Document ID: chunk:federal_register_of_legislation:F2023L00015:reg:21:p87
Version: federal_register_of_legislation:F2023L00015
Segment Type: reg
Provision Reference: reg 21 (pt 87/101)
Character Range: 271952–275055

into account any relevant projected investment earnings; and

          (b) the rate of projected investment returns assumed is typically above the time value of money rate applied to measure liabilities for incurred claims.

     Accordingly, public sector entities ordinarily recognise unexpired risk liabilities (onerous contract losses) due, in part, to the gap between the rates.

     BC287        The Boards also noted that, for many public sector entities, the liability for incurred claims is by far the largest liability and small changes in discount rates can create liability changes from period to period that create the largest expense or revenue item in the income statement. Based on consultation with stakeholders when undertaking this project, yields on government bonds that are typically used to determine risk-free rates had been at historical lows, and small changes in rates have been having a larger than usual impact.

     BC288        The Boards noted that, based on stakeholder outreach conducted in 2020-21, there is a widespread awareness that:

          (a) the gap between discount rates leads to up-front loss recognition;

          (b) changes in discount rates lead to volatility; and

          (c) some stakeholders find the up-front loss recognition and volatility potentially misleading.

     BC289        The Boards noted some stakeholders consider that long-run investment rates of return should be applied to discount cash flows in measuring liabilities for incurred claims, which may generally remove the up-front loss recognition and mitigate the volatility in liabilities for incurred claims.

     BC290        The Boards considered whether there might be a need for public sector-specific guidance or modifications in respect of the discount rate requirements in AASB 17/PBE IFRS 17 (such as in AASB 17/PBE IFRS 17.36 and 56) on the basis that:

          (a) for-profit private sector insurers typically have a profit 'buffer' that (in most cases) avoids the need to recognise an up-front loss relating to the impact of the gap between risk-free and investment rates; and

          (b) the gap between the risk-free and investment rates can be larger for public sector entities relative to their regulated private sector counterparts. This is because regulated private sector insurers typically hold investments with an overall lower risk/return profile than their public sector counterparts, which do not face the same regulatory disincentives to investing in higher risk/return asset classes.

Rates in other Standards

     BC291        The Boards noted that some Australian public sector entities have arrangements that give rise to claims settled over long periods and these arrangements are currently accounted for as provisions by applying AASB 137. They noted that discount rates required for measuring provisions reflect current market assessments of the time value of money and the risks specific to the liability.

     BC292        The Boards noted that, based on stakeholder outreach conducted in 2020-21, there are differing views on the