Exposure Draft, Exposure Draft, Employee Future Benefits Employee Future Benefits (Amendments to Section 3461) (Amendments to Section 3461) Overview of the requirements and highlights of Overview of the requirements and highlights of the expected changes in Canadian practice the expected changes in Canadian practice
Background � Concerns over balance sheet presentation of 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 2
Benefits � Defined benefit plan asset/liability in balance sheet represents current economic status � Increased transparency � Measurement date same as balance sheet date 3
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 4
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 obligation � Currently, funded status disclosed only in the notes 5
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 6
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) To bring unrecognized amounts of Unrecognized past service costs $ 150,000 $ 475,000 onto the balance sheet Unrecognized net actuarial losses 300,000 Unrecognized transitional obligation 25,000 Unrecognized amounts $ 475,000 Accrued pension costs (asset) $ 125,000 Financial statement Before Section 3461 Adjustment After Section 3461 line item amendments amendments Accrued pension costs $ 125,000 $ (475,000) $ (350,000) Deferred tax assets — 190,000 190,000 Accumulated other — 285,000 285,000 comprehensive income (component of equity) Reverse current accrued pension costs $ (125,000) + Funded status $ (350,000) = $ (475,000) adjustment 7
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 Before Section 3461 Adjustment After Section 3461 line item amendments amendments Accrued pension costs $ 125,000 $ (475,000) $ (350,000) Deferred tax assets — 190,000 190,000 Accumulated other — 285,000 285,000 comprehensive income (component of equity) Tax effect of total unrecognized amounts ($ 475,000 x 40%) = $190,000 Total unrecognized amounts, after tax ( $475,000 x (1-40%)) = $285,000 8
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 9
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 10
Presentation Plan A � Aggregate all Plan B overfunded plans and recognize a single asset � Aggregate all Plan A underfunded plans and recognize a single liability Plan B Plan C 11
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 12
Disclosure � Amounts in OCI and accumulated OCI � Effects of recognition and measurement date provisions on the financial statements in year of adoption � New requirements same as for FAS 158 − FAS 158 also has certain additional disclosures � Also see requirements in Accounting Changes , Section 1506 13
Disclosure � Modification of existing Section 3461 requirements as affected by the proposals � Relief from certain requirements for specific entities consistent with current Section 3461 14
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 15
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 16
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 17
Effective date � Recognition and related disclosure provisions effective for fiscal years ending on 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 18
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 19
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 option − Amounts not recycled from OCI to net income 20
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 21
Further information � Proposals and supporting materials available at: www.acsbcanada.org � Comment deadline — June 30, 2007 22
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