What companies listed on the S&P/TSX Index do in regard to the accounting standards applicable to employee future benefitsLinkedIn
There, in black and white
Bulletin NB Vol. 9 N. 14, December 2006
Several companies in the private sector will soon finalize their budgets for the upcoming fiscal year and will be preparing their financial statements for the fiscal year that is drawing to a close. Among the disclosure notes that should be prepared for these financial statements is one which pertains to costs for defined benefit (DB) pension plans and group insurance plans offered to retirees (other post-employment benefits).
The required assumptions to determine the accrued benefit obligation and the cost must be established by the management of the company. To help companies select these assumptions, we have analyzed the annual reports of 29 Quebec-based companies listed on the S&P/TSX Index whose fiscal year ended between September 30, 2005 and March 31, 2006. All of these companies sponsored at least one DB pension plan and 23 of them offered at least one group insurance plan to their retired employees.
Our study is divided into three sections. The first section presents the assumptions used in percentile format. The charts present a comparison of the assumptions used for fiscal years ending in 2005 (between September 30, 2005 and March 31, 2006) and in 2004 (between September 30, 2004 and March 31, 2005). The second section summarizes the results of these charts along with additional data analysis. The third and final section presents our comments with respect to measures which would potentially affect future results.
Please note that this is the second year for this study. We therefore invite you to consult our Bulletin no. 16, vol. 8 to see the results, conclusions and comments of last year’s study. Please note, however, since the companies listed on the S&P/TSX change regularly with respect to predetermined criteria, the group of companies in this year’s study differ from those of last year’s study. This year’s results for year 2004 may then be different than last year’s results for year 2004.
1.Selection of assumptions
The following charts present the survey results of the key economic assumptions used for DB pension plans and other post-employment benefits in percentile format.
Approximately one quarter of the surveyed companies at the end of 2005 used a measurement date that differed from their fiscal year-end date. They used, as permitted by Chapter 3461 of the CICA Handbook, a measurement date somewhere within a three-month period preceding the end of the fiscal year date. This provision is used, in particular, by companies who wish to give themselves more time to prepare the disclosure notes in their financial statements.
In the United States, the same provisions with respect to the measurement date exist in the FAS. However, the adoption of the new FAS 158 in September 2006 will abolish this provision for fiscal years ending after December 15, 2008. In light of the FAS 158, the CICA, in the first quarter of 2007, will issue an exposure draft inspired by the FAS 158 and anticipate application for fiscal years ending as of December 31, 2007.
Eventually, Canadian companies will more than likely be required to issue their financial statements using a measurement date that falls on their fiscal year-end date.
Financial position vs. accrued benefit liability
For all of the surveyed companies, with the exception of only one, the financial position of pension plans at the end of 2005 was in deficit. However, for approximately 60% of them, an accrued benefit asset instead of an accrued benefit liability was presented in their financial statements. For the other companies, the accrued benefit liability was inferior to the deficit at the end of 2005. The difference is a result of the significant accumulated actuarial losses (losses represented approximately 20% of the accrued benefit liability at the end of 2005), which will be, in part (only the portion exceeding the 10% corridor), recognized sometime over the next 15 years or so.
The CICA propose a convergence of the Canadian standards towards the International standards by 2011. Similarly to the International standards, FAS 158 and possibly the exposure draft to be issued by the CICA in the first quarter of 2007, will force companies to recognize, in their financial statements, a larger portion of the accumulated actuarial losses. This will significantly deteriorate the financial statements of many Canadian companies over the next few years.
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