Cobham plc
Brook Road, Wimborne,
Dorset BH21 2BJ, England
T: +44 (0) 1202 882020
F: +44 (0) 1202 840523
25 September 2009
International Accounting Standards Board
30 Cannon Street
LONDON
EC4M 6XH
Dear Sir/Madam,
Re: Exposure Draft – Discount Rate for Employee Benefits
We welcome the invitation to comment on this Exposure Draft and write on behalf of Cobham plc, a
UK based FTSE 100 and S&P Europe 350 company. We operate globally in the Aerospace and Defence
sector and operate a number of defined benefit and money purchase pension schemes.
We recognise the challenges in determining an appropriate discount rate for employee benefits and
the significant impact on the Statement of Financial Position that can arise from inconsistency in the
assumptions made by different companies. In summary, we are therefore supportive of the IASB’s
proposal to eliminate the requirement to use government bond rates to determine the discount rate
when there is no deep market in high quality corporate bonds. We also agree with the assertion that
estimating the yield on a bond is essentially the same as estimating the fair value of the bond, and we
believe that currently one would gravitate towards the guidance contained in IAS 39 in the absence of
an appropriate market. However, specific cross reference in IAS 19 to this guidance would be helped
by an illustration of how an appropriate discount rate could be generated using this guidance.
We have also taken the opportunity to comment on the appropriateness of using corporate bonds to
determine a discount rate, particularly given the availability and increasing use of derivatives matched
to liabilities and the diversification of the duration of liabilities between open schemes and those that
have been closed to new members for some time.
Further details of our views are presented in the answers to the specific questions asked by the Board
covered below.
Please contact Stephen Morris or Paul Kemp if you need any further clarification in respect of these
comments.
Yours faithfully,
Paul Kemp FCMA
Group Director of Financial Control
paul.kemp@cobham.com
Registered Number: 30470 England
Registered Office: Brook Road, Wimborne, Dorset BH21, 2BJ, England
Stephen Morris ACA MSc (Econ)
Group Financial Accounting Manager
Stephen.morris@cobham.com
www.cobham.com
Question 1 – Discount rate for employee benefits
Do you agree that the Board should eliminate the requirement to use government bond rates to
determine the discount rate for employee benefit obligations when there is no deep market in high
quality corporate bonds? Why or why not? If not, what do you suggest instead, and why?
We agree.
Question 2 – Guidance on determining the discount rate for employee benefits
For guidance on determining the discount rate, do you agree that an entity should refer to the
guidance in IAS 39 Financial Instruments: Recognition and Measurement for determining fair value?
Why or why not? If not, what do you suggest instead, and why?
We agree with the assertion that estimating the yield on a bond is essentially the same as estimating
the fair value of the bond. In the absence of other guidance we believe that currently one would
gravitate towards the guidance contained in IAS 39 where there is not an appropriate market.
However, the guidance provided in AG69 – AG 82 of IAS 39 is complicated and may be less familiar to
preparers of accounts who do not participate in complex financial instruments. Therefore, it would be
helpful to provide additional guidance specific to the valuation of bond yields with an example which
would be beneficial to both preparers and users of the accounts.
Furthermore we would question the use of a high quality corporate bond rate as a default in all
circumstances. We believe that a discount rate should be determined with reference to the portfolio of
assets which will be used to settle the liabilities. For example, given the increased use of liability
matched derivatives to eliminate risk in certain employee benefit liabilities then those liabilities should
be discounted by the rate within that derivative. Another example would be a company resident in a
jurisdiction without a deep market in high quality corporate bonds, which may have an asset portfolio
which includes investments in leading financial markets in the world such that the discount rate would
be better matched to yields in those markets rather then their domestic economy. We also believe
that the yield rate used should be determined with reference to the expected duration of the liabilities.
Question 3 – Transition
The Board considered whether the change in the defined benefit liability (or asset) that arises from
application of the proposed amendments should be recognised in retained earnings or as an actuarial
gain or loss in the period of initial application (see paragraph BC10). Do you agree that an entity
should:
(a) apply the proposed amendments prospectively from the beginning of the period in which it first
applies the amendments?
(b) recognise gains or losses arising on the change in accounting policy directly in retained earnings?
Why or why not? If not, what do you suggest instead, and why?
We agree that it is appropriate to apply changes made under this amendment prospectively. If
changes to the liability are as a result of the application of a new accounting policy then this should be
reflected directly in reserves, consistent with other changes in accounting policies.
Registered Number: 30470 England
Registered Office: Brook Road, Wimborne, Dorset BH21, 2BJ, England
www.cobham.com