Australia Discount rate in make good provision

[Tania]

Hi there,

for a make good provision which discount rate would you use and why? Work didn’t want me to use wacc but instead to change to a more appropriate discount rate.

Many thanks in advance for your input!

 

[simply_slmn]

As per AASB 137, where the time value of money is material, the provision is discounted to reflect the present value of the estimated expenditures (using a pre-tax rate, such as the government bond rate).

Using WACC as a discount rate may not be appropriate for the provision.

A more appropriate rate would be risk-free rate (government bond rate) taken into account the risk adjusted cash flow. Alternatively, risk adjusted discount rate along with actual expected cash flow can be taken for the purpose of discounting.

Hope this helps!

 

[Tania]

Thanks simply_slmn
I tend to go with only the government bond rate. Reason being that the asset is fully depreciated and very tied up to government. I don’t know what risk I could adjust it for…

 

[simply_slmn]

You may simply skip adjusting the cash flow then. Just discount the cash flow with applicable government bond rate.