Discount rate and IAS 17: Difference between pages

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1.  
International Accounting Standard 17, dealing with leases.


In short-term financial markets, 'discount rate' means the quoted market rate for traded instruments quoted at a discount.  
IAS 17 requires finance lease liabilities to be accounted for 'on balance sheet'.


The market discount rate is quoted based on a percentage of the ''maturity amount''.  
It also requires the appropriate allocation of the total lease instalments between finance charges and reduction of the outstanding lease liability.




<span style="color:#4B0082">'''Example 1: Discount rate calculation'''</span>
Under IAS 17 the total finance charge should be spread in such a way as to produce a constant periodic rate of interest on the remaining balance of the liability.


The maturity amount for an investment is £10m.
However, IAS 17 also allows for some form of approximation to be used to simplify the calculation.


The gain for the single period from the start to the final maturity is £2m.


The periodic discount rate (d) is:
Fully accurate calculation bases for spreading the total finance charge include the Actuarial method.


(d) = Gain / End amount
The Sum of the digits method is simpler to apply, and will normally produce a close approximation.


= 2 / 10


= '''20%'''
'''Future developments'''


Differences in accounting standards can lead to significant non-comparability. 


In the US the market discount rate is sometimes known as the ''discount yield''.
A joint IASB-FASB project to improve and align accounting for leases led to the issue of [[IFRS 16]] in early 2016, with mandatory effect from 2019.


This is different from a [[yield]] or interest rate, which is conventionally quoted based on a percentage of the ''starting amount''.
<span style="color:#4B0082">'''Example 2: Yield calculation'''</span>
The starting amount for an investment is £8m.
The gain for the single period from the start to the final maturity is £2m.
The periodic yield (r) is:
(r) = Gain / Start amount
= 2 / 8
= '''25%'''
Notice that the discount rate and the yield calculated above both relate to exactly the same deal.
£8m is invested now, and £10m is repaid at the end of one period.
The discount rate of 20% and the yield of 25% both summarise the same deal, using different conventional bases.
2.
The term 'discount rate' is used in certain other contexts as a synonym the the cost of capital.
In these contexts, discount rate means the yield used to calculate [[discount factor]]s and present values.
3.
In the field of pensions, discount rate means the rate used to discount future liabilities of a Defined benefit pension scheme in order to calculate the present value of the liabilities, often for the purpose of comparing them with the market value of the scheme’s assets. 
Historically it was common to use the blended rate of investment return expected on the actual assets in the scheme, but typically now a market rate is used, such as the government bond or AA corporate bond yield for a fixed income security with a similar duration to that of the underlying liabilities.
4.
In US central banking, the term 'discount rate' means the interest rate that member banks pay the Federal Reserve when the banks use securities as collateral.  The discount rate acts as a benchmark for interest rates issued. 
Other central banks also have similar discount rates.




== See also ==
== See also ==
* [[CertFMM]]
* [[Actuarial method]]
* [[Cost of capital]]
* [[Finance charge]]
* [[Discount]]
* [[Finance lease]]
* [[Discount basis]]
* [[International Financial Reporting Standards]]
* [[Discount instruments]]
* [[Off-balance sheet finance]]
* [[Discounted cash flow]]
* [[Operating lease]]
* [[Interest rate]]
* [[SSAP 21]]
* [[Monetary policy]]
* [[Sum of the digits]]
* [[Nominal annual discount rate]]
* [[IFRS 16]]
* [[Periodic discount rate]]
* [[Periodic rate]]
* [[Yield]]
 
 
===Other links===
[http://www.treasurers.org/node/8837 Students: Triumph with timelines, The Treasurer, March 2013]


[[Category:Corporate_finance]]
[[Category:Accounting_and_Reporting]]

Revision as of 22:04, 13 January 2016

International Accounting Standard 17, dealing with leases.

IAS 17 requires finance lease liabilities to be accounted for 'on balance sheet'.

It also requires the appropriate allocation of the total lease instalments between finance charges and reduction of the outstanding lease liability.


Under IAS 17 the total finance charge should be spread in such a way as to produce a constant periodic rate of interest on the remaining balance of the liability.

However, IAS 17 also allows for some form of approximation to be used to simplify the calculation.


Fully accurate calculation bases for spreading the total finance charge include the Actuarial method.

The Sum of the digits method is simpler to apply, and will normally produce a close approximation.


Future developments

Differences in accounting standards can lead to significant non-comparability.

A joint IASB-FASB project to improve and align accounting for leases led to the issue of IFRS 16 in early 2016, with mandatory effect from 2019.


See also

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