Methodology for Risk-free Discount Rates and CPI Assumptions for Accounting Valuation Purposes (Original)

Page updated 6 Jul 2012
Published 7 Jul 2010

The purpose of this paper is to document the original methodology for determining risk-free discount rates and corresponding Consumer Price Index (CPI) assumptions for use in certain accounting valuations that are reported to the Crown for consolidation purposes.

This methodology should be read in conjunction with the May 2012 review of long-term assumptions. In the May 2012 review the bridging methodology has been refined.

The methodology is not intended to apply to the valuation of traded securities.

The Treasury publishes a table of the current discount rates and CPI assumptions at Risk-free Discount Rates and CPI Assumptions for Accounting Valuation Purposes.

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1 Why do we need a discount rate methodology? 1.1 What is the methodology for? 1.2 Why is the Treasury publishing discount rates now? 1.3 Who should use these discount rates and CPI assumptions? 1.4 Why are CPI assumptions for accounting valuations being published? 1.5 When and where will the discount rates and CPI assumptions be published? 1.6 Did the Treasury have help from external experts? 1.7 How did the Treasury approach the development of this methodology? 2 Summary of Proposed Methodology 2.1 Overall Framework 2.2 Proposed Methodology Steps 1 to 8 2.3 Proposed Parameters 2.4 Disclosures in Financial Statements 2.5 Ongoing Reviews Required 2.6 Auditor Confirmation 3 Short-Term Risk-Free Rates 3.1 Introduction 3.2 Summary 3.3 Analysis 3.4 Risk-Free Rates for Terms of Less than One Year 3.5 Market Data for Terms of More than One Year 3.6 Bank SWAPS compared to Government Stock 3.7 Market Adjustments 3.8 Illustrative Examples with Current Market Data 3.9 Outlook for the New Zealand Government Stock Market 4 Short-Term Inflation 4.1 Introduction 4.2 Summary 4.3 Analysis 4.4 Consensus Forecasts 4.5 The Treasury Forecasts 4.6 The Reserve Bank of New Zealand 4.7 Adjustments to CPI Forecasts 4.8 Results using an Example 5 Long-Term Real Risk-Free Discount Rates 5.1 Introduction 5.2 Summary 5.3 Analysis 5.4 Historical Rates 5.5 Index Linked Stock 5.6 Economic Theory 6 Long-Term Nominal Risk-Free Discount Rates 6.1 Introduction 6.2 Summary 6.3 Options for setting long-term rates 6.4 Historical Market Yields on Long-Term New Zealand Government Stock 6.5 International Observations 7 Long-Term Inflation 7.1 Introduction 7.2 Summary 7.3 Analysis 8 Bridging the short and long-term rates 8.1 Introduction 8.2 Summary 8.3 Analysis 8.4 Interpolation between Market and Long-Term Rates 9 Review of Accounting and Actuarial Standards and Other Literature 9.1 Introduction 9.2 Literature Hierarchy 9.3 Accounting Standards 9.4 Actuarial Standards 9.5 Technical Papers from International Bodies 9.6 Other New Zealand Technical Papers Appendix 1 Reliance and Limitations Appendix 2 Forward Rate Yield Curve Fitting Methodology Appendix 3 Sample Table of Rates	disc-rates-meth-jul10.pdf (298 KB) pp. 73

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