GLOBAL - The International Accounting Standards Board has issued the official draft of its proposal to eliminate the use of government bonds to determine discount rates.
At least one consultant said this could reduce pension deficits by up to a third.
Accounting rule IAS19 currently requires companies to use the value of high quality corporate bonds to calculate the rate used to discount employees benefits. In countries where there is no deep corporate bond market - like India, Turkey and South Africa, for example - plan sponsors must use the yield on government bonds instead.
The IASB is proposing to eliminate the use of the government bond yields, which has prevented schemes from benefiting from higher corporate bond yields.
The IASB said: "The global financial crisis has led to a widening of the spread between yields on corporate bonds and yields on government bonds. As a result, entities with similar employee benefit obligations may report them at very different amounts."
Lane Clark & Peacock partner Colin Haines said the new proposal creates an even playing field between schemes in the UK, US and the Euro-zone, whose deficits have decreased with the rise in corporate bond yields, and those in other countries.
Haines said: "We could see reported IAS19 pension liabilities for some plans reducing by as much as a third, or moving from deficit to surplus as a result of this technical change."
IAS19 is undergoing a transformation and the amendment to the source of the discount rate is only part of a wider package of changes expected for the accounting rule.
Among them would be forcing pension gains and losses to appear within the year on a company's profit and loss statement and the removal of the corridor option which is still widespread in continental Europe.
Punter Southall principal Simon Banks said the use of the corporate bond yields to determine the discount rate could also change depending on the result of the broader changes to IAS19.
He said: "By applying this sticking plaster the IASB has given itself more time for its detailed review of IAS19 which is ongoing. It has gone out of its way to say that this change in no way implies that the outcome of their detailed review will be to continue to use corporate bond-based discount rates."
The IASB is accepting comments on the discount rate proposal until September 30.
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