EFRAG Research Project Discounting with Current Interest Rates

Introduction

Various Standards require to measure assets or liaiblities at the present value of the future cash inflows or outflows. Some of these Standards require to update the discount rate at each reporting date. Different concerns have been raised about the implications of the current level of negative and low interest rates in relation to discounting.

In the presence of negative rates, the present value of an asset or liability would exceed its ultimate recoverable or settlement amount. Some consider that this outcome is counterintuitive and may not provide relevant information. In the presence of rates that are close to zero, the impact of minor changes can result in very significant remeasurement. Some doubt that reporting these large remeasurements in profit or loss is helpful in depicting the entity's performance.

Moreover, there are inconsistencies across Standards about reporting the impact of updating the discount rates. IAS 19 Employee Benefits requires recognition of actuarial differences in Other Comprehensive Income, while IAS 37 Provisions, Contingent Liabilities and Contingent Assets requires reporting these changes in profit or loss.

What is the objective of the project?

The objective of the project is two fold. First, EFRAG will investigate whether discounting with a negative rate always results in relevant information. Secondly EFRAG will consider the presentation of changes in liabilities due to the reassessment of discount rates.

Current status

After tentatively agreeing the scope of the project, EFRAG discussed in January 2017 the first topic. 

EFRAG subsequently decided to co-fund an academic paper on the theory and practice of discounting in financial resporting. A link to the project is provided below.