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Normandin Beaudry

Accounting standards applicable to employee future benefits: measures that could impact future results

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There, in black and white

NB Bulletin Vol. 13 N. 15, December 2010

In a recent there in black in white bulletin entitled Accounting standards applicable to employee future benefits: what Quebec-based companies do, we shared the results of our analysis of the annual reports of Quebec-based companies to help companies select their assumptions for employee future benefits.

This information bulletin is a follow-up of sorts, providing comments on some measures that could potentially impact future results.

Determining the discount rate

Recent substantial variations in discount rates, in line with the market data used to determine these rates, have highlighted an issue associated with determining discount rates. Even though the rates must be selected by the company's management, management typically looks to its actuary or actuaries for advice on the rates to use. Accounting standards and guides for applying them do not define in detail the meaning of certain terms that they use or the methodology that must be followed. Each actuarial firm has thus developed its own methodology.

To facilitate the process of determining discount rates, the Canadian Institute of Actuaries (CIA) created a task force responsible for issuing recommendations on the approach to use to determine the discount rate in accordance with Section 3461 of the CICA Handbook. The task force is analyzing several options, including that of basing discount rates on provincial bonds. The task force is also examining the possibility of having the CIA publish a discount rate curve each month. More details should be available by mid-2011.

Transition to international standards

For fiscal years starting on or after January 1, 2011, publicly accountable enterprises will be required to adhere to international standards (IFRS) when preparing and presenting their financial statements. The comparison year must also be prepared and presented in accordance with IFRS, which requires the adjustment of certain results at the start of this fiscal year.

At the transition for employee future benefits plans, companies will need to decide whether or not to use the optional exemption under the First-time adoption of International Financial Reporting Standards in recognizing unamortized actuarial gains and losses at the time of transition. To make their decision, companies will need to consider the impact on financial position and annual expense, as well as the complexity of the calculations required if the exemption is not used. Companies must also make a decision concerning the method for recognizing future actuarial gains and losses, and, going forward, companies still using the provision from Section 3461 concerning early measurement must use a measurement date corresponding to the end of their fiscal year.

Proposed amendments to international standards beginning in 2013

While targeted Canadian companies are preparing to apply international standards for the first time, they need to take into account the fact that these standards will be amended within a few years. An exposure draft outlining the proposed amendments was published last April. The goal is to make significant improvements regarding recognition, presentation and disclosures for employee future benefits plans. The revised standards should be published in mid-2011 for fiscal years starting on or after January 1, 2013 (early application will be permitted once the amendments have been adopted). According to the exposure draft, the improvements will help financial statements users understand the impact of employee future benefits plans on the company's financial position, thereby facilitating the comparison between companies. The key amendments are as follows:

  • mmediate recognition of all costs (actuarial gains and losses, past service costs);
  • Standardization of the presentation of the annual expense components; and
  • Amendments to required disclosures.

Change in standards for private enterprises

For fiscal years starting on or after January 1, 2011, private enterprises will be required to adhere to new standards (new version of Section 3461) when presenting their financial statements. Private enterprises can elect to adopt these new Canadian standards or the international standards.

Included in the new Canadian standards are some simplifications in comparison to Section 3461 in effect up to December 31, 2010, given the nature of private enterprises.

 

Please feel free to contact us for additional information.

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