The yield curve for Saudi Arabia is an unsolved problem. Selection of the correct discount rate is central for IAS 19 compliance — and has implications for other standards like IFRS 17 and IFRS 9 that also require a term structure of interest rates. For Saudi End of Service Benefits (EOSB), even a 50 basis point difference can shift the Defined Benefit Obligation by 5-8%.
Key Takeaways: Discount Rates for Saudi EOSB Valuations
- Currency Match Required: IAS 19 paragraph 83 requires the discount rate to reflect the currency of the obligation — SAR for Saudi EOSB
- Common Errors: USD Treasury yields, USD + CDS spreads, single bond lookups, and FTSE maturity buckets are all flawed approaches
- Correct Source: Saudi government bonds/sukuks denominated in Saudi Riyals (SAR)
- Technical Complexity: The Saudi SAR bond market is thinly traded — proper yield curve construction using recognised techniques is essential
- Spot Rates Required: IAS 19 cash flow discounting technically requires a zero-coupon yield curve, not raw yield-to-maturity figures
Table of Contents
1. Why the Discount Rate Matters
The discount rate directly affects the present value of future EOSB payments. For a company with SAR 10 million in EOSB liability, a 100 basis point error in the discount rate could misstate the obligation by SAR 500,000 to SAR 800,000 — enough to be material for most entities.
This sensitivity makes discount rate selection critical for accurate actuarial valuation of EOSB under IAS 19. The challenge is that Saudi Arabia lacks an established benchmark curve that practitioners can simply reference.
2. What IAS 19 Actually Requires
IAS 19 paragraph 83 states:
“The rate used to discount post-employment benefit obligations (both funded and unfunded) shall be determined by reference to market yields at the end of the reporting period on high quality corporate bonds. The currency and term of the corporate bonds shall be consistent with the currency and estimated term of the post-employment benefit obligations.“
Two requirements emerge clearly:
- Currency consistency — The discount rate must reflect the currency of the obligation
- Term consistency — The rate should match the duration of the liability
For Saudi EOSB, the obligation is denominated in Saudi Riyals (SAR) under Saudi Labour Law. Therefore, the discount rate must be derived from SAR-denominated instruments.
Paragraph 83 also notes that where there is no deep market in high-quality corporate bonds, government bond yields should be used instead. Saudi Arabia falls into this category — there is no deep, liquid market for high-quality SAR corporate bonds with sufficient tenor coverage.
Note: IAS 19 specifies high-quality corporate bonds as the primary reference. In practice, most jurisdictions — including Saudi Arabia — lack sufficiently deep corporate bond markets, making government bonds the appropriate reference. This is consistent with the approach used for other IAS 19 requirements for Saudi EOSB.
3. Common Approaches (And Their Limitations)
The SAR government sukuk market exists, but it’s thin. On most days, fewer than 5 sukuks actually trade. This scarcity has led practitioners to improvise — with varying degrees of compliance.
Using USD Treasury Yields
⚠️ Fundamentally Incorrect: Using the US Treasury yield curve for Saudi EOSB valuations violates IAS 19’s currency consistency requirement.
This is the most common error. The reasoning usually goes: “The SAR is pegged to the USD, so it’s essentially the same.”
Why this fails:
- The SAR-USD peg doesn’t make SAR liabilities equivalent to USD liabilities
- A discount rate should reflect the economic environment of the obligation — Saudi Arabia’s fiscal position and inflation dynamics are entirely different from the US economy
- Currency peg is not economic equivalence
Using USD Treasuries + Saudi CDS Spread
⚠️ Appears Sophisticated, Still Flawed: This approach seems more rigorous but conflates different concepts.
The CDS market prices USD-denominated default risk. Adding a Saudi CDS spread to USD yields doesn’t produce a SAR discount rate — it produces an adjusted USD rate dressed up as something else.
Looking Up Single Bond Yields from Saudi Exchange
⚠️ Insufficient: A data point is not a yield curve.
Selecting one bond “near” your liability duration isn’t a discount rate methodology for IAS 19. Such a selection makes no consideration of trading volume or illiquidity — it could be just one bond traded that day with a stale or unrepresentative price.
Using FTSE Saudi Government Bond YTM Data
⚠️ Closer, But Not Complete: Maturity buckets require interpolation, and YTM ≠ spot rates.
FTSE provides yields by maturity bucket, which gets closer to what’s needed. But discrete buckets still require interpolation between them. More fundamentally, yield-to-maturity figures aren’t spot rates — and IAS 19’s cash flow discounting technically requires a zero-coupon curve. See our detailed methodology for why this distinction matters.
Using Whatever Rate the Auditor Suggests
⚠️ Independence Issue: When auditors provide the discount rate, they compromise their independence.
Auditors cannot objectively audit a figure they helped produce. Assumption selection belongs with the reporting entity and their valuation actuary, not the auditor.
Important: Some of the approaches above can serve as useful reference points or sanity checks — but none should be treated as the answer.
4. What’s Actually Needed
✓ IAS 19 Compliant: A yield curve constructed using recognised techniques, fitted to actual traded Saudi government instruments, with methodology that accounts for the market’s unique characteristics.
The Saudi SAR bond market has specific characteristics that require careful handling:
Market Characteristics:
| Challenge | Implication |
|---|---|
| Sparse trading | Fewer than 5 sukuks trade on most days |
| Concentration in certain maturities | Some tenors have better coverage than others |
| Days with minimal liquidity | Historical data may need to supplement current trades |
| YTM vs spot rates | Bootstrapping to zero-coupon rates is required |
What Proper Curve Construction Requires:
- Gather available data points — Identify SAR government bonds/sukuks with actual traded yields
- Assess data quality — Weight by trading volume; account for stale prices
- Bootstrap to spot rates — Convert yield-to-maturity to zero-coupon rates
- Apply curve-fitting techniques — Use recognised methods (e.g., Nelson-Siegel) to construct a smooth curve
- Handle data scarcity — Apply credibility-weighted smoothing to stabilise the curve on low-volume days
- Document methodology — Transparent assumptions that can withstand professional scrutiny
Numerica’s Approach: We have developed a framework for constructing a SAR yield curve, involving bootstrapping of traded sukuk yields, Nelson-Siegel model fitting, and credibility-weighted smoothing to handle the market’s thin trading characteristics.
The truth is that any approach will require judgement. But choosing a discount rate from a scientifically constructed and documented yield curve should be able to stand up to auditors’ scrutiny.
5. Practical Implications
What Companies Should Do
| Action Item | Priority | Responsible Team |
|---|---|---|
| Review current valuation methodology for IAS 19 compliance | High | Finance / Audit Committee |
| Confirm discount rate source with actuary — is it SAR-denominated? | High | Finance |
| Request documentation of yield curve construction methodology | Medium | Finance / External Auditors |
| Compare discount rate to prior periods for reasonableness | Medium | Finance |
Questions to Ask Your Actuary
- What data source are you using for the discount rate?
- Is the underlying instrument denominated in SAR?
- How are you constructing the yield curve from available data points?
- Are you using yield-to-maturity or zero-coupon spot rates?
- How do you handle days with limited trading activity?
If your actuary cannot clearly answer these questions, or if the answers reveal use of USD or other foreign currency instruments, the valuation methodology requires review.
6. Frequently Asked Questions
Why does IAS 19 require currency matching?
The discount rate represents the time value of money for the specific obligation being valued. An SAR liability will be settled in SAR, so the discount rate must reflect SAR interest rate conditions. Using a different currency’s rates — regardless of peg arrangements or perceived similarities — introduces a mismatch between the obligation and the rate used to value it.
What if SAR bond data is unreliable or unavailable for certain tenors?
This is precisely why proper curve construction matters. Actuarial techniques exist to interpolate between available data points, smooth over low-volume periods, and extrapolate beyond them. Limited data requires more sophisticated methodology, not a switch to a different currency’s instruments. Our methodology documentation explains how we handle these challenges.
Why can’t I just use the yield quoted on Saudi Exchange for a single bond?
A single bond yield is a data point, not a yield curve. It makes no consideration of trading volume, bid-ask spreads, or whether that bond is representative. IAS 19 requires discounting cash flows at rates appropriate to their timing — which requires a complete term structure, not a single observation.
What’s the difference between yield-to-maturity and spot rates?
Yield-to-maturity (YTM) is a single rate that equates a bond’s price to its future cash flows — but it assumes all coupons are reinvested at that same rate. Spot rates (zero-coupon rates) are the rates for specific maturities with no reinvestment assumption. IAS 19 requires discounting each cash flow at the rate appropriate to its timing, which technically requires spot rates. Converting YTM to spot rates through bootstrapping is a standard step in proper curve construction.
How often should the discount rate be updated?
IAS 19 requires the discount rate to reflect market yields “at the end of the reporting period.” For most entities, this means updating at each annual or interim reporting date. However, monitoring rate movements between periods helps anticipate the impact on reported liabilities. Our yield curve is updated regularly to support both period-end valuations and interim monitoring.
Related Resources
- Saudi Arabia Discount Rate Curve — Live curve and summary methodology
- Detailed Methodology Documentation — Technical explanation of curve construction
- Straight-Line Approach for IAS 19 Reporting of Saudi EOSB Plans — Understanding benefit accrual patterns
- Actuarial Valuation of EOSB Under IAS 19 in Saudi Arabia — Comprehensive guide to Saudi EOSB valuations
- IAS 19 Employee Benefits — IFRS Foundation — Official standard text
- Saudi Labour Law — Official EOSB regulations
Questions About EOSB Discount Rates?
Getting the discount rate right requires both understanding IAS 19 requirements and having access to proper Saudi bond market data. If you’re uncertain about your current methodology or need a valuation that will withstand audit scrutiny, our team has experience supporting organizations across the GCC with IAS 19 valuations.