Dec 2003 FAS87 discount rate

[Guest dsyrett]

Anyone care to comment on what Dec 2003 Fas 87 discount rates may be?

I am assuming that 6.25% (maybe lower) to 6.5% (maybe not any higher) may prove to be near the top of the bell curve.

[Guest DBtech]

I think the median discount rate will be about 6.25% for 12/31/03. In general, rates on corporate bonds are down 55 to 75 bps year over year, so it looks like a 50 bp decrease would be looked for by the auditing firms.

GM used 6.75% as of 12/31/02 and announced today they will be decreasing rate for this year's measurement. Announcement to be made tomorrow and this should be a bellweather.

[david rigby]

That sounds about right to me also. But there are many issues to consider, so the plan sponsor should be comfortable with whatever technique is used to derive/estimate a discount rate.

[AndyH]

Has anybody seen guidelines from the major auditing firms? We're expecting their maximum range to be 6%. That was the maximum 6/30/03 according to two of them. We actually had to revise one that was done at 6.25% 6/30 down to 6%.

[Guest merlin]

We've heard from KPMG. They're looking at a range of 5.5-6.25%

[AndyH]

Merlin, they are the ones who rejected 6.25% as of 6/30. Is the range you mentioned something being circulated nationally, or just one person's opinion?

[Guest merlin]

Andy, Moody's Aaa rate for 6/03 was 5.16% so adding 75 bps would bring it to 5.91%,rounded up to 6%. The Aaa rate for 12/03 was 5.63%. adding 50-75 bps and rounding brings you to about 6.25%. That's the best I can think of.

[Guest merlin]

Andy, it came in a conversation with the KPMG auditor for one of our clients.

[Mike Preston]

The SOA website has a link to Moody's which purports to show a December rate of 6.01%. That is 38 basis points higher than the Aaa rate you quoted. I think the SOA rates are Aa.

[Guest merlin]

Mike,

I got the12/03 Aaa rate from the "data" tab in Academy Alert 2004-PEB-1. The Aa rates only go up to October. The Aaa rate for 10/03 was 5.69, the Aa rate was 6.11, so you're probably right.

[david rigby]

At this link, http://www.federalreserve.gov/releases/h15/Current/, see the January 5 release. The 12/31/03 Aaa rate is 5.63%.

[Effen]

What I thought was simple is fast becoming confusing. I have always used the SOA site for these rates and they don't match anything said yet?

Moody's® Long-Term Corporate Bond Yield – Month End Close

(Click the link that says "Moody's Content Agreement"

This shows the 6/30/03 rate as 5.83% and the 12/31/03 rate as 6.01%

I think we need to be careful, when you say "6/03", does that mean 6/1 or 6/30? The Aa rates change daily.

[david rigby]

Yes, potential for confusion. The differences might be that some rates are for one day (such as the last business day of the month) and others are for the month (probably arithmetic average over all business days in that month). For example, in my link above, the article provides daily rates for 5 business days, and also (last column) for the month. The Aaa rate for 12/31/03 is 5.63%, but the rate for December 2003 is 5.62%. Careful labeling is helpful.

[Guest DBtech]

According to GM's 8K filing with the SEC yesterday, they are using a 6% discount rate for 2004, down from 6.75% in 2003, and a 9% LTRR for 2004. Remember ""As GM goes, so goes the nation."

http://ccbn.tenkwizard.com/cgi/image?repo=...=2513550&doc=15

[AndyH]

Anything new on this? We've yet to see any auditor guidelines for December.

[Guest Doug Goelz]

Andy and Merline,

The attached guidelines from KPMG may be of interest to you.

Evaluation_of_Discount_Rate.doc

[Mike Preston]

"Generally, we believe an assumed discount rate between 5.50% and 6.25% is appropriate for a December 31, 2003 measurement date, accompanied by a 50 basis point decrease in the discount rate from the previous year-end measurement date."

Seems to be the conclusion of the article.

[AndyH]

Terrific, Doug. Thanks!

[MGB]

Note the KPMG guidance is not new or current. This is their same annual guidance with a new title refering to 12/31/03.

PwC's internal guidance indicates a 6% expected. But, they wouldn't quibble with up to 6.25% if there is good substantiation (e.g., being able to create a bond portfolio that matches cash flows) and consistent application from year to year.

[Guest merlin]

Thank you, Doug.

[Guest flogger]

If you are working on a plan that is disclosing FAS numbers for the first time, then I believe you have to use rates that are most "current". However, the discount rate to use on an ongoing reporting plan must consider what the previous discount rates were used over the last several years. This rate should not "jump", but should trend in the proper direction--perhaps at a delta of 25bp, and certainly not more than 50bp. That is our approach.