The CFOs of companies and government agencies that have seen liabilities for employee benefits spike are working on a proposal to change accounting standards so alternatives to government bond rates can be used to calculate the value of their liabilities.
Demand for Australian government bonds from offshore investors has seen government bond yields fall sharply, increasing the present value of long-term liabilities such as pension schemes, long-service leave and workers’ compensation.
Under international accounting rules, companies can use the local corporate bond rate to discount future cash flows, but in the absence of a liquid corporate bond market in Australia they can use government bond rates. The default has been the commonwealth rate.
As the commonwealth government bond yields have plunged, several companies have either used a blend of the commonwealth and state government bond rates, or the state government bond rates alone to calculate their liability.
For Telstra this resulted in a $35 million decrease in its liability for long-service leave, according to its last full-year financial accounts.
Qantas Airways only used state government bond rates. But while its half-year results recorded a net $9 million decrease in provisions, its full-year results reported a net increase in provisions of $30 million.
The CFO peak body the Group of 100 has set up a working group including CFOs from Qantas, Telstra and Australia Post to come up with an “options paper" to present to the Australian Accounting Standards Board and the International Accounting Standards Board.
“We’re looking at some of the other options that could be used," said G100 chief executive officer Peter Meehan.
While private companies have been free to switch to state government rates, he says government bodies have to use the commonwealth rate.
The working group is looking to finalise proposals by the end of the year.
“We’re not saying that companies should use their cost of capital [as the discount rate] because there will not be comparability, but we will be going back to the AASB and the IASB and point out that there are other ways of determining what that discount rate should be," he says.
At present he says it is too early to say what options they would suggest.
The Australian Financial Review