, case facts, professional judgement and conclusion.L2