more-arw search

Firms Using More Assumptions to Calculate Financial Liabilities, Says Survey

Firms are using an increasing number of inflation assumptions and discount rat

Firms are using an increasing number of inflation assumptions and discount rates when calculating liabilities, according to the results of the most recent FTSE 350 survey conducted by actuarial consulting firm Hyman Robertson.

Discount rates 

The number of different types of discount rates used by participants in the 2011 survey was significantly more than it was in 2010. A lot of the respondents made greater use of higher discount rates, which lowered the pension liabilities that were reported.

Discount rates are a crucial component involved in the measuring of liabilities, The Financial Times reports. When expressed in today's dollars, the value of liabilities will vary inversely with the discount rate. The higher the discount rate used, the lower the value of liabilities will be when expressed in today's dollars.

Only 68 percent of participants reported utilizing a discount rate that was within a 10-year time frame of the group of highly-rated bonds called the IBoxx 15-year plus AA Index, which was a sharp drop from the 92 percent that did this in 2010, according to the news source. Around one-third of participants reported using a discount rate more than 0.2 percent higher than the bond index.

Impact of lower discount rates 

Clive Fortes, Hyman Robertson's partner and head of corporate consulting, said that market participants will need to perform more in-depth analysis when evaluating company's assets and liabilities, according to Professional Pensions.

He stated that "companies continue to be optimistic about long-term future returns on equities notwithstanding falling bond yields and continuing concerns over the Eurozone," the media outlet reports.

"However, from 2013 companies will no longer be permitted to take advance credit for investment returns in assessing their profits. As a result, we expect that investors and analysts will strip out any allowance for equity returns in assessing companies' 2012 accounts," according to the news source.

Fortes attributed the wide range of discount rates to the significant credit spreads for AA-rated stocks and the sharp angle of the yield curve, the media outlet reports.

"Whilst the dispersion of AA yields continues, and the upward sloping yield curve remains, it is likely that there will continue to be a dispersion in the discount rates used for IAS19," he stated, according to the news source.

He added that "since AA bonds make up such a mixed bag, the market perception of what AA really means varies greatly, leading to a wider range of discount rates.