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Under AASB 119 Employee Benefits, all for-profit entities and not-for-profit private sector entities are required to discount employee liabilities using the rate applicable to high quality corporate bonds. Where there is no deep market for those bonds, government bond rates are used. In Australia the accepted view has been that there is not a deep market for high quality corporate bonds and, accordingly government bond rates have been used to discount employee benefits such as long service leave liabilities and defined benefit obligations.
Actuarial firm Milliman were commissioned by the Group of 100 (G100) and the Actuaries Institute of Australia to analyse the corporate bond market in Australia. The results of this research support the view that there is a sufficiently deep corporate bond market in Australia.
What is the impact of this?
As a result of there being a deep market for corporate bonds in Australia, employee entitlements as at 30 June 2015 will be required to be discounted using corporate bond rates, rather than government bond rates. Given that corporate bond rates are higher than government bond rates, it is expected that long service leave liabilities and defined benefit obligations will reduce as a result of this change.
What rates should be used?
Given the complexity of developing a yield curve for high quality corporate bonds, the G100 has engaged Milliman to publish quarterly yield curves for entities to use. The first of these for 30 May 2015 has been published by Milliman and is available online.
How is the change accounted for?
The change in discount rate is a change in estimate in accordance with AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors. Therefore the change is accounted for prospectively. If the impact of the change is material, disclosure will be required of the nature and amount of the change.
Is this mandatory?
Yes. AASB 119 requires the use of a corporate bond rate where there is a deep market for such bonds.
Not-for-profit public sector entities
Not-for-profit public sector entities are not impacted by this change and will continue to apply the government bond rate, as required by AASB 119.