Employee Future Benefits

Employee Future Benefits CICA Handbook Accounting, Part II Section 3462 Background Information and Basis for Conclusions

Foreword In May 2013, the Accounting Standards Board (AcSB) released EMPLOYEE FUTURE BENEFITS, Section 3462 in Part II of the CICA Handbook Accounting. The AcSB has approved for publication the contents of this document setting out its rationale for these standards. Background Information and Basis for Conclusions documents are sources of generally accepted accounting principles, as described in GENERALLY ACCEPTED ACCOUNTING PRINCIPLES, Section 1100 in Part II of the Handbook. These documents are intended to help readers understand how the AcSB reached its conclusions, but they do not include explanations of requirements or guidance on the application of the relevant Section or Accounting Guideline. October 2013

Table of Contents PARAGRAPH Introduction... 1-2 Background... 3-7 Elimination of deferral and amortization accounting... 3-6 Applicability to not-for-profit organizations and pension plans... 7 Development of the standard... 8-13 Defined benefit plans... 14-86 Recognition of defined benefit liability (asset), including changes in that amount... 14-25 Remeasurements and other items... 26-43 Presentation and disclosure... 26-39 Capitalization of costs... 40-41 Definition... 42 Other issues... 43 Measurement date of plan assets and defined benefit obligations... 44-51 Measurement of a defined benefit obligation... 52-69 Timing of a funding valuation... 57-59 Use of a funding valuation... 60-65 Comparison between a funding and an accounting valuation... 66-67 Changes in accounting policy... 68-69 Remeasurement of a defined benefit obligation... 70-75 Determination of the cost for the period... 76-81 Administration costs... 76-78 Finance cost... 79 Gain or loss arising from settlements and curtailments... 80-81 Disclosures... 82-86 Defined contribution plans... 87-88 New types of benefit plans... 89-90 Other... 91 Effective date... 92-95 Transition... 96-105 Illustrative examples... 106-107 Consequential amendments... 108-112 Exposure for comment... 113-114

Background Information and Basis for Conclusions INTRODUCTION 1 This document summarizes considerations that were deemed significant by the members of the Accounting Standards Board (AcSB) in reaching their conclusions in developing EMPLOYEE FUTURE BENEFITS, Section 3462 in Part II of the Handbook. Section 3462 replaces EMPLOYEE FUTURE BENEFITS, Section 3461 (former Section 3461). This document sets out the reasons the AcSB undertook the project to develop this material, the process of research and deliberation, the key decisions made, and the principal reasons for adopting the positions taken and rejecting others. Individual AcSB members gave greater weight to some factors than to others. 2 Nothing in this document is to be taken as overriding the requirements of the Handbook. However, the discussion may help readers understand how the AcSB reached its conclusions in developing the Section and the AcSB s intent with respect to its interpretation and application. BACKGROUND Elimination of deferral and amortization accounting 3 Former Section 3461 permitted a choice between the immediate recognition approach and the deferral and amortization approach in accounting for defined benefit plans. Deferral and amortization accounting does not provide a faithful representation of an entity s defined benefit obligations since it excludes the effects of some gains and losses on the reported amount of those obligations. In some circumstances, this exclusion can result in the reporting of a plan asset even though the plan s obligations exceed its assets. 4 Deferral and amortization accounting also makes it difficult to understand defined benefit plan costs included in the income statement. Gains and losses related to defined benefit plans are deferred and amortized into income in future years (i.e., smoothed into income). Consequently, defined benefit plan costs include amounts resulting from current period activities and the amortization of amounts deferred in prior periods. 5 Financial statement users informed the AcSB that deferral and amortization accounting did not provide them with useful information about defined benefit plans. In their analysis, lenders and other users commonly replaced the balance sheet liability with the liability determined from the information on plan assets and defined benefit obligations included in the notes to the financial statements. The accounting policy choice between the two approaches also reduced comparability between different entities. 6 After consulting with its Private Enterprises Advisory Committee, the AcSB decided that eliminating the option to defer and amortize gains and losses for defined benefit plans would significantly improve the understandability, comparability and transparency of financial reporting for private enterprises. The AcSB noted that for similar reasons the International Accounting Standards Board (IASB) and the U.S. Financial Accounting 1

Employee Future Benefits Section 3462 Standards Board (FASB) had both eliminated deferral and amortization accounting for employee future benefits in their standards. Applicability to not-for-profit organizations and pension plans 7 While developing the revised standard on employee future benefits in Part II of the Handbook, the AcSB recognized that: (a) (b) not-for-profit organizations applying the standards in Part III of the Handbook also apply the standards for private enterprises in Part II of the Handbook to the extent that the Part II standards address topics not addressed in Part III, and no specific guidance is provided in Part III (see paragraph 38 below); and pension plans applying the standards in Part IV of the Handbook also may apply the standards for private enterprises in Part II of the Handbook to the extent that the Part II standards address topics not addressed in Part IV, and no specific guidance is provided in Part IV. DEVELOPMENT OF THE STANDARD 8 In developing Section 3462, the AcSB focused the revisions on the elimination of the deferral and amortization approach. In addition, the AcSB reflected that the elimination of the ability to measure plan assets and defined benefit obligations within a threemonth period prior to the balance sheet date was only included in that approach and not in the immediate recognition approach. The AcSB concluded that introducing a preyear-end measurement date for plan assets and defined benefit obligations into Section 3462 would be inconsistent with providing a faithful representation of the entity s defined benefit liability (asset). 9 The AcSB was not aware of any other significant concerns with former Section 3461 in practice. Consequently, the new standard was developed by modifying that Section to incorporate the above changes and necessary consequential changes. Other aspects of that Section were carried forward unchanged. 10 Throughout the development of the standard, the AcSB followed its due process. This process included: (a) (b) (c) (d) ongoing consultation with the Advisory Committee; a survey of the Associates of the Advisory Committee; issuance in January 2012 of the Exposure Draft, Employee Future Benefits, proposing to replace former Section 3461 with new Section 3462; and analysis and consideration of feedback received through written responses to the Exposure Draft (26 letters), a public consultation meeting and other discussions with stakeholders. 2

Background Information and Basis for Conclusions 11 The issues considered by the AcSB in developing the Exposure Draft and the conclusions on the more significant issues raised by stakeholders of private enterprises are discussed below. This discussion includes the anticipated effects on stakeholders that were considered by the AcSB in developing the standard. 12 Respondents to the Exposure Draft comprised a fairly even split between preparers, actuarial firms and public accounting firms. These respondents provided views on the proposals from both private enterprise and not-for-profit organization perspectives. The AcSB reminds stakeholders that as part of its due process related to Parts II, III and IV of the Handbook, it makes available a public file of materials relating to completed projects, which includes response letters received, unless confidentiality is requested. 13 Respondents generally supported the proposed changes and agreed that they should be applied by private enterprises and pension plans applying the standard. Concerns raised about the application of the proposals by not-for-profit organizations are discussed in paragraph 38. DEFINED BENEFIT PLANS Recognition of defined benefit liability (asset), including changes in that amount 14 As noted above, former Section 3461 included an option for an entity to defer to future periods the recognition of gains and losses on its defined benefit plans the deferral and amortization approach. Under this approach, the balance sheet amount excluded unrecognized gains and losses. The balance sheet did not provide financial statement users with a complete understanding of the extent of an entity s defined benefit obligations and its ability to satisfy these obligations. While note disclosure provided additional information, the AcSB pointed out that note disclosure is not a substitute for appropriate recognition and measurement. 15 The AcSB weighed the costs and benefits of eliminating the deferral and amortization approach, including the reasons provided in paragraphs 3-6. Additional benefits included simplification to the accounting by eliminating the need for preparers to maintain amortization schedules and reconcile on- and off-balance sheet amounts. The AcSB concluded that the costs to implement this proposal would be minimal because no new information was required and the accounting would be simpler. 16 The AcSB recognized that private enterprises with significant unrecognized losses would report an increased defined benefit liability. In some cases, this increased liability might materially reduce previously reported shareholders equity affecting certain financial ratios and the application of existing contractual arrangements, including debt covenants. Many changes to accounting standards affect financial ratios. The AcSB thinks that improving faithful representation and transparency in financial statements is important, while acknowledging that such improvements will often have an effect on financial ratios. The AcSB also noted that lenders and other financial statement users have generally adjusted the financial statements for defined benefit plan data, based on information in the notes. As a result, this change in accounting would not generally affect the ratios used by users. 3

Employee Future Benefits Section 3462 17 While eliminating the deferral and amortization approach would result in a more faithful representation of an entity s defined benefit liability (asset), the AcSB recognized that the immediate recognition of the effects of remeasuring plan assets and defined benefit obligations could result in significant volatility in earnings, depending on the materiality of remeasurements each year. Some supporters of deferred recognition of defined benefit plan gains and losses argue that smoothing remeasurements better reflects the annual cost of pension and other post-retirement defined benefit obligations given their long-term nature and, therefore, provides a more useful basis for financial statement users to predict future cash flows. Financial statement users on the Advisory Committee felt that if remeasurements were included in income, it would be important for financial statement users to be able to isolate the effect in carrying out their analyses. Provided this information was clearly evident, the financial statement users on the Advisory Committee believed that the potential volatility in income caused by remeasurements would not outweigh the benefits arising from immediate recognition. 18 IAS 19 Employee Benefits (amended in 2011) in Part I of the Handbook recognizes the effects of remeasuring plan assets and defined benefit obligations in other comprehensive income, rather than in profit or loss. However, the AcSB noted that accounting standards for private enterprises in Part II do not have the concept of other comprehensive income. Consequently, changes from remeasuring plan assets and defined benefit obligations could not be presented in other comprehensive income, but instead would be presented in net income. The AcSB also noted that private enterprises can opt to follow the International Financial Reporting Standards in Part I of the Handbook in its entirety, which include the concept of other comprehensive income. 19 In developing the Exposure Draft, the AcSB considered, but rejected, recognition of changes in the defined benefit liability (asset) directly in equity, rather than in income, for the following reasons: (a) (b) including remeasurements directly in equity is akin to other comprehensive income a concept that had been rejected by the AcSB in developing the Part II standards as it would add a level of complexity and cost beyond the benefits; and concern about setting a precedent for a similar treatment in other standards. 20 The AcSB concluded that the deferral and amortization approach should be eliminated and that alternative ways of reporting the volatility resulting from remeasurements of plan assets and defined benefit obligations should be considered. Therefore, the Exposure Draft proposed that private enterprises with defined benefit plans would report the full amount of the defined benefit obligation, net of plan assets, on the balance sheet. All changes from remeasuring these amounts would be recognized immediately in income. 21 The AcSB asked the Advisory Committee to undertake further analysis of the presentation and disclosure approaches that might be used to report remeasurements of plan assets and defined benefit obligations (see paragraphs 26-39). 4

Background Information and Basis for Conclusions 22 Most respondents agreed with the proposal to recognize the defined benefit liability (asset) in the balance sheet and to recognize changes in that amount in income. 1 They noted that the elimination of income smoothing practices was consistent with the conceptual framework. They also noted that this proposal was simpler to understand than deferred recognition and also eliminated the complexity associated with that recognition method. 23 Respondents who disagreed with the proposal were largely concerned with the effects on reported net income. Some felt that entities would be less likely to offer defined benefit plans or to make plan amendments providing increased benefits. Others were concerned about debt covenants and other contractual arrangements, pointing out that understanding, comparing and estimating costs would be more difficult because of the volatility in the balance sheet and income statement. Some respondents wished to continue smoothing actuarial gains and losses because of the long-term nature of the liability. They advocated for recognizing such gains and losses over a period of time, as explained in paragraph 17 above. 24 Respondents identified two alternatives to address volatility in reported net income including remeasurements in other comprehensive income similar to the treatment under IAS 19; or directly in equity, similar to a cumulative translation adjustment as described in FOREIGN CURRENCY TRANSLATION, Section 1651. The AcSB did not think that respondents put forth any new arguments or alternatives. The final standard states that the defined benefit liability (asset) is recognized in the balance sheet and changes in that amount are recognized immediately in income. The AcSB noted that in developing the proposals, it recognized concerns regarding volatility in the income statement and included presentation and disclosure requirements to ensure financial statement users have the information that they need. 25 Eliminating the accounting policy choice to use deferral and amortization accounting for defined benefit plans also led to the following changes from former Section 3461: (a) (b) (c) changes in terminology for example, the term defined benefit liability (asset) replaced the terms accrued benefit liability and accrued benefit asset, and the term defined benefit obligation replaced accrued benefit obligation ; elimination of the expected rate of return on plan assets because the actual return on plan assets is now included in the determination of defined benefit cost for the period; as a result of eliminating the expected rate of return on plan assets, calculation of the present value of economic benefits for purposes of the limit on the carrying amount of a defined benefit asset uses the discount rate for measuring the obligation; 1 Changes in the defined benefit liability (asset) are reflected as costs of a defined benefit plan for the period. These costs may be either expensed or capitalized as part of an asset such as inventory or property, plant and equipment. When an entity expenses these costs, it recognizes them in income for the period. 5

Employee Future Benefits Section 3462 (d) (e) elimination of the guidance on a temporary deviation from the benefit plan; and a new break-out of components of cost consistent with these changes and inclusion of the new defined term, remeasurements and other items. Remeasurements and other items Presentation and disclosure 26 Including changes in the defined benefit liability (asset) in income immediately could have a significant effect on reported net income in any individual period and lead to volatility in reported net income over a number of periods. Therefore, the AcSB considered whether presentation and disclosure requirements might help financial statement users in understanding these effects. Former Section 3461 did not require disclosure or separate presentation of defined benefit cost or of any components of that cost. 27 The financial statement users on the Advisory Committee supported the elimination of the deferral and amortization approach but stressed the importance of being able to identify the amount of remeasurements in a year and the change from year to year. They noted that the effects of remeasurements have low predictive value and, therefore, wanted the amount to be visible, so as to be able to make any appropriate adjustments in projecting future income and cash flows, developing key ratios and carrying out their analyses. The users also noted that they could generally obtain further information from a private enterprise about remeasurements when needed, as long as they are aware of the existence and amount of these items. The users were not concerned with including the volatile element in net income provided it is clearly identified. 28 With this understanding, the AcSB considered, but rejected, a proposal to require presentation or disclosure of total defined benefit cost. The AcSB noted that other compensation costs, such as salaries and wages, are not required to be disclosed. Disclosure of defined benefit cost would not clearly identify the size or amount of remeasurements included in total defined benefit cost nor would it be an efficient signal of a material remeasurement. Instead, the AcSB focused on providing information that would identify the effects of remeasurements separately. 29 The AcSB also considered, but rejected, a proposal to require presentation of the effects of remeasurements as a separate line item after tax, similar to the requirements for discontinued operations in DISPOSAL OF LONG-LIVED ASSETS AND DISCONTINUED OPERATIONS, Section 3475. The AcSB considered that approach to be similar to the concept of other comprehensive income that it had previously rejected. 30 The AcSB decided that the Exposure Draft would propose a requirement for the effects of remeasuring defined benefit plans to be clearly identified in the financial statements. This identification could be done by presentation as a separate line on the face of the income statement or by disclosure in the notes to the financial statements. Financial statement users on the Advisory Committee confirmed that this requirement would meet their need to understand the effect of volatility of defined benefit plan expense on 6

Background Information and Basis for Conclusions reported net income, and deal with volatile elements appropriately in their analyses. Conforming amendments were also proposed to INCOME STATEMENT, Section 1520. 31 After deciding on the proposal to require presentation or disclosure of the effects of remeasurements, the AcSB considered what should be included in the amount required to be separately presented or disclosed. The AcSB proposed that the effects of remeasurements would be referred to as remeasurements and other items and would comprise: (a) (b) a remeasurements component actuarial gains and losses, the difference between the return on plan assets and the return calculated using the discount rate used to determine the plan obligation, and the effect of any valuation allowance for a defined benefit asset; and an other items component past service costs, and gains and losses arising from settlements and curtailments. 32 The AcSB derived the remeasurements component from the following definition in IAS 19: Remeasurements of the net defined benefit liability (asset) comprise: (a) (b) (c) actuarial gains and losses; the return on plan assets, excluding amounts included in net interest on the net defined benefit liability (asset); and any change in the effect of the asset ceiling, excluding amounts included in net interest on the net defined benefit liability (asset). 33 For the purposes of accounting standards for private enterprises in Part II, the AcSB simplified the elements of the remeasurements component to minimize effort and cost. The AcSB proposed that no adjustment would be made for net interest on the net defined benefit liability (asset) because it thought that this adjustment would not make a difference to the decisions made by financial statement users. The AcSB concluded that it would only come into play when a net defined benefit asset is affected by an asset ceiling test. Also, such an adjustment would be more likely to result in confusion to the users of the Part II standards. 34 The AcSB considered whether other components of total defined benefit cost should be included with remeasurements. Past service costs, settlements and curtailments are similar to remeasurements in that the amount can vary significantly from year to year, resulting in volatility in expense and net income. Financial statement users on the Advisory Committee informed the AcSB that being able to identify these amounts was also important to them for reasons similar to those applicable to remeasurements. As a result, the AcSB decided to propose including past service costs and costs related to settlements and curtailments in an other items component that would be presented or disclosed together with remeasurements as remeasurements and other items. 7

Employee Future Benefits Section 3462 35 As a result of proposing to include past service costs and gains and losses arising from settlements and curtailments as part of remeasurements and other items, the AcSB considered also including the cost of termination benefits. The AcSB observed that termination benefits occur on an irregular basis and are controlled by management, similar to plan amendments, settlements and curtailments. However, the AcSB rejected including the cost of termination benefits because termination benefits do not always relate to defined benefit plans, unlike costs proposed to be included in remeasurements and other items. For example, contractual termination benefits can occur under a collective bargaining agreement when a specified event such as a plant closing occurs, or under a benefit plan other than a defined benefit plan such as a defined contribution plan. 36 In finalizing the proposal to require either presentation or disclosure of the amount of remeasurements and other items, AcSB members expressed some concern about the possible cost of determining this amount if the individual components discussed above had to be determined separately. As a simplification, the proposals permitted this amount to be determined by deducting current service cost and finance cost from total defined benefit cost (see paragraph 3462.090). 37 The majority of respondents supported the proposed requirement for private enterprises to disclose remeasurements and other items in the notes to the financial statements, unless separately presented on the face of the income statement, for the same reasons as the AcSB. As a result, the standard was finalized, as exposed (see paragraph 3462.115(f) and INCOME STATEMENT, paragraph 1520.04(s)). 38 Respondents generally agreed that the Exposure Draft proposals should also be applied by not-for-profit organizations following the standards in Part III of the Handbook. However, significant concerns were raised about including remeasurements and other items in a not-for-profit organization s statement of operations. The AcSB considered this concern and decided to develop separate guidance for not-for-profit organizations on this specific point. Accordingly, in June 2013, the AcSB issued a separate Exposure Draft, Reporting Employee Future Benefits by Not-for-Profit Organizations. 39 Some additional issues related to the proposed accounting for remeasurements and other items arose from respondents comments, and these issues are discussed below. Capitalization of costs 40 One respondent felt it was unclear whether remeasurements and other items should be included in the cost of inventory, and property, plant and equipment for selfconstructed assets. The respondent noted that remeasurements and other items can be highly volatile and questioned whether these items related to the work performed in producing inventory, or constructing or developing an asset. 41 In undertaking this project, the AcSB had limited its scope and did not intend to change current practice on capitalization of employee future benefit costs. Both INVENTORIES, Section 3031, and PROPERTY, PLANT AND EQUIPMENT, Section 3061, provide guidance on the costs to be capitalized for self-constructed assets. This guidance includes labour 8

Background Information and Basis for Conclusions costs and does not differentiate between different components of labour costs. Therefore, the AcSB decided not to address this issue in Section 3462. Definition 42 The Exposure Draft described remeasurements and other items, but did not include this as a defined term. The AcSB agreed with suggestions to add a definition to the final standard given its significance. Other issues 43 Other issues raised related to remeasurements and other items included aligning the composition of the components with IAS 19 and adding a requirement to disclose the components of remeasurements and other items as well as total benefits expense. In consultation with the Advisory Committee, which includes financial statement users, the AcSB noted that it considered these issues during the development of the proposals and found that no new arguments had been put forth as a result of the exposure process. Accordingly, the AcSB did not modify the proposals for these related issues. Measurement date of plan assets and defined benefit obligations 44 Former Section 3461 permitted an entity using the deferral and amortization approach to measure plan assets and defined benefit obligations within a three-month measurement date window prior to the balance sheet date. However, the immediate recognition approach in that Section required measurement at the balance sheet date. 45 The AcSB noted that the ability to use a measurement date for the defined benefit obligation up to three months before the end of the year was inconsistent with how other liabilities were measured and also affected comparability between entities. For example, under former Section 3461, an entity with a December 31 year end could have a measurement date of October 31 while a similar entity might have a December 31 measurement date. The effect of these different measurement dates could be substantial, especially when market events change plan asset values significantly between these measurement dates. 46 Therefore, the AcSB decided to require that plan assets and defined benefit obligations be measured at the balance sheet date. 47 The AcSB recognized that many private enterprises had used the deferral and amortization approach in former Section 3461 and that the measurement date change would provide less time for the measurement process. However, the proposals included the roll forward provision from former Section 3461. An actuarial determination of the obligation could be made prior to the balance sheet date and subsequently updated as necessary, as long as the result of such computations reflects the defined benefit obligation at the balance sheet date. 48 Most respondents agreed with the proposal to eliminate the three-month measurement date window prior to the balance sheet date for plan assets and defined benefit obligations because it would enhance comparability between entities. 9

Employee Future Benefits Section 3462 49 However, some respondents felt that the proposed requirement to measure plan assets and defined benefit obligations at the balance sheet date precluded use of rollforward provisions. In finalizing the standard, the AcSB modified the wording to as of the balance sheet date to be consistent with the use of the roll-forward provisions. 50 The AcSB noted that plan assets for private enterprises usually consist of securities with readily available market values. A roll-forward is not necessary for such assets. It would also be difficult for a roll-forward to reflect potentially significant fluctuations between the balance sheet date and an earlier measurement date. However, market values may not be readily available for some plan assets (for example, real estate or non-quoted investments). For these assets, a valuation may be done prior to the balance sheet date and rolled forward, taking into account known changes in conditions. 51 For an actuarial valuation prepared for accounting purposes, former Section 3461 specified that the discount rate used to measure the defined benefit obligation be determined at the measurement date for defined benefit obligations. As a consequence of eliminating the pre-year-end measurement date, Section 3462 requires the discount rate to be determined at the date of the actuarial valuation. Measurement of a defined benefit obligation 52 When a defined benefit plan is required by legislation or regulation to have an actuarial valuation for funding purposes, the immediate recognition approach in former Section 3461 required the use of an appropriate funding valuation for the measurement of the defined benefit obligation. An appropriate funding valuation in that Section was one that had not been prepared for solvency or wind-up purposes. The use of a funding valuation was a simplification that eliminated the additional costs of preparing an accounting valuation. Financial statement users had informed the AcSB that the use of a funding valuation would not result in a loss of decision-useful information. 53 The AcSB thinks that many entities use an actuarial valuation for accounting purposes for defined benefit plans that do not have a funding valuation and may prefer to measure all their defined benefit plans using consistent methodology. The AcSB did not see any reason to prevent entities from using an accounting valuation if they choose to do so. Financial statement users had informed the AcSB that either valuation would meet their needs. 54 The AcSB decided to propose that an entity would have an accounting policy choice for the measurement of the obligation for defined benefit plans that have a funding valuation meeting certain criteria. The measurement choice would be to use either that funding valuation or a separate actuarial valuation for accounting purposes. This accounting policy choice would be applied to all such plans to provide consistency in the information provided in the financial statements a characteristic valued by financial statement users. 55 Almost all respondents supported this Exposure Draft proposal. Some respondents acknowledged a lack of comparability to the financial statements of entities that choose an accounting valuation. Other respondents noted a potential opportunity to manage the volatility of reported earnings by using a margin for adverse deviation in the best 10

Background Information and Basis for Conclusions estimate assumption for the discount rate. Actuarial standards permit a margin, which typically might be an allowance of one per cent in the discount rate. However, it was noted that funding valuations generally use unadjusted market interest rates for the discount rate. 56 On balance, the AcSB concluded that the arguments supporting the proposed choice outweighed those against and decided to permit entities an accounting policy choice to measure the defined benefit obligation using either an accounting valuation or an appropriate funding valuation, as exposed. However, the AcSB made some clarifications in developing the final standard as discussed below. Timing of a funding valuation 57 Former Section 3461 and the Exposure Draft referred to using the most recent actuarial valuation prepared for funding purposes. In finalizing Section 3462, some AcSB members questioned the meaning of these words. For example, should a valuation finalized shortly after the balance sheet date be used? 58 The AcSB noted that the following requirements provide users with information regarding the timing of the valuation used: (a) (b) remeasurement of the defined benefit obligation at least every three years; and disclosure of the effective date of the most recently completed actuarial valuation used in determining the defined benefit obligation. 59 The AcSB agreed that it did not intend that entities delay issuing financial statements by waiting for a valuation report. The AcSB also did not wish to require entities to accelerate their process of obtaining a funding valuation. The AcSB clarified that, when a funding valuation is used, the actuarial valuation of a defined benefit obligation is measured as of the balance sheet date using the most recently completed actuarial valuation. Use of a funding valuation 60 Former Section 3461 and the Exposure Draft referred to an actuarial valuation prepared for funding purposes (but not one prepared for solvency or wind-up purposes). 61 One respondent questioned whether the choice of a funding valuation was only available to plans that meet the definition of a funded benefit plan. The AcSB confirmed that it did not intend to require an entity to use an accounting valuation for an unfunded plan. It clarified this intent by adding paragraph 3462.031 to explain that an entity may prepare a valuation for an unfunded plan on a basis consistent with a funding valuation. During its redeliberations, the AcSB considered an example of an entity with an unfunded defined benefit supplemental executive retirement plan offering pension benefits and a funded registered defined benefit pension plan. This entity may prefer to measure both pension plans using a funding valuation rather than measure the unfunded supplemental plan using an accounting valuation. 11

Employee Future Benefits Section 3462 62 The AcSB also noted that an entity with an unfunded non-pension post-retirement benefit plan may find the choice of using a funding valuation an attractive option. Such plans are often provided to the same employee and retiree groups as the pension benefits and, thus, use of a funding valuation may produce efficiencies and, as a result, reduce valuation costs. 63 One respondent felt that the proposals should clarify whether there were any limitations on the use of a valuation prepared for funding purposes. Examples raised included using a funding valuation that has been prepared but not filed with a regulatory authority, and a funding valuation that uses different actuarial cost methods than the one used for accounting purposes. The AcSB confirmed that it did not intend to impose any further restrictions on the use of a funding valuation because it considered that any such guidance would inappropriately extend into the area of an actuary s expertise. 64 After the AcSB s exposure period closed, changes were proposed and finalized to the Canadian Actuarial Standards of Practice. Those changes introduced an other valuation that could be used in preparing a funding valuation for a pension plan. This new valuation was in addition to the most common types a going concern valuation, a hypothetical wind-up valuation and a solvency valuation. After consultation with representatives from the actuarial community, the AcSB decided to modify the types of actuarial valuations prepared for funding purposes that are permitted by Section 3462 to accommodate this recent change to the actuarial standards. Thus, Section 3462 permits measurement of the defined benefit obligation using the most recently completed actuarial valuation prepared for funding purposes (but not one prepared using a solvency, wind-up, or similar valuation basis). 65 In finalizing the wording of Section 3462, the AcSB confirmed its intent to avoid a specific reference to the going concern funding valuation to allow entities with individual pension plans accounted for as defined benefit plans to use the funding valuation referred to in the Income Tax Act. Comparison between a funding and an accounting valuation 66 Former Section 3461 and the Exposure Draft included a brief discussion within the guidance on actuarial assumptions regarding differences between those assumptions used for funding valuations compared to accounting valuations. 67 One respondent expressed concern that many stakeholders did not understand the difference between a funding valuation and an accounting valuation. This respondent suggested that the final standard explain this difference to benefit both users and preparers. The AcSB agreed and decided to clarify the distinction between a funding valuation and an accounting valuation by expanding the qualitative discussion of the different objectives of these valuations. Changes in accounting policy 68 An entity may change between an actuarial valuation for funding purposes and an actuarial valuation for accounting purposes, or it may change the actuarial cost method. 12

Background Information and Basis for Conclusions These changes represent accounting policy changes. ACCOUNTING CHANGES, Section 1506, requires retrospective application of such changes unless impractical. The AcSB noted that when employee benefit costs have been capitalized as part of the cost of inventory or self-constructed property, plant and equipment, recalculations of the capitalized amounts would be necessary in conjunction with a change in accounting policy to meet the Section 1506 requirements. As recommended by the Advisory Committee, the AcSB concluded that this aspect of a restatement would be difficult and would not meet a cost/benefit test. 69 As a result, the AcSB added an exemption to Section 3462 to indicate that an entity that includes employee benefit costs in the carrying amount of assets, such as inventories or property, plant and equipment, need not restate the carrying amount of those assets when making a change in its accounting policy for measuring the defined benefit obligation. The AcSB noted that this exemption is consistent with the exemption provided within the transitional provisions. Remeasurement of a defined benefit obligation 70 The immediate recognition approach in former Section 3461 included roll-forward provisions for remeasurement of a defined benefit obligation for years between valuations. Those provisions were carried forward into the Exposure Draft. 71 The provisions identified certain elements that an entity would take into account in a roll-forward, including any other significant changes. Several respondents questioned whether an entity would be required to include a change in the discount rate when calculating a roll-forward. 72 The AcSB and the Advisory Committee considered the costs and benefits related to changing the discount rate in those circumstances. Requiring significant changes in the discount rate would complicate the roll-forward methodology. It may also increase actuarial costs and related audit costs because quantifying the effect of a change in the discount rate would likely require the assistance of an actuary. The AcSB noted that the intent of the roll-forward provision is to avoid a requirement for an annual actuarial valuation. Furthermore, preparers and auditors may have different views on what constitutes a significant change in the discount rate. However, requiring changes in the discount rate to be included in a roll-forward calculation would promote consistent application of the standard and enhance comparability between entities. 73 The AcSB decided that the final standard should include examples of factors to be taken into account in a roll-forward, rather than what might appear to be a comprehensive list. As a result, the AcSB deleted any other significant changes and the effects of changes in employee composition and salaries from the list of factors provided in the Exposure Draft. It also clarified that an entity exercises professional judgment and takes into account factors such as the ones identified in the standard. The AcSB acknowledged that not updating the discount rate may result in the measurement of the defined benefit obligation becoming less accurate during the period when a rollforward is used. The AcSB noted that an entity would not be precluded from updating 13

Employee Future Benefits Section 3462 the discount rate. Disclosure of the last actuarial valuation is required, which will help users in evaluating the obligation. 74 The AcSB also clarified that a significant change in the interest rate used in determining the discount rate to measure the defined benefit obligation does not constitute a significant event for the purpose of triggering a requirement for a new actuarial valuation. 75 One respondent noted that the proposals implied that all settlements, curtailments and plan amendments would be significant events, even if they are quite small. The AcSB agreed that these events would not always be significant and clarified that a settlement, curtailment or plan amendment are examples of events that may be significant and require a remeasurement of the defined benefit obligation. Determination of the cost for the period Administration costs 76 The Exposure Draft proposals clarified that the costs of managing plan assets paid for by the plan sponsor are deducted in calculating the actual return on plan assets a component of the total cost of a defined benefit plan for a period. Former Section 3461 did not address this issue. 77 Several respondents questioned whether other fees relative to administering the plan and paid for by the plan sponsor, such as audit and actuarial fees, should also be deducted. The final standard clarified that other administration costs are not deducted from the actual return on plan assets. This clarification converges with IAS 19. In addition, the final standard included audit and actuarial fees as examples of other administration costs. 78 The AcSB also noted that any costs of managing plan assets paid for by the plan itself reduce plan assets. Therefore, the return on plan assets is affected equally, whether the costs of managing plan assets are paid for by the plan or by the plan sponsor. Finance cost 79 One element of the defined benefit cost is finance cost. Finance cost represents the interest cost associated with the unfunded portion of the liability. The AcSB noted that the interest cost would depend on the amount of the liability during the reporting period and that this amount would vary with such factors as contributions to the plan and benefit payments from the plan. However, to track interest cost throughout the reporting period could be a significant work effort. Therefore, the AcSB decided to permit a simplification whereby finance cost is calculated based on the defined benefit liability at the start of the period. This simplification would also apply to a defined benefit asset. The AcSB noted that the standard does not prevent an entity from incorporating into the determination of finance cost the effect of cash flows into and out of a plan during the year. 14

Gain or loss arising from settlements and curtailments Background Information and Basis for Conclusions 80 The Exposure Draft did not include guidance on the determination of a gain or loss arising from settlements and curtailments because it was part of the guidance on the deferral and amortization approach in former Section 3461. Respondents noted that one way of calculating remeasurements and other items involves determining each component separately, including settlements and curtailments, to build up to the total. They suggested that the guidance on settlements and curtailments be provided. One respondent also suggested that the AcSB clarify that a gain or loss from a settlement involves a change in the fair value of plan assets, in addition to a change in the defined benefit obligation. 81 The AcSB agreed with these respondents and added guidance for determining a gain or loss from a settlement or curtailment that was derived from the corresponding guidance in IAS 19. Disclosures 82 The Exposure Draft proposed disclosure of remeasurements and other items, unless separately presented on the face of the income statement as discussed in paragraphs 26-39. The Exposure Draft also proposed several minor changes to the disclosure requirements in former Section 3461. 83 The AcSB noted that ACCOUNTING CHANGES, Section 1506, required disclosure of changes in accounting policies. It agreed to clarify in the Exposure Draft that this requirement includes any change in the actuarial cost method used. Respondents agreed with this proposal but suggested that a change between a funding valuation and an accounting valuation also be included for clarity. It was also suggested that a definition of an actuarial cost method be added. The AcSB agreed with these suggestions. This definition was derived from the Canadian Actuarial Standards of Practice. 84 Former Section 3461 required disclosure of the most recent actuarial valuation used for funding purposes. The Exposure Draft proposed to change this disclosure to the effective date of the most recent actuarial valuation used in determining the defined benefit obligation, including the nature of that valuation. The AcSB thought that this disclosure would be more useful in understanding the information about defined benefit plans included in financial statements. Respondents agreed with this proposal but noted that the requirement to disclose the nature of the valuation was covered by the disclosure of accounting policies. The AcSB agreed and eliminated the duplication. The AcSB also clarified the disclosure regarding the effective date to refer to the most recently completed actuarial valuation to be consistent with the clarification for the funding valuation. 85 One respondent suggested that the valuation method used in determining the defined benefit obligation should be disclosed. For example, in the case of a funding valuation, whether a going concern funding valuation or a maximum funding valuation as per the Income Tax Act is used. The AcSB had previously considered, but rejected, this disclosure. The AcSB noted that although information regarding the valuation method 15

Employee Future Benefits Section 3462 would be readily available and a preparer would not incur additional costs, such information would likely produce boilerplate information. The AcSB was also concerned that many financial statement users would not find the information useful as they did not have sufficient understanding of actuarial methods. Those users who wanted such information could request it from the reporting entity. The AcSB continued to support its previous decision and, thus, rejected requiring disclosure of the valuation method. 86 Other additional disclosures suggested by respondents included reconciliation of plan assets and defined benefit obligations, a summary of significant assumptions, and sensitivity information. The AcSB and the Advisory Committee had considered, but rejected, additional disclosures of this nature when developing the accounting standards for private enterprises. That decision was based on the objective that the existing disclosures provide enough information for users to understand the financial statements, and to be able to make informed inquiries regarding financial statement items or transactions when they require further details. The AcSB continued to support this previous decision and, thus, rejected adding new disclosures. DEFINED CONTRIBUTION PLANS 87 The Exposure Draft proposed modifications to the accounting for past service costs of defined contribution plans in former Section 3461 to be consistent with the proposals for past service costs of defined benefit plans. Past service costs would be recognized immediately in income rather than deferred and amortized to income over future periods. 88 Respondents agreed with this proposal for accounting for past service costs of defined contribution plans. However, one respondent suggested clarification of the proposed wording. The AcSB agreed with the respondent and clarified that past service costs for defined contribution plans are recognized in the period in which the plan is initiated or in the period in which a plan amendment is agreed to. NEW TYPES OF BENEFIT PLANS 89 One respondent requested that the AcSB address new types of benefit plans emerging in the Canadian marketplace such as target benefit plans. 90 The AcSB decided that addressing new types of plans would be beyond the scope of the current project. The AcSB observed that private enterprises following Part II of the Handbook may wish to exercise their professional judgment and consider the substance of the benefit plans as well as their components, and analogize to the guidance and refer to the definitions that exist in Section 3462 (and former Section 3461) for benefit plans, defined benefit plans and defined contribution plans. OTHER 91 The AcSB received other minor suggestions from respondents, including those of an editorial nature such as reordering paragraphs and moving paragraphs around to 16