Posted by & filed under Financial Reporting.

18 March 2013

 

Mr Hans Hoogervorst
Chairman
International Accounting Standards Board
30 Cannon Street
London EC 4M 6XH
UNITED KINGDOM

Dear Mr Hoogervorst

Discount rates

The Group of 100 (G100) is an organization of chief financial officers from Australia’s largest business enterprises with the purpose of advancing Australia’s financial competitiveness.

The G100 believes that to achieve consistency in accounting practice and enhance comparability of financial statements it is important that the IASB address issues relating to the use of discount rates in accounting measurements.

Discount rates are required to be used in a broad range of accounting measurements including insurance liabilities (IFRS 4), rehabilitation costs and self-insurance liabilities (IAS 37), leases (IAS 17), employee benefits (IAS 19), asset impairments (IAS 39) and financial instruments (IAS 39) and (IFRS 9).

A source of uncertainty for preparers is that different discount rates are required to be used by different standards without the reasons for those differences being explained in the standards. For example:

  • the discount rate required by IAS 37 is a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the liability (para 47) which can be significantly different than the discount rate required for discounting pension obligations and other employee benefits as IAS 19 specifies that the discount rate reflects the time value of money and not actuarial or investment risk;
  • IAS 36 para 30 states that the time value of money is represented by the current market risk-free rate of interest but at para 32 requires uncertainty as to the timing of cash flows or the market’s assessment of risk in these assets to be dealt with as an adjustment to cash flows or the discount rate.

A further source of uncertainty for users of financial statements is that one entity’s interpretation of the ‘current market assessment of the time value of money’ or ‘risk free rate’ can be substantially different than that of another entity.

In the ‘Feedback Statement: Agenda Consultation 2011’ the IASB identified Discount Rates as a priority research project work on which would begin in due course. The G100 believes that this project should be included on the active work program as a matter of urgency in order to address concerns about inconsistency of approaches.

A further source of uncertainty for users is that one entity’s interpretation of the ‘current market assessment of the time value of money’ or ‘risk free rate’ can be substantially different from that of another entity.

In the ‘Feedback Statement: Agenda Consultation 2011’ the IASB identified Discount Rates as a priority research project, on which work would begin in due course. The G100 believes that this project should be included on the active work program as a matter of urgency in order to address concerns about inconsistency of approaches.

 

Yours sincerely
Group of 100 Inc

 

Terry Bowen
President


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