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Normandin Beaudry

Amendments to accounting standards applicable to employee future benefits

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There, in black and white

Special publication - June 2011

Currently, Canada's accounting standards are undergoing changes and are being brought in line with new Canadian standards or with international accounting standards. Canadian organizations are thus in the middle of a transition period and must already anticipate the impact of further amendments for employee future benefits in the short term:

  • International accounting standards applicable to publicly accountable enterprises will be amended as of January 1, 2013 (as expected and discussed in our December 2010 bulletin – Accounting standards applicable to employee future benefits: measures that could impact future results).
  • Amendments to Canadian standards for private enterprises are expected as of January 1, 2014, and would also apply to not-for-profit organizations.
     

Amendments to international standards applicable to employee future benefits (IAS 19)

The goal of the amendments to IAS 19 is to enhance the recognition, presentation and disclosures of costs associated with employee future benefits.

Defined benefit cost components

Effective January 1, 2013, organizations applying IAS 19 will have to present the defined benefit cost in their financial statements broken down in three distinct components. It is important to note that, as of that date, the deferred recognition method will be eliminated. As such, enterprises will now have to immediately recognize any change in the value of plan assets or the defined benefit obligation (the “obligation”), as well as the vested and unvested past service costs in the period in which these changes occurred.

The immediate recognition of costs will serve to present the surplus or deficit status of employee future benefit plans on an accounting basis in the statement of financial position, including the effect of the application of the limit on the net defined benefit asset (the “asset ceiling”).

The first defined benefit cost component is the service cost and will be presented in the profit or loss. The service cost includes the current service cost, past service cost and gains and losses on settlements. Curtailments will be handled in the same way as past service cost and will be recognized immediately and completely in the profit or loss.

The second defined benefit cost component, the net interest on the net defined benefit liability (asset), will also appear in the profit or loss. The net interest represents the net effect of the interest on the obligation plus the interest calculated on the plan assets based on the discount rate, and includes the effect of the interest on the impact of the asset ceiling. Therefore, the expected return on plan assets will now be based on the discount rate used to determine the obligation.

The final defined benefit cost component, the remeasurement of the net benefit liability (asset), will be included in the other comprehensive income (OCI). The remeasurement of the net benefit liability (asset) includes elements such as those related to the elimination of the deferred recognition method. Accordingly, actuarial gains and losses on the obligation, the actual return on plan assets exceeding the amounts recognized in the net interest on the net defined benefit liability (asset), and the variation in the effect of the asset ceiling exceeding the amounts recognized in the net interest on the net defined benefit liability (asset), will be included in the remeasurement of the net benefit liability (asset) component.

Financial statement disclosures

Amendments will also be made to financial statement disclosures. In general, organizations will have to disclose the characteristics of their defined benefit plans and risks associated with them, explain the different amounts in the financial statements arising from their defined benefit plans and describe the factors that may affect future cash flows. An example of one of the amendments is the disclosure of a sensitivity analysis for each actuarial assumption deemed significant.

Transition

The new IAS 19 will be applicable for the fiscal years beginning on or after January 1, 2013. However, early application will be permitted for those organizations that choose to do so.

The transition to the new IAS 19 will be carried out in compliance with the requirements of the IAS 8. As such, organizations will have to adjust the results retroactively from the creation of the benefits plan and immediately and directly recognize the adjustment in the equity component in the first comparative year of the financial statements (without affecting the profit or loss).

Amendments to other Canadian standards applicable to employee future benefits (Section 3461)

Amendments may also be made to the Canadian standards applicable to private enterprises and not-for-profit organizations in the private sector, effective January 1, 2014.

The Canadian Accounting Standards Board is examining the possibility of eliminating the deferral and amortization approach to immediately recognize all gains and losses, as well as the possibility of eliminating the early measurement provision.

These amendments are intended to help financial statements users obtain information that is easier to understand and to compare to other organizations.

 

Please feel free to contact us for additional information.

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