IAS 37 explicitly prescribes that :
a. The amount of the provision is the present value of the expenditure expected to be required to settle the obligation;
b. The discount rate applied is a pretax rate that reflects current market assessments of the time value of money and the risks specific to the liability; and
c. The discount rate should not reflect risks for which future cash flow estimates have been adjusted.
I wonder why the discount rate should "reflects current market assessments of the time value of money and the risks specific to the liability"
This include two term:
- Time value of money => I guest this include inflation rate and interest income to get fund for settlement in the future. => discount rate reflect (inflation rate + minimum interest rate to funding)
- Risk specific to the liability => I can not come up with any idea here.
Please help me understand this issue. Thank you very much.
