Employee Future Benefits
AK/ADMS 4510 M&N – Winter 2004
Nancy Estey, Principal, Accounting Standards Board
staff
February 23, 2004 4-7 pm; 7-10 pm
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Employee Future Benefits – February 2004
Discussion Outline
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Recent headlines
Environment driving change
Current financial statement impacts
Background
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A compensation package
Types of employee future benefits
Financial statement objectives
Deferred compensation
Discount rate
Employee Future Benefits – February 2004
Discussion Outline
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Developments in Canada
Highlights of Canadian disclosure
improvements
What’s Ahead
Understanding “smoothing”
The “Corridor” approach
Move to presentation format
Employee Future Benefits – February 2004
Recent Headlines
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Rates, high dollar erase pension gains
(G&M, Jan 22/04)
Pensions seen as key factor in executive pay
(G&M, Jan 7/04)
Pension smoothing hides the facts (G&M,
Oct 15/03)
Pension shortfalls threaten to explode (G&M,
May 12/03)
Employee Future Benefits – February 2004
Environment Driving Change
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Significant losses sustained by many pension plans
in the last few years + lower market interest rates
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Post-Enron era
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Increased benefit obligation
Growing deficit position
Drain on cash flow
Increased pension costs
“Smoothing” results in off-balance sheet debt, which draws
attention
Poor plan performance increases this debt
Need for transparency
Employee Future Benefits – February 2004
Current Financial Statement
Impacts
Average Pension Expense ($ million)
$25
$20
$15
$10
$5
$0
2000
2001
2002
Source: Towers Perrin review of financial statements of 90 major Canadian
Companies that sponsor defined benefit plans.
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Employee Future Benefits – February 2004
Current Financial Statement
Impacts
Average Deferred Pension Cost ($ 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 – February 2004
A Compensation Package
This Year
•Salary
•Fringe benefits
•Bonus
Cash Paid
When Retired
•Pension benefits
•Vision Care
•Drug Plan
•Profit sharing
•Life Insurance
•Stock options
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Employee Future Benefits – February 2004
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 – February 2004
F/S Objectives
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Plan performance affects
– Financial Position (B/S)
– Operating Results (I/S)
– Changes in Financial Position (Cash flows)
Employee Future Benefits Accounting
– CICA Section 3461
– FAS 87, 88, 106, 112, 132(r) in the US
Employee Future Benefits – February 2004
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 – February 2004
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 (element of smoothing) helps
But volatility unwelcome
Employee Future Benefits – February 2004
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
Limited-scope disclosure enhancements
Revised disclosure requirements to be issued on
or about March 1, 2004
Employee Future Benefits – February 2004
shall recognize
ility and an expense
for post employment benefits
and compensated absences
that do not vest or accumulate
An entity
a liab
Highlights of CDN Disclosure
Enhancements
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Disclosures related to the reporting entity’s financial
statements
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when
(a) the event obligating the
Total cash payments
Balance sheet classification of the accrued benefit
asset/liability
Clarification on the accounting policy disclosures that
should be made
Components of costs recognized (in addition to the total)
Reconciliation of the accrued benefit obligation to the
balance sheet asset or liability
Effects of a one-percentage-point increase and decrease in
the assumed health care cost trend rates
Employee Future Benefits – February 2004
shall recognize
ility and an expense
for post employment benefits
and compensated absences
that do not vest or accumulate
An entity
a liab
Highlights of CDN Disclosure
Enhancements (cont’d)
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Disclosures related to the benefit plan
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when
(a) the event obligating the
Description of the type of plans
Actual allocation of plan assets by major asset category
Date used to measure the plan assets and the benefit
obligations
Effective date of the last (as well as the next required)
actuarial valuation for funding purposes
Significant assumptions
Reconciliations - plan obligation and plan assets
Employee Future Benefits – February 2004
shall recognize
ility and an expense
for post employment benefits
and compensated absences
that do not vest or accumulate
An entity
a liab
Highlights of CDN Disclosure
Enhancements (cont’d)
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Distinction between “public” and non-”public”
entity requirements
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“Public” implies public enterprises, co-operative
organizations, deposit-taking institutions or life insurance
companies
Covers pension benefits, but also postretirement and post-employment plans
Interim financial statements
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when
(a) the event obligating the
Total benefit cost
Employee Future Benefits – February 2004
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 Q2 2004 with
final standard Q1 2005
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the removal of options for the deferred recognition of actuarial
gains and losses
enhancing disclosure
Employee Future Benefits – February 2004
What’s Ahead?
Developments Around the World (cont’d)
 US FASB
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Disclosure ‘quick fix’
Final statement issued with effective date for fiscal years
ending after December 15, 2003
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more complete information about plan assets, obligations, cash
flows, and net cost
assists users of f/s in assessing the market risk of plan assets, the
amount and timing of cash flows, and reported earnings.
Employee Future Benefits – February 2004
Understanding “Smoothing”
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Delayed recognition of events (spread changes over
the future)
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Amortize to expense over a period of time rather than
immediate recognition
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Treatment of returns on pension plan assets
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Past service costs
Actuarial gains/losses [also corridor approach]
Expected return, not actual return (difference amortized to
expense over time)
Market-related value of plan assets deferring recognition of
recent investment gains and losses for up to 5 years
Employee Future Benefits – February 2004
The “Corridor” approach
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Employee Future Benefits – February 2004
Move to Presentation format
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Debate “smoothing” i.e., deferred recognition
of events
Employee Future Benefits – February 2004