IN FOCUS
IN FOCUS 

INTEREST RATES CONTINUE DECLINE

Interest rates continue to decline. Based on the reference rates published by the Philippine Dealing Exchange (PDEx) System, As of November 30, 2010, interest rates are lower by around 200 basis points (2%) as compared to the 2009 yearend rates.

This means long-term liabilities such as defined benefit retirement program obligations which are discounted using prevailing interest rates will be significantly higher, assuming all other assumptions remain the same (employee turnover, salary increase rate, etc.). A 1% decrease in the interest/discount rate could result to 10% - 20% increase in the defined benefit obligation. For companies comlpying with PAS 19 and recognizing actuarial gains or losses immediately either in profit and loss (P&L) or in other comprehensive income (OCI), the effect would be very significant. For those using the corridor approach,  the increase in cost would be felt in the succeeding year and though not as abrupt, it is expected to be sginificant.

For companies under the PFRS for SMEs, cost impact would be immediate as it does not allow cost deferrals.

With the expected significant effect on the defined benefit obligation and related items for disclosure, auditors may require not permit using roll-forward figures, if ever they have done so in previous reporting reporting periods. In other words, a full actuarial valuation would be needed. 

To manage the cost impact, the salary increase assumption as well as employee turnover assumption should be revalidated.