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Exposure Draft, Employee Future Benefits (Amendments to Section 3461) Exposure Draft, Employee Future Benefits (Amendments to Section 3461)

Overview of the requirements and highlights of the expected changes in Canadian practice Overview of the requirements and highlights of the expected changes in Canadian practice

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Background

Concerns over balance sheet presentation

• f defined benefit plan assets/liabilities

FAS 158 issued in September 2006

− Short-term project − Focused on balance sheet recognition and presentation

Longer-term comprehensive project

− Measurement of obligation, smoothing etc − Converge with IASB project

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Benefits

Defined benefit plan asset/liability in balance sheet represents current economic status Increased transparency Measurement date same as balance sheet date

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Applicability

• Applies to all defined benefit plans, including

− Pension and other retirement benefits − Certain post-employment benefits and compensated absences

Applies to all entities, including

− Not-for-profit organizations − Non-publicly accountable enterprises

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Balance sheet recognition

• Recognize funded status of an entity’s defined

benefit plans in the balance sheet

− Measured as the difference between the fair value of plan assets and the accrued benefit

• bligation
• Currently, funded status disclosed only in the

notes

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Income statement reporting

No change to net income Actuarial gains/losses and past service costs/credits initially recognized in OCI Amounts transferred from OCI to net income each period

− Transfer is component of benefit cost for period calculated per Section 3461

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Effect on the balance sheet

Current Section 3461 disclosure in notes At year end Fair value of plan assets $ 100,000 Accrued benefit obligation $ (450,000) Funded status of defined benefit plan $ (350,000) Unrecognized past service costs $ 150,000 Unrecognized net actuarial losses 300,000 Unrecognized transitional obligation 25,000 Unrecognized amounts $ 475,000 Accrued pension costs (asset) $ 125,000 Financial statement line item Before Section 3461 amendments Adjustment After Section 3461 amendments Accrued pension costs $ 125,000 $ (475,000) $ (350,000) Deferred tax assets — 190,000 190,000 Accumulated other comprehensive income (component of equity) — 285,000 285,000 Reverse current accrued pension costs $(125,000) + Funded status $(350,000) = $(475,000) adjustment To bring unrecognized amounts of $475,000 onto the balance sheet

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Effect on the balance sheet

Current Section 3461 disclosure in notes At year end Fair value of plan assets $ 100,000 Accrued benefit obligation $ (450,000) Funded status of defined benefit plan $ (350,000) Unrecognized past service costs $ 150,000 Unrecognized net actuarial losses 300,000 Unrecognized transitional obligation 25,000 Unrecognized amounts $ 475,000 Accrued pension costs (asset) $ 125,000 Financial statement line item Before Section 3461 amendments Adjustment After Section 3461 amendments Accrued pension costs $ 125,000 $ (475,000) $ (350,000) Deferred tax assets — 190,000 190,000 Accumulated other comprehensive income (component of equity) — 285,000 285,000 Total unrecognized amounts, after tax ($475,000 x (1-40%)) = $285,000 Tax effect of total unrecognized amounts ($475,000 x 40%) = $190,000

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Asset ceiling test

• Limit on carrying amount of defined benefit

plan asset continues to apply

− Maintain existing US-Canadian GAAP difference

• Change in valuation allowance arising from

limit recognized as a charge (credit) to other comprehensive income

− Amount then transferred to benefit cost to maintain same reported net income as current Section 3461

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Measurement date

Measure fair value of plan assets and accrued benefit obligation at balance sheet date (instead of date up to 3 months before)

− Unless subsidiary or equity-accounted investee’s year end differs from parent’s

− Measure at subsidiary or equity- accounted investee’s year end

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Presentation

Aggregate all

• verfunded plans and

recognize a single asset

Aggregate all

underfunded plans and recognize a single liability

Plan B Plan A Plan B Plan A Plan C

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Presentation

When a classified balance sheet is presented

− Show current and non-current portions of the defined benefit plan liability − Current portion determined as amount by which benefit payments in next 12 months exceed plan assets (on a plan-by-plan basis) − Asset for an overfunded plan shown as a non-current asset

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Disclosure

• Amounts in OCI and accumulated OCI
• Effects of recognition and measurement date

provisions on the financial statements in year

• f adoption
• New requirements same as for FAS 158

− FAS 158 also has certain additional disclosures

• Also see requirements in Accounting Changes,

Section 1506

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Disclosure

Modification of existing Section 3461 requirements as affected by the proposals Relief from certain requirements for specific entities consistent with current Section 3461

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Transitional provisions

• Earlier adoption encouraged, but only for all of

an entity’s defined benefit plans

• Recognition

− Include previously unrecognized amounts in accumulated OCI in year of adoption − Retrospective application prohibited

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Transitional provisions – Change in measurement date

“Dual measurement” alternative

− Additional measurement as of beginning of year of adoption − Period between previous lagged measurement date and beginning of year of adoption

• Adjust opening retained earnings for benefit

cost

• Recognize any settlement or curtailment

gains/losses in net income as incurred

• Adjust opening balance of accumulated OCI

for changes in plan assets and accrued benefit obligations

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Transitional provisions – Change in measurement date

“15-month” alternative

− No additional measurement in year of adoption − Between lagged measurement date and end of year of adoption (up to 15-month period)

• Benefit cost allocated proportionately between

benefit cost for year of adoption and ending retained earnings

• Recognize changes in plan assets and

accrued benefit obligations as OCI − Recognize any settlement or curtailment gains/losses incurred in period between lagged measurement date and beginning of year of adoption in net income in that period

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Effective date

Recognition and related disclosure provisions effective for fiscal years ending

• n or after December 31, 2007

− 1-year deferral for non-publicly accountable enterprises

Measurement date provisions effective for fiscal years ending on or after December 31, 2008

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Consequential amendments

Amended Interim Financial Statements, Section 1751, to require interims to use same asset/liability for defined benefit plans as at previous year-end balance sheet, adjusted for certain accruals and contributions to funded plan, or benefit payments

− Unless a remeasurement occurred during the year

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How do the proposals align with US GAAP and IFRSs?

US GAAP

− Maintains substantial harmonization

IFRSs (IAS 19)

− Measurement date provisions consistent − Recognition of funded status is an

• ption

− Amounts not recycled from OCI to net income

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Significant implications for preparers

Significant liability now on balance sheet

− Review compliance with contractual arrangements, including debt covenants

Measurement date of plan assets and accrued benefit obligations aligned at balance sheet date

− Entities with lagged measurement approach will need to revise processes

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Further information

Proposals and supporting materials available at:

www.acsbcanada.org

Comment deadline — June 30, 2007