In April this year, Milliman Australia published its report 'Discount Rates for Australian Employee Benefit Liability Valuation'. The report was commissioned by the Group of 100 to examine whether Australia has a 'deep' market in high quality corporate bonds.
What did the Millman Australia report find?
Up to now, Australian preparers and auditors have generally
assumed that the Australian market for high quality corporate bonds
is not 'deep', and therefore both private and public sector
entities have discounted their obligations for defined benefit and
other long-term employee benefits obligations using rates
determined by reference to market yields on government bonds. The
findings of the Milliman Report, however, indicate that compared to
other countries with corporate bond markets with similar features,
the Australian market for corporate bonds is 'deep'.
Accordingly, consistent with the requirements in
AASB 119: Employee Benefits, for-profit and not-for-profit private sector and for-profit public sector entities should now be discounting their obligations for defined benefit and other long-term employee benefit obligations at a rate determined by reference to market yields on high quality corporate bonds. For not-for-profit public sector entities, the finding that the Australian market for corporate bonds is 'deep' does not alter their accounting for defined benefit and other long-term employee benefit obligations. Under AASB 119, such entities will continue to use a rate determined by reference to market yields on government bonds to discount their obligations for employee benefits.
Who is impacted?
The following entities applying AASB 119:
- for-profit private sector entities;
- not-for-profit private sector entities; and
- for-profit public sector entities.
What is impacted?
Obligations for long-term employee benefits, including:
- long service leave;
- profit-sharing and bonuses;
- deferred employee remuneration;
- annual leave classified as long-term obligations; and
- defined benefit obligations.
How will obligations for employee benefits be affected?
As discount rates derived from yields on high quality corporate bonds are generally greater than discount rates derived from yields on government bonds, shifting to a discount rate based on high quality corporate bond yields would be expected to, holding everything else constant, reduce the measured amounts of obligations for other long-term employee benefits up to the point they are extinguished. Accordingly, in the period of transition to high quality corporate bond yields, for-profit and not-for-profit private sector and for-profit public sector entities reporting under AASB 119 might expect to recognise smaller amounts in respect of their defined benefit and other long-term employee benefit obligations compared to what they would have otherwise recognised using government bond yields. Nevertheless, it is important to remember that the actual amount of any change in an entity's measured obligations for defined benefit and other long-term employee benefits as a consequence of a change in discount rate would be subject to the entity's particular circumstances. Moreover, any change in the discount rate applied to obligations for defined benefit and other long-term employee benefits will not change the amount or timing of associated cash flows and therefore does not alter the ultimate cost of the benefits, as demonstrated below.
Are there any other financial reporting implications?
The shift to discounting defined benefit and other long-term employee benefit obligations on the basis of high quality corporate bond yields represents a change in accounting estimate as defined in AASB 108: Accounting Policies, Changes in Accounting Estimates and Errors. Accordingly, subject to the change being material, an entity is required to, among other things:
- not adjust comparative figures for the change – changes in estimates are accounted for prospectively from the date of the change;
- disclose the nature and amount of the change in estimate in the current period; and
- only disclose the effects of a change in estimate in future periods when it is not impracticable to estimate that effect. When it is impracticable to estimate the future effect of the change in estimate, the entity is required to disclose that fact.
Impacted entities should also review their accounting policy note disclosures in respect to employee benefit obligations and, when applicable, amend any references to discount rates determined by reference to market yields on government bonds.
Where can I find guidance on applying an appropriate discount rate based on high quality corporate bonds?
To facilitate entities making the shift to discount rates based on high quality corporate bond yields, Milliman Australia will calculate a blended high quality corporate bond rate that incorporates both AA and AAA rated bonds on a quarterly basis. These rates will be published on the Milliman Australia (http://au.milliman.com) and Group of 100 (http://www.group100.com.au/) websites.
How much time do I have to make the necessary changes?
As the Milliman Report is now publicly available, for-profit and not-for-profit private sector and for-profit public sector entities preparing full year and interim financial statements at 30 June 2015 should be evaluating the impact of the change in discount rate on their defined benefit and other long-term employee benefit obligations now.
For further information on the matters discussed above, please contact your local Moore Stephens office or Moore Stephens Australia on the contact details below.
This publication is issued by Moore Stephens Australia Pty Limited ACN 062 181 846 (Moore Stephens Australia) exclusively for the general information of clients and staff of Moore Stephens Australia and the clients and staff of all affiliated independent accounting firms (and their related service entities) licensed to operate under the name Moore Stephens within Australia (Australian Member). The material contained in this publication is in the nature of general comment and information only and is not advice. The material should not be relied upon. Moore Stephens Australia, any Australian Member, any related entity of those persons, or any of their officers employees or representatives, will not be liable for any loss or damage arising out of or in connection with the material contained in this publication. Copyright © 2014 Moore Stephens Australia Pty Limited. All rights reserved.