ACCOUNTING STANDARDS APPLICABLE TO EMPLOYEE FUTURE BENEFITS: WHAT QUEBEC-BASED COMPANIES LISTED ON THE S&P/TSX INDEX DO?LinkedIn
There, in black and white
NB Bulletin Vol. 10 N. 14, November 2007
Several private sector companies will soon be finalizing their budgets for the upcoming fiscal year and preparing their financial statements for the current fiscal year. Included among the accompanying notes that should be prepared for these financial statements are those pertaining to costs for defined benefit (DB) pension plans and group insurance plans offered to retirees (other post-employment benefits).
The assumptions required to determine the accrued benefit obligation and the cost must be established by the company's management. To help companies select these assumptions, we have analyzed the annual reports of 25 Quebec-based companies listed on the S&P/TSX Index whose fiscal year ended between September 30, 2006 and March 31, 2007. All of these companies sponsored at least one DB pension plan and 19 of them offered at least one group insurance plan to their retired employees.
Our analysis is divided into three sections. The first section presents the assumptions used by the companies included in our analysis in percentile format. The charts present a comparison of the assumptions used for fiscal years ending in 2006 (between September 30, 2006 and March 31, 2007) and in 2005 (between September 30, 2005 and March 31, 2006). The second section summarizes the findings from these charts and additional results that could be obtained only through data analysis. The third and final section presents our comments with respect to some measures that could potentially impact future results.
Please note that this is the third year that we have conducted this analysis. We therefore invite you to consult Bulletin No. 14, Vol. 9, to review last year's results, findings and comments. However, given that the composition of the S&P/TSX Index varies regularly based on predefined criteria, the group of companies analyzed this year differs from that analyzed last year. The results presented on a comparable basis for 2005 may also differ from those presented last year.
1. Selection of assumptions
The following charts present the analysis results, in percentile format, for the key economic assumptions used for DB pension plans and other post-employment benefits
Exposure draft withdrawn
At the end of 2006, around one third of the companies analyzed were using a measurement date different than the fiscal year end date. As permitted under Section 3461 of the CICA Handbook, they were using a measurement date within three months preceding the fiscal year end. Among other things, this provision is used by companies wishing to allocate more time to the preparation of notes to financial statements.
The same provisions exist in the United States under FAS standards. However, the adoption of FAS 158 in September 2006 abolished this provision for fiscal years ending after December 15, 2008. As a result of this initiative, at the end of March 2007, the CICA issued an exposure draft modeled after FAS 158 and prescribing the application of provisions for all fiscal years ending on or after December 31, 2008.
The exposure draft was, however, withdrawn in August 2007. As a result, Canadian companies are not forced to disclose their financial statements on a measurement date corresponding to their fiscal year end date.
Funded status vs. accrued benefit liability
Pension plans for around 90% of the companies analyzed were in a deficit position at the end of 2006. However, an accrued benefit asset as opposed to an accrued benefit liability was reported on the balance sheet for about 70% of these companies. For the remaining companies, the accrued benefit liability was lower than the deficit at the end of 2006. The difference is due in large part to the substantial actuarial losses accumulated (representing around 15% of the accrued benefit obligations at the end of 2006) that will be recognized in part (only the portion exceeding the 10% corridor) over the next 15 years or so.
In the United States, the adoption of FAS 158 requires companies to recognize, for fiscal years ending after December 15, 2006, the funded status of pension plans and other retirement benefits in their balance sheet. The exposure draft issued by the CICA in late March 2007 and withdrawn in August 2007, provided for an application similar to FAS 158 for fiscal years ending on or after December 31, 2007.
One of the reasons behind the withdrawal of the exposure draft is the project targeting the convergence of Canadian standards toward international standards (IAS 19), effective on or after January 1, 2011. The introduction of the FAS standard would have created two sets of modifications over a short period of time.
With the exposure draft withdrawn in August 2007, for the time being, Canadian companies are not forced to present the funded status of their pension plans and other retirement benefits in their respective balance sheets. However, depending on the approach adopted to harmonize Canadian standards with international standards, some companies may be obligated to recognize a larger portion of actuarial losses accumulated and past service costs in their balance sheet. This could have a negative impact on the balance sheets of Canadian companies in the coming years.
Please feel free to contact us for additional information.
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