2008 general meeting assemblée générale 2008 toronto, ontario
DESCRIPTION
Canadian Institute of Actuaries. L’Institut canadien des actuaires. 2008 General Meeting Assemblée générale 2008 Toronto, Ontario. IFRS CONVERSION: IMPLICATIONS FOR SPONSORS OF PENSION AND POSTRETIREMENT PLANS. Mark Walsh, Principal Accounting Standards Board Ken Choi, Principal - PowerPoint PPT PresentationTRANSCRIPT
2008 General MeetingAssemblée générale 2008
Toronto, Ontario
Canadian Institute
of Actuaries
L’Institut canadien desactuaires
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IFRS CONVERSION: IMPLICATIONS FOR SPONSORS
OF PENSION AND POSTRETIREMENT PLANS
Mark Walsh, PrincipalAccounting Standards Board
Ken Choi, PrincipalTowers Perrin
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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
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Why Change?
• Growth of global capital markets– 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
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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
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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
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Adoption of IFRS• IFRS will be adopted “as is”
– 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
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Implications of Adopting IFRS• A significant project• More than accounting:
– Actuaries– Systems– Debt covenants– Compensation linked to financial performance– Management reporting, budgets– Controls– Shareholders, analysts
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When will IFRS become Canadian GAAP?
• Years beginning on or after January 1 2011– 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
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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
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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
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Not-for-profit Organizations• AcSB strategy under development
– 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
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Pension and Postretirement Benefit Plans
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CICA vs IFRS – What's Different?
CICA 3461 IFRS
Accrued Benefit Obligation (ABO) Defined Benefit Obligation (DBO)
Accrued Benefit Asset/Liability (ABA/ABL) Defined Benefit Asset/Liability
Terminology differences…
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CICA vs IFRS – What's Different?
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
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CICA vs IFRS – What's Different?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
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Gains/Losses
• 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
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Past Service Costs
• 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
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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
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Curtailments and Settlements
• 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
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Note Disclosures
• 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
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Limit on Balance Sheet Asset
• 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
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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
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Limit on Balance Sheet Asset
• 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
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Example: Past Service MFRXYZ Company Balance Sheet
Assets Liabilities and Shareholders' Equity
Cash 300 Other liabilities 250
Pension assets 200
Shareholders' equity 250
Total assets 500 Total liabilities and equity 500
* MFR for past service is 100
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Example: Past Service MFRXYZ Company Balance Sheet
Assets Liabilities and Shareholders' Equity
Cash 300 Other liabilities 250
Pension assets 200
Shareholders' equity 250
Total assets 500 Total liabilities and equity 500
* MFR for past service is 100
200
400400150
After MFR of 100 has been contributed
no change because XYZ doesn’t have unconditional right
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Limit on Balance Sheet Asset
• Under IFRIC 14: Future Service MFRs– 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”
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Limit on Balance Sheet Asset
• Changes in effect of asset limits and MFRs– Are recognised through P&L if company
amortizes gains/losses– Are recognised through OCI otherwise
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IASB Discussion Paper
• 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
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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
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Contribution Based Promises
• 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 defined-
dollar 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
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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
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Keeping up-to-date
www.acsbcanada.org
• Register to be notified of changes
Questions? Comments?