Canadian
Institute
of
Actuaries
L’Institut
canadien
des
actuaires
2008 General Meeting
Assemblée générale 2008
Toronto, Ontario
2008 General Meeting
Assemblée générale 2008
IFRS CONVERSION:
IMPLICATIONS FOR SPONSORS
OF PENSION AND
POSTRETIREMENT PLANS
Mark Walsh, Principal
Accounting Standards Board
Ken Choi, Principal
Towers Perrin
2008 General Meeting
Assemblée générale 2008
Canada’s Decision to Adopt IFRS
• Improve access to capital
• Reduce cost of capital
• Make Canada more attractive to foreign
investors and foreign businesses
• Facilitate financial reporting
– External reporting
– Internal reporting
Why Change?
• Growth of global capital markets
2008 General Meeting
Assemblée générale 2008
– Canada < 3%
• Reconciling national GAAPS too costly
• Large and small companies are struggling
– Too many new requirements
– Too few resources
• “Harmonization” strategy was leading us
too far into US detailed rules
2008 General Meeting
Assemblée générale 2008
IFRS
• IFRS are the basis for accounting in 100+
countries
– Includes Europe, Australia, Russia
• FASB and IASB strategy of convergence
– E.g. joint projects on revenue, business
combinations, concepts
• US likely to adopt IFRS
– SEC roadmap issued
2008 General Meeting
Assemblée générale 2008
IFRS vs Canadian GAAP
• IFRS fundamentally similar to Cdn GAAP
– Principles and concepts closely match
– Harmonization over last several years has
eliminated many key differences
• Limited number of major differences
– Devil is in the details
– Differences in details can have significant
impact
Adoption of IFRS
• IFRS will be adopted “as is”
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Assemblée générale 2008
– No modifications, interpretations
– Less rules, more judgment
• Exception: Pension plans
– Pension plans are separate entities
– IAS 26 is inferior to Section 4100
– Pension plans to follow 4100 plus IFRS for
assets and liabilities not in 4100
Implications of Adopting IFRS
2008 General Meeting
Assemblée générale 2008
• A significant project
• More than accounting:
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–
–
–
–
Actuaries
Systems
Debt covenants
Compensation linked to financial performance
Management reporting, budgets
Controls
Shareholders, analysts
When will IFRS become Canadian
GAAP?
2008 General Meeting
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• Years beginning on or after January 1 2011
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First reporting Q1 2011
Comparatives (i.e. Q1 2010)
Opening balance sheet January 1, 2010
Early adoption
US filers may continue to use US GAAP
2008 General Meeting
Assemblée générale 2008
Adopting IAS 19
• IFRS 1 provides overall IFRS transition rules
• Basic approach is to restate prior years
• Unrealistic to expect companies to calculate
unamortized actuarial gains and losses on
transition
• IFRS 1 permits recognition of ALL actuarial gains
and losses at date of transition (not past service
costs)
• This is a choice – but must be same for all plans
2008 General Meeting
Assemblée générale 2008
Private Enterprises
• IFRS will only be required for publicly
accountable enterprises
• New private enterprise standards under
development – ED in Q1 2009
• For certain IPPs this will permit use of funding
valuation, with a roll forward
• Other plans – existing Section 3461
• Reduced disclosures
• Private enterprises may use IFRS
Not-for-profit Organizations
• AcSB strategy under development
2008 General Meeting
Assemblée générale 2008
– Invitation to comment by end of year
• Proposal is to permit use of IFRS or private
enterprise standards
– Some may fall under public sector standards
– Most would likely adopt private enterprise
standards
2008 General Meeting
Assemblée générale 2008
Pension and Postretirement
Benefit Plans
CICA vs IFRS – What's Different?
Terminology differences…
2008 General Meeting
Assemblée générale 2008
CICA 3461
IFRS
Accrued Benefit Obligation (ABO)
Defined Benefit Obligation (DBO)
Accrued Benefit Asset/Liability
(ABA/ABL)
Defined Benefit Asset/Liability
CICA vs IFRS – What's Different?
2008 General Meeting
Assemblée générale 2008
CICA 3461
IFRS
Allows early measurement date
Must use fiscal year end date
Allows smoothed asset values in
expense calculation
Market values must be used for
expense calculation
Recognize gains/losses over service
lifetime (or faster) through P&L
Can recognize through OCI
Recognize plan changes over service
lifetime
Recognize plan changes over period
to vesting (immediately if vested)
For "inactive" plans, recognize
gains/losses and plan changes over
expected lifetime
For "inactive" plans, plan changes
and gains/losses are recognized fully
and immediately
CICA vs IFRS – What's Different?
2008 General Meeting
Assemblée générale 2008
CICA 3461
IFRS
Accrued benefit asset limited by
economic value of surplus
Similar, but asset ceiling is calculated
differently and future minimum
contributions and surplus ownership
issues are more complex
B/S recognition of plan's funded
status, less unamortized amounts
Allows B/S recognition of plan's
funded status, less unrecognized cost
of plan changes (non-vested)
Complex rules for settlement and
curtailment recognition and timing
Somewhat consistent, but more
simplified approach; curtailment
gains may be recognized earlier
Gains/Losses
2008 General Meeting
Assemblée générale 2008
• CICA 3461
– Immediate recognition through P&L, or
– Deferred recognition through P&L
– Amounts in excess of 10% corridor are amortized over future
working lifetime
– Amortization over future lifetime for inactive plans
• IAS 19
– Same options, plus immediate recognition in OCI (no recycling)
– Recognition of entire amount outside corridor for inactive plans
Past Service Costs
2008 General Meeting
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• Past service cost/credit recognized more rapidly under IAS
19
– Immediately for vested portion
– Amortized over average service to vesting date for non-vested
portion
– Definition of "vesting period" - Expected time to first eligibility for
any benefit
– Under IAS, amortization period relates to affected active members
only; under CICA/FAS, amortization period relates to all active
members
2008 General Meeting
Assemblée générale 2008
Past Service Costs
• EXAMPLE: Benefits are improved for plan with
5-year vesting:
– DBO increase for vested participants is 70M
– DBO increase for non-vested participants is 30M
• Average service until vested is 3 years
– 70M recognized immediately through P&L
– 10M/year recognized over each of the next 3 years
Curtailments and Settlements
2008 General Meeting
Assemblée générale 2008
• More straightforward under IAS 19
– Measure as change in DBO + related unrecognised amounts
– Under CICA 3461, settlements affect NTAs and experience
gains/losses, while curtailments affect NTOs and prior service
costs; under IAS, no such distinction
– Under CICA 3461, recognise curtailment gain when employees
terminate and plan is amended; under IAS 19, recognition can be
earlier
– There is no SC+IC threshold for settlements under IAS 19
Note Disclosures
2008 General Meeting
Assemblée générale 2008
• IAS 19 requires:
– DBO split between wholly unfunded and partly/wholly funded
plans
– Gains/losses recognized through OCI in current year and
cumulatively
– 5-year history of DBO, FVA, FS, Experience G/L (assets and
liabilities separately)
• CICA 3461 requires:
– Cost incurred, and deferred components of expense recognized
– Interim disclosures for DB pension/postretirement benefit costs
Limit on Balance Sheet Asset
2008 General Meeting
Assemblée générale 2008
• CICA 3461 limits the Accrued Benefit Asset
– Based on economic value of future surplus withdrawals
and contribution holidays in perpetuity
– Considers effect on ABA of recognizing deferred losses
2008 General Meeting
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Limit on Balance Sheet Asset
• IAS 19/IFRIC 14 also limit the Defined Benefit
Asset
– Conceptually similar to CICA 3461 limit but different
in a number of ways:
• Availability of surplus refunds must be “unconditional”
• Must consider MFR’s – statutory or contractual minimum
funding requirements for past and future service
• Accounting treatment depends on whether actuarial gains and
losses are recognized through P&L or OCI
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Limit on Balance Sheet Asset
• A refund is considered to be available only if the
company has an unconditional right to a refund
– During life of the plan, without having to settle the DBO, or
– Assuming full settlement of the DBO in a single event, or
– Assuming gradual settlement of the DBO
• CICA 3461 Q&A 89 requires that we look only at surplus
refunds available from an ongoing plan
Limit on Balance Sheet Asset
2008 General Meeting
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• Under IFRIC 14: Past Service MFRs
– To the extent a contribution to fund deficits would not
be recoverable in the future (through contribution
holiday or refund), the unrecoverable portion reduces
the balance sheet asset or increases the balance sheet
liability
Example: Past Service MFR
XYZ Company Balance Sheet
2008 General Meeting
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Assets
Liabilities and Shareholders' Equity
Cash
300
Pension assets
200
Total assets
* MFR for past service is 100
500
Other liabilities
250
Shareholders' equity
250
Total liabilities and equity
500
Example: Past Service MFR
XYZ Company Balance Sheet
After MFR of 100 has been contributed
2008 General Meeting
Assemblée générale 2008
Assets
Liabilities and Shareholders' Equity
Cash
300
Pension assets
200
Total assets
* MFR for past service is 100
500
200
Other liabilities
250
no change because XYZ doesn’t
have unconditional right
400
Shareholders' equity
250
150
Total liabilities and equity
500
400
Limit on Balance Sheet Asset
• Under IFRIC 14: Future Service MFRs
2008 General Meeting
Assemblée générale 2008
– Reduce economic value of future contribution holidays to:
• PVFSC in perpetuity, less PVFNC in perpetuity
• Where NCs are required to be funded in accordance with current
funding valuation report
• Did you know? CICA 3461 also has future service MFRs
– CICA refers to “minimum contributions the entity is required to
make regardless of any surplus”
– IFRIC 14 refers to “any requirement to fund”
Limit on Balance Sheet Asset
2008 General Meeting
Assemblée générale 2008
• Changes in effect of asset limits and MFRs
– Are recognised through P&L if company
amortizes gains/losses
– Are recognised through OCI otherwise
IASB Discussion Paper
2008 General Meeting
Assemblée générale 2008
• In March 2008, the IASB published a Discussion
Paper
– Initial ideas to address perceived deficiencies in IAS 19
– Suggests several fundamental changes in the way
pension accounting would work
– Comment period ended Sept. 26th with 147 letters
submitted to IASB
– Final changes not expected to be effective until 2013,
and could end up being very different
2008 General Meeting
Assemblée générale 2008
IASB Discussion Paper
• Concept of "contribution-based promise" which would
change accounting for certain types of plans
• Elimination of all delayed recognition (i.e. amortization)
• Considering alternative approaches to display changes in
FVA and DBO in P&L vs OCI
Contribution Based Promises
2008 General Meeting
Assemblée générale 2008
• Defined Broadly
– Only plans with “earnings risk” and traditional retiree medical
plans would maintain DB status
– Includes career-pay plans, flat dollar plans, and possibly defineddollar medical reimbursement plans
• Implications
– Valuation, accounting and disclosures are different from DB
• Obligation is a market consistent measure of fair value reflecting all
possible outcomes
• Changes in funded status (net of contributions) reflected in P&L
2008 General Meeting
Assemblée générale 2008
Cost Recognition/Presentation
• If DB promise, three possible approaches
presented for comments:
Approach
Ongoing cost items in P&L
1
All changes in unfunded obligation
2
Service costs, DBO gain/loss except discount rate
3
Service costs, DBO gain/loss except discount rate, interest cost,
“interest income”
All other changes in unfunded (net of contributions) are recognized in Other Comprehensive Income (OCI)
“Interest income” is not clearly defined, but doubtful that it will be based on EROA as it is in the current standard
Keeping up-to-date
2008 General Meeting
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www.acsbcanada.org
• Register to be notified of changes
Questions?
Comments?
nancy.estey@cica.ca