carondelet hospital is evaluating a lease arrangement for its ambulance fleet 613246

Accounting for the effect of changes in the discount rate

A provision is required to be set up for an expected cash outflow of €100,000 (estimated at current prices), payable in three years’ time. The appropriate nominal discount rate is 7.5%, and inflation is estimated at 5%. At future prices the cash outflow will be €115,762 (€100,000 × 1.05³). The net present value of €115,762, discounted at 7.5%, is €93,184 (€115,762 × 1 ÷ (1.075)³).

At the end of Year 2, all assumptions remain valid, except it is determined that a current market assessment of the time value of money and the risks specific to the liability would require a decrease in the discount rate to 6.5%. Accordingly, at the end of Year 2, the revised net present value of €115,762, discounted at 6.5%, is €108,697 (€115,762 ÷ 1.065).

The movement in the provision would be reflected as follows: