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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. 16 N. 18, December 2013

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 promises 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 defined benefit obligation and the defined benefit cost (the expense) must be established by the company’s management. For the ninth 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 2012 (between September 30, 2012 and March 31, 2013) and in 2011 (between September 30, 2011 and March 31, 2012). The second section summarizes the findings from these tables and from our data analysis. The third and final section presents additional information with respect to some measures that could potentially impact future accounting results for some enterprises.

We invite you to consult the “NB Bulletins” 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 obligation at the end of the fiscal year.
  • Our previous bulletins presented in the table for DB plans the expected long-term rate of return on assets assumption. However, since this assumption is not required by IAS 19 for the fiscal years beginning on January 1, 2013, we will not present the information anymore. Note that this assumption will also not be required by Section 3462, applied by private enterprises and private sector non-profit organizations for fiscal years beginning on January 1, 2014.

2. Findings

  • For DB plans, the discount rate assumption is the most important assumption. Because it is based on market rates, it can vary from one month to the other. Based on our analysis, the median annual discount rate used at the end of 2012 was 0.47% lower than the rate used at the end of 2011 (4.40% versus 4.87%). 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. However, based on recent Canadian bond market data, a upward trend could be observed at the end of 2013.
  • 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 2012, the median annual compensation growth rate was 3.20%, although it had been relatively stable at a higher level during the last nine years (approximately 3.50%). Outlooks for the compensation growth rate for accounting recognition purposes have therefore decreased this year.
  • For companies sponsoring both DB plans and other post-retirement benefits, the median discount rates used for all of the plans were similar. Hence, 65% 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 2012.
  • The trend rate for health care costs is an 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. Since the end of 2009, we had noticed a drop of 0.50%, with a median final trend rate at 4.50% at the end of 2009, 2010 and 2011. However, at the end of 2012, we are observing an increase of 0.25%, with a median final trend rate at 4.75%. 

3. Additional information

Last spring, in a There, in black and white bulletin, we informed you of the amendments to the Canadian accounting standards for private enterprises (new Section 3462) applicable for fiscal years beginning on or after January 1, 2014. For more information, we invite you to consult our bulletin "Amendments to accounting standards applicable to employee future benefits".

Moreover, the Accounting Standards Board (AcSB) published in June an exposure draft on amendments to the Canadian accounting standards for private sector non-profit organizations for fiscal years beginning on or after January 1, 2014. The AcSB proposed to add the Section 3463 to the Part III of the CPA Canada Handbook – Accounting, which will be a supplement to Section 3462 of Part II of the Handbook applied by these organizations. The Section 3463 provides for the recognition of the remeasurement elements (including the actuarial gains and losses) in the statement of evolution of net assets instead of the expense. The AcSB recently confirmed that Section 3463, exactly as presented in the exposure draft, will be added to the Handbook by the end of this year.


Please feel free to contact us for additional information.

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