Deep-Market by IAS-19: A Unified Cross-Country Approach for Discount Rate Selection*

The discount rate reporting entities apply for future employee benefits obligations has a profound impact on their present value, both at the firm and at the country level. The IAS-19 accounting standard requires the existence of a ‘deep market’ in high-quality corporate bonds in order to use their yields as the discount rate, and in its absence, the often-lower government bond yields should be used. From a financial economics perspective, the term ‘deep market’ is vaguely defined in IAS-19, therefore we propose a dual approach. First, from the macro-economic perspective, we explore funding liquidity, and second, from the micro-economic perspective, we measure the illiquidity premium in high-quality corporate bonds. We argue that both aspects are essential because they are inter-connected. Our approach is tested empirically on a sample of 32 countries, with detailed analysis of the Israeli market as a case in point.