AASB 119 Employee Benefits requires that the rate used by for-pro t entities and not-for-pro t private sector entities to discount long-term employee bene t liabilities (such as long service leave, annual leave classified as long-term and de ned bene ts obligations) shall be determined by reference to market yields at the end of the reporting period on high quality corporate bonds. Where there is no ‘deep market’ for such bonds, AASB 119 requires that market yields on government bonds must be used to discount those liabilities. Accounting standards do not provide a definition of a deep market.
When Australia adopted AASB 119 in 2005, the Australian Accounting Standards Board’s (AASB) stated view was that Australia did not have a sufficiently active and liquid market for high quality corporate bonds and required the use of government bond rates. Ever since, the collective practice of the Australian accounting profession has been that market yields on government bonds should be used to discount long-term employee entitlements.
What’s changed
Recently, the Group of 100 commissioned Milliman Australia to assess whether a deep market for high quality corporate bonds exists in Australia. As detailed in their April 2015 report, in Milliman Australia’s opinion the Australian high quality corporate bond market is sufficiently deep to satisfy the requirements in AASB 119.
We are aware that the some accounting firms have publicly supported the Group of 100 and Milliman's findings and have reported that their for-profit clients should change their current practice and adopt a discount rate reflecting the yields on high quality corporate bonds for their 30 June 2015 financial reporting.
However, we are also aware of opposing views in the market and some participants do not believe that the Milliman report contains compelling evidence to support a change from the use of government bond rates. The Australian Securities and Investments Commission (ASIC) has not publicly commented on the Milliman report and, from our discussions, is unlikely to do so. Also, at this time, the AASB has not publicly stated whether they concur with Milliman’s findings.
It should be noted that not-for-profit public sector entities are still required by AASB 119.Aus83.1 to use government bond rates for discounting employee bene t liabilities and will be unaffected by this issue.
What this means for your organisation
Clients should consider whether, in their opinion, there is sufficient evidence to satisfy themselves that Australia has a deep market in high quality corporate bonds. If so,
i. AASB 119 will require the entity to use yields on high quality corporate bonds to calculate its long-term employee bene ts obligations, affecting calculations of most annual leave, long service leave and defined benefit liabilities. Milliman has developed, and will now regularly publish, periodic yield curves that will be available for use in valuing these liabilities. Entities are not obliged to use the Milliman rates and alternative rates may be used if they are appropriately derived.
ii. the entity’s stated accounting policies must be amended to reflect the new measurement basis; and
iii. the change in measurement basis will be accounted for prospectively and, if material, disclosed as a change in accounting estimate in accordance with AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors.
Conclusion
A view on whether Australia has a ‘deep market’ in high quality corporate bonds is largely subjective and a matter of judgement. Entities will need to form their own view based on available evidence and should document their rationale if they change their accounting estimate.
We do not believe that compelling evidence currently exists to require entities to change their current practice of using yields on government bonds to measure their employee entitlement obligations in their 30 June 2015 financial statements. Nevertheless, over the coming months we will continue to undertake outreach activities and monitor emerging practice.
We encourage entities that have significant employee entitlement obligations that may be affected by this matter to engage with your Nexia Advisor to discuss the implications ahead of the 30 June reporting season.
