IFRS discount rate

CFA Level II
#1

In Schweser’s Quicksheet, for pension, it says IFRS discount rate = expected rate of return on plan assets.

I thought only GAAP uses expected return? Now I am confused.

I know when calcuating pension expense IFRS is supposed to use actual return and GAAP use expected. But I have seen conficting info here and there. Can someone lay it out?

Thanks so much in advance.

#2

I think the formula is wrong, but the interest rate cost for IFRS should be net pension liability * discount rate.

#3

Thanks. I understand that but I have a hard time believing Quicksheet is wrong given it’s a summary that so many people look at.

Anyone else? Thanks.

#4

Have you checked the errata?

#5

It’s a matter of semantics, nothing more.

IFRS uses the discount rate to compute the expected (smoothed) return on assets, but doesn’t call it “expected return on plan assets”; instead, they simply net that amount with the interest cost to get interest expense included in pension expense, and net it with the actual return on plan assets to get the actuarial gain/loss.

Whatever you call it, it’s the same as expected return on plan assets.

#6

Thanks S2000.

So let me get this straight.

When we calculate return on plan assets, we use discount rate for IFRS and expected rate for GAAP.

What you are saying is that the discount rate =/= expected rate , but it is still an expected rate of return? I am confused…

#7

Under IFRS, the rate used to compute the expected (smoothed) return on plan assets must be the same as the discount rate. Call that rate whatever you want (discount rate, expected return, Fred, whatever). Functionally, it’s an expected rate of return on plan assets.

Under US GAAP, the rate used to compute the expected return on plan assets needn’t be the same as the discount rate; they call that return the expected return on plan assets.

#8

Got it now! Really appreciate it.