November 2020

Accounting standards: changes regarding the use of going concern valuations for private enterprises and private sector not-for-profit organizations

This publication will be of particular interest to individuals involved in preparing financial statements in the private sector for private enterprises or not-for-profit organizations.

On November 1, 2020, the Accounting Standards Board (AcSB) published the final text presenting the changes announced to Section 3462 (“Employee Future Benefits”) regarding the use of going concern valuations. With this publication, the AcSB confirms what it had suggested in the spring.

DEFINED BENEFIT PLANS WITH A FUNDING VALUATION REQUIREMENT

For defined benefit plans with a funding valuation requirement (e.g., registered pension plans) that use going concern valuations for their accounting results, the following elements are worth noting:

  • The obligation must correspond to the “amount that is required to be funded by contributions in accordance with legislative, regulatory or contractual requirements, which could include cash contributions or a posted letter of credit.” This amount must take into consideration the aggregate of the funding components, including—among other things—Quebec’s stabilization provision and Ontario’s provision for adverse deviations.
  • Few details have been provided regarding the level of Quebec’s stabilization provision that should be taken into consideration in calculating the obligation. Furthermore, the AcSB has stated that a solvency or hypothetical wind-up valuation does not constitute a funding valuation, so it is understood that solvency funding requirements must not be included in determining the obligation. This question arose in regard to plans registered in jurisdictions in which solvency funding applies or for plans required to fund any insolvency upon full settlement of benefits.
DEFINED BENEFIT PLANS WITHOUT A FUNDING VALUATION REQUIREMENT

For defined benefit plans without a funding valuation requirement (e.g., unfunded supplemental pension plans or group benefits plans at retirement), the following element is worth noting:

  • It will no longer be possible to determine the results by using a funding valuation “approach.” Therefore, an accounting valuation must be prepared (i.e., using a market discount rate rather than the discount rate from one of the enterprise’s defined benefit plan’s funding valuation).
EFFECTIVE DATE OF THE CHANGES

The changes will apply to fiscal years starting January 1, 2022. Early adoption is permitted but only for all of an enterprise’s defined benefit plans.

Minor changes to Section 3463, which applies to private sector not-for-profit organizations, were also made to align it with the revised version of Section 3462 to which it refers. Similarly, Section 1506, which deals with accounting changes, was also slightly changed in order to reflect the removal of the possibility to use a funding valuation for unfunded plans.

For more information on this subject, please contact a Normandin Beaudry consultant.