The interest cost calculation under IAS 19 when discounting with a yield curve

Abstract

Some concerns have been raised in recent discussions on how to calculate the interest cost when measuring the defined benefit obligation (DBO) using a yield curve. This article presents the application of some noted concepts on the yield curve in reference to IAS 19.

The issue we investigate specifically concerns the rate or rates to be used when discounting expected liabilities (DBO calculation) and the resulting interest cost (IC) calculation criteria. 

We analyze three different approaches that are commonly used in actuarial practice.

These different methods do not produce significant effects on the amount of DBO, while they lead to annual IC values (and consequently actuarial gains/losses) that may be significantly different in relation to the performance of the yield curve.

In this paper, after having reviewed the basic concepts of using a yield curve to evaluate a liability, these concepts are applied to a tangible example in order to quantify the differences that occur in the use of the three approaches. We then show that only the first approach has the characteristics of a model consistent with the assumptions underlying the construction of the model itself.