Mercer | Discount rate for IFRS/US-GAAP valuations

Discount rate for IFRS/US-GAAP valuations


To assist companies in determining the discount rate, Mercer delivers monthly information on the discount rates for IFRS, US-GAAP and HGB (German Commercial Code) valuations of pension obligations. Furthermore, Mercer reports weekly on the development of the discount rates for IFRS and US-GAAP valuations during November and December of each year.

Discount rate for IFRS/US-GAAP valuations

To determine the discount rate recommendation Mercer uses its own approach, the ‘Mercer Yield Curve Approach’ (MYC). The MYC is being used for setting discount rates for valuations made for USA, UK, Canada, Eurozone and some other countries. According to this approach, Mercer creates a ‘Spot Rate Yield Curve’ based on bonds from the Thomson Reuter’s Datastream indexes (until 31.5.2015 from Bloomberg indexes) in the Euro area. Since the discount rate in accordance with IAS 19.78 is defined by the ‘time value of money’, which by definition does not incorporate any greater risk of default, Mercer consequently uses only those bonds, which have no interest rate-distorting options, like e.g. it would be the case with call or put options. Furthermore, the bonds with much higher or lower interest rates compared to the other bonds (statistical outliers) are also not considered. A detailed explanation of the method described above can be found here.

For the valuations according to international accounting standards (IFRS/US-GAAP/FRS), the discount rate should be determined according to the maturity of the liability based on "high quality corporate bonds". In the long-term average these rates were only around 0.5% points higher than the rates for (quasi safe) AAA rated government bonds. Therefore, the standard setters, auditors and actuaries typically used AA rated corporate bonds as ‘high quality corporate bonds’. E.g. the iBoxx corporate AA10+ is a commonly used benchmark index.

Due to the uncertainties in the financial markets, the spread between the yield on (quasi safe) AAA rated government bonds and the yield on AA rated corporate bonds had increased from earlier 0.5 percentage points up to about 2 percentage points in 2008. This results from the fact that the markets had yet equipped many AA rated bonds with a significant risk premium. In the meantime the spread has returned again nearly to the situation before the crisis of the financial markets.

The  relevant method used to determine the discount rate has a very strong impact.

The companies therefore have a certain  latitude in the choice of the discount rate (although the principles of continuity and consistency still must be followed).

Further information on the present uncertainties in the Eurozone (ECB‘s quantitative easing program, Brexit und Greek crisis) and the corresponding impact on yields of corporate bonds can be found here.

Our recommendation is based on durations of 10, 15 and 20 years. The discount rates for different durations can be determined by interpolating the values ​​from the table below. It should also be noted that the current low level of discount rates may result in higher durations than those in the previous years.




Basis: Until 31.05.2015 Bloomberg indexes, since 30.06.2015 Thomson Reuters Datastream indexes. Discount rates Mercer Yield Curve 2006–2014 rounded to 10 basis points. Smaller adjustments in the calculation as of 30.06.2015 and 30.11.2016 (description here).

The effects of changes in discount rates lead to so-called actuarial gains / losses. These must be taken into account in equity immediately according to the revised version of ASC 715 (US-GAAP) released in the end of September 2006 or according to the version of IAS 19 (revised 2011) released in June 2011 and applicable from 2013. In ASC 715, gains and losses lead may lead to increased (for losses) or reduced (for gains) expenses in the next year when using the so-called corridor approach and exceeding of the corridor.

The following interest rates can be derived from the MYC for different durations through an interpolation (as of: January 31st, 2018):


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