Comments from ACCA to the International Accounting Standards Board, September 2009. ACCA (the Association of Chartered Certified Accountants) is pleased to have this opportunity to comment on the exposure draft (ED) on the above subject, which proposes amendments to IAS19. The ED was considered by ACCA's Financial Reporting Committee and I am writing to give you their views.
Although we have consistently stressed the need to avoid piecemeal changes to accounting standards, we understand that the proposals in the ED are quite distinct from the longer term project being considered by the IASB on pension accounting. Given the significant impact that even slight changes in discount rates can have on an entity's financial statements, we believe that future considerations on what the most appropriate basis is for discount rates should remain a crucial part of that project.
As noted in paragraph BC7, these short term measures do not pre-empt those considerations, and are required as a result of the significant widening of the spread between yields on corporate bonds and yields on government bonds due to the global financial crisis.
We fully support the view that in all cases the discount rate should be based on market yields on high quality corporate bonds, and that if need be, this should be estimated based on the requirements of IAS39 for estimating the fair value of the bond.
Question 1 – Discount rate for employee benefits
Do you agree that the Board should eliminate the requirement to use government bond rates to determine the discount rate for employee benefit obligations when there is no deep market in high quality corporate bonds? Why or why not? If not, what do you suggest instead, and why?
We agree that the Board should eliminate the requirement to use government bond rates to determine the discount rate for employee obligations. Regardless of the extent of use of such rates, we believe it is not satisfactory to have such a fall back, which not only depends on a subjective assessment of whether a particular bond market is ‘deep', but clearly could result in quite divergent rates being used for similar underlying obligations.
We also agree that where there are no deep markets, an entity should estimate the yield of corporate bonds. This is consistent with other such estimates which would incorporate subjective assumptions, and is a more appropriate reflection of the discount rate than simply using the government bond rate.
Question 2 – Guidance on determining the discount rate for employee benefits
For guidance on determining the discount rate, do you agree that an entity should refer to the guidance in IAS 39 Financial Instruments: Recognition and Measurement for determining fair value?* Why or why not? If not, what do you suggest instead, and why?
We agree with the proposal to replace paragraph 81 in IAS19 with a cross reference to the guidance in IAS39 in order to estimate the yield on a bond. This should not prove overly burdensome, and the benefits of the more relevant information outweigh those costs.
Question 3 – Transition
The Board considered whether the change in the defined benefit liability (or asset) that arises from application of the proposed amendments should be recognised in retained earnings or as an actuarial gain or loss in the period of initial application (see paragraph BC10). Do you agree that an entity should:
(a) apply the proposed amendments prospectively from the beginning of the period in which it first applies the amendments?
(b) recognise gains or losses arising on the change in accounting policy directly in retained earnings?
Why or why not? If not, what do you suggest instead, and why?
Changes in discount rates can have a significant impact on the reported obligation liability for an entity. We therefore support the prospective application of these amendments. We also agree that any gains or losses arising from the change in accounting policy should be recognised directly in retained earnings.