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Normandin Beaudry

Proposed amendments to accounting standards applicable to employee future benefits

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There, in black and white

NB Bulletin Vol. 15 N. 4, February 2012

Private enterprises that only recently transitioned to new Canadian accounting standards already need to anticipate the impact of other amendments for employee future benefits that could be introduced in the near future. Private sector not-for-profit organizations are also preparing to adopt the new Canadian standards and must already consider the impact of future amendments to these standards.

The Accounting Standards Board (AcSB) recently published an exposure draft on the proposed amendments for employee future benefits. These amendments would apply to private enterprises (Part II of the Canadian Institute of Chartered Accountants (CICA) Handbook) and to not-for-profit organizations (Part III of the CICA Handbook) and could take effect on January 1, 2014.

Purpose of the amendments

The purpose of replacing Section 3461 of Parts II and III of the Handbook with Section 3462 is to improve the understanding, comparability and transparency of financial information on defined benefit plans for financial statement users.

Elimination of the deferral and amortization approach

The proposed amendments provide for the elimination of the deferred recognition method. As such, enterprises and organizations would now have to immediately recognize in income any change in:

  • the value of plan assets (the “assets”);
  • the value of the accrued benefit obligation (the “obligation”);
  • past service costs; and
  • gains and losses arising from settlements and curtailments.

The immediate recognition of costs would serve to present the actual surplus or deficit status on an accounting basis of employee future benefit plans (taking into account the limit that applies when the plan is in a surplus position).

Choice of using a funding valuation

The choice between two types of valuations, a valuation for funding purposes or a valuation for accounting purposes, would be maintained. With the elimination of the deferred recognition method, these two types of valuations would recognize plan costs in the same way. However, the assumptions used for the two types of valuations may differ, particularly with respect to the method used to select the discount rate. For some plans, this could have a considerable impact on the value of the obligation calculated and thus on the surplus/deficit recognized on the balance sheet. Enterprises and organizations would therefore have to be cautious when choosing the type of valuation.

Transition

New Section 3462 would take effect on January 1, 2014; however, early adoption would be permitted. Transition to new Section 3462 would be completed through the retrospective application of standards, in accordance with the rules set out in Section 1506, Accounting Changes. Enterprises and organizations would adjust results retroactively to plan creation and would immediately and directly recognize the adjustment in retained earnings for the year preceding the year in which the Section would first be applied (without impacting net income).

Elimination of the early measurement provision

The proposed amendments provide for the elimination of the early measurement of assets and the obligation. Enterprises and organizations would thus need to measure plan assets and the obligation as of the balance sheet date rather than up to three months before this date. This would require enterprises and organizations to adopt a tighter schedule for finalizing their financial statements. A provision aimed at simplifying the transition for this amendment is included in the exposure draft.

Components of the cost for the period

The proposed amendments provide for a change in the components comprising the cost for the period, which the enterprise or organization must present in the financial statements, to include the following three components:

  • Current service cost for the period
  • Finance cost
    • In accordance with Section 3462, the finance cost would be the net interest on the accrued benefit liability (asset) at the start of the period, based on the discount rate from the beginning of the period. This differs from Section 3461, in accordance with which the finance cost is equal to the interest on the obligation (established using the discount rate from the beginning of the period) net of the expected return on assets (established using the expected rate of return from the beginning of the period).
  • Remeasurements and other items
    • In accordance with Section 3462, remeasurements and other items would include actuarial gains and losses on the obligation, the difference between the actual return on plan assets and the return calculated using the discount rate, the effect of any valuation allowance, past service costs and gains and losses arising from settlements and curtailments.

Financial statement disclosures

Changes regarding financial statement disclosures would also be introduced. Enterprises and organizations would be required to disclose the amount of remeasurements and other items, the date and type of the most recent valuation and any changes in the actuarial method.

Comparison with international standards applicable to employee future benefits

International accounting standards applicable to publicly accountable enterprises will be amended as of January 1, 2013. These amendments were discussed in our June 2011 bulletin entitled Amendments to accounting standards applicable to employee future benefits.

Following these amendments, the immediate recognition of gains and losses will be the only method set out in IAS 19 (Part I of the CICA Handbook), as would also be the case in Section 3462. However, a considerable difference would remain because, under Section 3462, actuarial gains and losses would be recognized in the income, whereas, under IAS 19, as of January 1, 2013, gains and losses will be recognized in the other comprehensive income, without affecting the profit or loss.

Finally, the exposure draft provides for the use of terminology in Section 3462 that is similar to that used in IAS 19, i.e. the use of the term “defined benefit” as opposed to “accrued benefit” for the asset and the liability presented in the balance sheet and for the obligation.

Next steps

The AcSB will be receiving comments on the proposed amendments up to May 25, 2012 and plans to publish the final standard in late 2013.

 

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