Employee Future Benefits ―
Additional Disclosures
AK/ADMS 4510 A B & C - Autumn 2003
Nancy Estey, Principal, Accounting Standards Board
staff
October 24, 2003; October 28, 2003
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Employee Future Benefits – October 2003
Discussion Outline
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Recent headlines
Nuts & Bolts
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F/S objectives
Types of Employee future benefits
Deferred compensation
Relating to F/S Concepts
Discount rate
Current financial statement impacts
Employee Future Benefits – October 2003
Discussion Outline
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Assessing pension accounting
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Is CICA 3461 meeting its objectives
What is working well?
What is not working well?
Leading up to the disclosure project
Draft for comment including needs
What’s Ahead
Other implications
Employee Future Benefits – October 2003
Recent Headlines
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Pension smoothing hides the facts (G&M, Oct 15/03)
S&P Fires volley in Accounting Board’s [FASB]
Pension Proposal (Dow Jones News Service, Oct 10/03)
Pension proposals on fast track (G&M Oct 9/03)
Corporate pension plans coming under fire (G&M Oct
2/03)
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Greater Disclosure on pensions – Accounting Board
may demand more plan accountability (FP, July 23/03)
Pension shortfalls threaten to explode (G&M, May
12/03)
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Employee Future Benefits – October 2003
Nuts & Bolts – F/S Objectives
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Pension Plan performance
affects:
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Pension Accounting
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CICA Section 3461
FAS 87 in the US
Pension Funding
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Financial Position (B/S)
Operating Results (I/S)
Changes in Financial Position
(Cash flows)
Not equal to pension
accounting
Governed by tax and pension
laws
Employee Future Benefits – October 2003
Nuts & Bolts ― Types of Employee
Future Benefits
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Accounting for future promises
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promised pension and other benefits when they retire
Eligibility via age and service
Pension Benefits
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Defined benefit plans now a major cost of doing business
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Low interest rates
Decline in equity markets
Post-retirement benefits
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Life insurance
Extended health care
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double-digit growth due to Rising drug costs, aging membership
Employee Future Benefits – October 2003
Nuts & Bolts ― Types of Employee
Future Benefits (cont’d)
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Post-employment
benefits
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any kind of plan that
provides for automatic
severance or automatic
disability for individual
type situations
Employee Future Benefits – October 2003
Nuts & Bolts ― Deferred
Compensation
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Estimate amounts to be paid out in the future (future
benefit payments)
Discount those future payments to reflect the time
value of money
Allocate the resulting amount “deferred
compensation cost”
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Over the periods of service required of the employees in
exchange for the promise of those future payments
So, cost of future benefits recognized as the
employees render service to the company
Employee Future Benefits – October 2003
Nuts & Bolts ― Relating to F/S
Concepts
Section 3461
 Entity has a responsibility to its
employees to provide benefits at a
specified time in the future, i.e., when
an employee retires or leaves the entity,
that may be by way of a transfer of or
use of assets
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Employee Future Benefits – October 2003
Nuts & Bolts – Discount Rate
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Market-driven rate
Controversial
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Revalue at each balance sheet date
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Volatility in I/S
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Discount rate  Obligation 
Discount rate  Obligation 
Corridor method helps
But volatility unwelcome
Long-term liabilities should tie to a long-term rate!
Employee Future Benefits – October 2003
Current Financial Statement
Impacts
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Significant losses sustained by many
pension plans in the last few years + lower
market interest rates
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Increased benefit obligation
Deficit position
Drain on cash flow
Reported Income Statement results distort reality
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Actuarial losses deferred
Pension income/costs not pure
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Market gains and losses netted with pension cost
Employee Future Benefits – October 2003
Current Financial Statement Impacts
2001
2000
1999
1998
1997
Expected return
on assets
69
65
58
53
46
Actual return on
assets
-59
42
117
74
97
(Overstated)/
understated
128
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(59)
(21)
(51)
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Employee Future Benefits – October 2003
Current Financial Statement
Impacts
Average Pension Expense ($ million)
$25
$20
$15
$10
$5
$0
2000
2001
2002
Source: Towers Perrin review of financial statements of 90 major Canadian
Companies that sponsor defined benefit plans.
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Employee Future Benefits – October 2003
Current Financial Statement
Impacts
Average Deferred Pension Cost ($ million)
$250
$200
$150
$100
$50
$0
-$50
-$100
-$150
2001
2002
2000
Source: Towers Perrin review of financial statements of 90 major Canadian
Companies that sponsor defined benefit plans.
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Employee Future Benefits – October 2003
CICA 3461 Objectives
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CICA 3461 harmonized with US GAAP
US GAAP based on FAS 87 (1985); intended
to be evolutionary, rather than revolutionary
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Standardized measurement approach to improve
comparability and understandability
Expanded disclosures with FAS 132 (1998) to
provide more complete picture
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Although, more enhancements needed
Employee Future Benefits – October 2003
Is CICA 3461 Meeting Its
Objectives?
Yes and no
 CICA 3461 good step to harmonizing North
American pension accounting
 But the world of pensions and the
sophistication of investors has evolved; the
current pension accounting model has lost
credibility
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Some say the “real” pension cost is not reflected,
even though the cost reported follows the
Employee Future Benefits – October 2003
accounting principles
What is Working Well?
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A common measurement approach is being
used … essentially around the world
Employee Future Benefits – October 2003
What is Not Working Well?
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“Real” cost of plan not recognized
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Treatment of returns on pension plan assets
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Expected return, not actual return
Market-related value of plan assets deferring recognition
of recent investment gains and losses
Delayed recognition
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Past service costs
Actuarial gains/losses
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Further aggravated by a smoothed asset value or
aggressive assumption
Cost (or income) recognized may not be
indicative of long-term cost of the plan
Employee Future Benefits – October 2003
What is Not Working Well?
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“True” financial position is masked by failing
to recognize the extent of the obligation
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Large prepaid assets
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No insight into
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May report a prepaid asset, even for plans in deficit
positions
Near-term cash flow needs
Forecasted earnings
Development and effect of key assumptions
Employee Future Benefits – October 2003
Other Concerns
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Analysts and rating agencies making their
own adjustments
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Eliminating pension income
Treating the pension obligation like debt
Employee Future Benefits – October 2003
Leading up to Disclosure Project
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Actuaries & Accountants, Oct 2002
– Accounting ok; assumptions ok
Analysts, 2003
– Accounting ok; improve disclosure
Accounting Standards Oversight Council, July 2003
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Tweak accounting; improve disclosure
Fundamental revision not urgent
Employee Future Benefits – October 2003
Tweak Measurement &
Recognition
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Eliminate corridor
Use actual rather than expected returns
Eliminate “market-related” values
Expense past service costs
Employee Future Benefits – October 2003
What’s Ahead? – Developments in
Canada
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Long-term
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Participate in global project
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Short-term
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Start over from 1st principles
No tweaking of measurement aspects
Limited-scope disclosure enhancements
ED issued October 1, 2003 “Employee Future Benefits —
Additional Disclosures”
30-day comment period ended October 31, 2003
Roundtables to be held late October 2003
Employee Future Benefits – October 2003
Addressing Needs
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F/S users – analysts, creditors, investors,
shareholders
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Evaluating plan assets and the expected longterm rate of return used in determining net
pension cost
Evaluating employer’s obligation under pension
plans and its effect on future cash flows
Estimating potential impact of net pension cost on
future net income
Employee Future Benefits – October 2003
Draft for Comment
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Company
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Contributions next year (minimum)
Cost without “smoothing” *
Cost components (format)
B/S classification*
Employee Future Benefits – October 2003
Draft for Comment
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Company
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Reconciliations*
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Sensitivity for health care cost trend rate only
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B/S liability to plan obligation
Opening to closing plan obligation
Opening to closing plan assets
Interrelationships of assumptions
Employee Future Benefits – October 2003
Draft for Comment
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Plan
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Description*
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Pension Plans
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Flat vs final pay
– Indexation
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Other Plans
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Benefits covered
– Cost sharing
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Employee Future Benefits – October 2003
Draft for Comment
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Plan
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By major asset category
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Asset allocation (actual and target mix)
Expected return
Measurement date
Actuarial valuation date
Employee Future Benefits – October 2003
Draft for Comment
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Distinction between “public” and non-”public” entity
requirements
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Covers pension benefits, but also post-retirement
and post-employment plans
Interim
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“Public” implies public enterprises, co-operative organizations,
deposit-taking institutions or life insurance companies
Cost
Contributions to be made in the year
Employee Future Benefits – October 2003
What’s Ahead?
Developments Around the World
 UK – FRS 17, mark to market
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Aborted; punted to IASB
IASB
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Plans to issue ED of improvements to IAS 19 in
Q4 2003, final statement in 2004
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Eliminate smoothing, i.e., immediate recognition of gains
and losses
Expand disclosure
Employee Future Benefits – October 2003
What’s Ahead?
Developments Around the World (cont’d)
 US FASB
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Disclosure ‘quick fix’
ED issued September 2003 with final statement
expected Q4 2003 with year end 2003 effective
date
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More information about asset mix, investment strategy,
assumed rate of return, expected cash flows
Responsive to investors’/creditors' information needs
Employee Future Benefits – October 2003
What’s Ahead?
Developments around the World (cont’d)
 Global converged standard
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Long-term
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Fundamental re-think
Short-term
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Nature of the issues
IASB existing workload
Enhance disclosures
Employee Future Benefits – October 2003
Not just Accounting Implications
Governance of plans
 Compensation issues
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defined benefits vs defined contributions
Regulatory minimum funding
Employee Future Benefits – October 2003
Thank you
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Employee Future Benefits – October 2003