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Normandin Beaudry

Accounting standards applicable to employee future benefits: what Quebec-based companies do


There, in black and white

NB Bulletin Vol 14. N. 11, November 2011

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. These must include the recognition of the costs for defined benefit pension plans (DB plans) and for group insurance plans offered to retirees (other post-retirement benefits).

The assumptions required to determine the accrued benefit obligation and the annual expense must be established by the company’s management. To help companies select these assumptions, we have analyzed the annual reports of Quebec-based companies listed on the S&P/TSX Index whose fiscal year ended between September 30, 2010 and March 31, 2011. All of these companies sponsored at least one DB plan and the majority of them offered at least one group insurance plan for 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 tables present a comparison of the assumptions used for fiscal years ending in 2010 (between September 30, 2010 and March 31, 2011) and in 2009 (between September 30, 2009 and March 31, 2010). The second section summarizes the findings from these tables and from our 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 seventh year that we have conducted this analysis. We therefore invite you to consult the “Publications” section of our website ( to review the results, findings and comments for previous years. However, given that the composition of the S&P/TSX Index varies regularly based on predefined criteria, the group of companies analyzed this year may differ from that analyzed in prior years.

1. Selection of assumptions

  • The tables present, in percentile format, the key economic assumptions used by companies for DB plans and other post-retirement benefits. The assumptions are those that were in effect at the end of the fiscal year that has ended. However, the assumption used for the expected long-term rate of return on assets is the one that was in effect during the fiscal year that has ended.

2. Findings

  • For DB plans, the median annual discount rate used at the end of 2010 was 0.70% lower than the rate used at the end of 2009 (5.50% versus 6.20%). This decrease is the result of the continuity in the narrowing of long-term yield spreads between federal and corporate bonds. We can note that discount rates have returned to the level they were at before the credit crisis of 2008. The median rate used at the end of 2007 was 5.50%, the same rate used at the end of 2010.
  • The median annual expected long-term rate of return on DB plan assets for 2010 was identical to the rate for 2009, at 7.00%. Since the start of the 2000s, companies have gradually lowered their long-term return expectations; however, a more stable trend has been observed in the last three years.
  • Several of the companies analyzed sponsor DB plans and other post-retirement benefits that offer benefits based on salary at retirement. These companies must therefore establish an assumption related to the compensation growth rate. At the end of 2010, the median annual compensation growth rate was 3.50%, a rate identical to the median rate used since 2004. Outlooks for the compensation growth rate for accounting recognition purposes have therefore not changed in the last seven years.
  • For companies sponsoring both DB plans and other post-retirement benefits, the median discount rates used for all of the plans were similar. At the end of 2010, more than half of the companies analyzed were using a discount rate for other post-retirement benefits identical to that used for DB plans.
  • The trend rate for health care costs is the most important assumption for other post-retirement benefits. The initial rate, which is higher than the final rate, can vary significantly from company to company. The median final trend rate had been 5.00% since 2004. However, at the end of 2009 and 2010, the median final trend rate dropped 0.50% to 4.50%. This decline could be explained by the lower increases in prescription drug insurance costs than in the past, a coverage accounting for a large portion of other post-retirement benefits. We also observed stabilization in the upward trend in the decreasing rate period.


Determining the discount rate

  • Even though discount rates must be selected by the company’s management, management typically asks its actuary or actuaries for advice on the rates to use. Accounting standards and their related guides do not define in detail the meaning of certain terms used or the methodology that must be applied in determining the discount rate. Each actuarial firm had thus developed its own methodology. The recent large variations in discount rates, in line with the market data used to establish them, had accentuated the problem associated with determining discount rates.
  • To help the discount rates determination process, the Canadian Institute of Actuaries (CIA) assembled a task force mandated to provide guidance on the approach to use to determine discount rates in accordance with accounting standards. The results of the work completed by this task force were recently disclosed in the form of an educational note and a rate curve published monthly in partnership with Natcan Investment Management Inc. You can access the educational note and information on the curve published monthly using the links below:
  • Although the educational note is not the only recognized practice, we can expect most companies to use the published rate curve going forward, unless their situation justifies a different practice.

Amendments to accounting standards applicable to employee future benefits

  • In a recent there, in black and white bulletin, we informed you of the amendments to the international accounting standards (IAS 19) applicable for fiscal years beginning on or after January 1, 2013. The goal of the amendments to IAS 19 is to enhance the recognition, presentation and disclosure of costs associated with employee future benefits.
  • Amendments may also be made to the Canadian standards applicable to private enterprises and not-for-profit organizations in the private sector, for fiscal years beginning on or after January 1, 2014. The Canadian Accounting Standards Board is examining the possibility of eliminating the deferral of amortization approach to immediately recognize all gains and losses, as well as the possibility of eliminating the early measurement provision.
  • We invite you to consult the bulletin entitled Amendments to accounting standards applicable to employee future benefits for more information.

Please feel free to contact us for additional information.

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