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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. 15 N. 15, December 2012

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. For the eighth consecutive year, we have analyzed the annual reports of Quebec-based companies listed on the S&P/TSX Index whose fiscal year was ending between September 30 of the previous year and March 31 of the current year. All of these companies sponsored at least one DB plan and the majority of them offered other post-retirement benefits.

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 2011 (between September 30, 2011 and March 31, 2012) and in 2010 (between September 30, 2010 and March 31, 2011). 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.

We 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 considered and were used to calculate the accrued benefit obligation at the end of the fiscal year. However, the assumption used for the expected long-term rate of return on assets is the one that was in effect at the beginning of the fiscal year considered and was used to calculate the annual expense for that fiscal year. The other assumptions that were used to calculate the annual expense for the fiscal year are those at the end of the previous fiscal year.

2. Findings

  • For DB plans, the median annual discount rate used at the end of 2011 was 0.60% lower than the rate used at the end of 2010 (4.90% versus 5.50%). This decrease in the level of discount rates reflects the generalized decrease in interest rates, for any term. Since the temporary increase at the beginning of the financial crisis in 2008 (a median annual rate of 7.33% could be observed at the end of that year), the rates never stopped decreasing.
  • The median annual expected long-term rate of return on DB plan assets for 2011 was identical to the rate for 2010, 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 four 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 2011, 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 eight years.
  • For companies sponsoring both DB plans and other post-retirement benefits, the median discount rates used for all of the plans were similar. Hence, 75% of the companies analyzed were using a discount rate for other post-retirement benefits identical to that used for DB plans at the end of 2011.
  • The trend rate for health care costs is the other 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, since the end of 2009, the median final trend rate dropped 0.50% to 4.50% for three years now. 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 note that the upward trend in the decreasing rates period, which was observed for a few years before stabilizing last year, continued this year.

3. Additional comment

Amendments to accounting standards applicable to employee future benefits

At the beginning of this year, in a There, in black and white bulletin, we informed you of the proposed amendments to the Canadian accounting standards for private enterprises and private sector not-for-profit organizations applicable for fiscal years beginning on or after January 1, 2014. The purpose of the published exposure draft by the Accounting Standards Board (AcSB) was to improve the understanding, comparability and transparency of financial information on defined benefit plans for financial statement users. Following this publication, the AcSB is currently discussing the comments received and clarifications to be added in the final version of the revised standards. The AcSB plans to publish the final standards during the second quarter of 2013.

Also, we remind you that there are amendments applicable to the international accounting standards (IAS 19) for fiscal years beginning on or after January 1, 2013.

For more information, we invite you to consult our bulletins:


Please feel free to contact us for additional information.

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