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Employee Future Benefits. Nancy Estey, Principal, Accounting Standards Board staff. AK/ADMS 4510 M&N – Winter 2004. February 23, 2004 4-7 pm; 7-10 pm. Discussion Outline. Recent headlines Environment driving change Current financial statement impacts Background A compensation package - PowerPoint PPT Presentation
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1 Employee Future Benefits – February 2004
Employee Future Benefits
Nancy Estey, Principal, Accounting Standards Board staff
February 23, 2004 4-7 pm; 7-10 pm
AK/ADMS 4510 M&N – Winter 2004
2 Employee Future Benefits – February 2004
Discussion Outline
Recent headlines Environment driving change Current financial statement impacts Background
– A compensation package– Types of employee future benefits– Financial statement objectives– Deferred compensation– Discount rate
3 Employee Future Benefits – February 2004
Discussion Outline
Developments in Canada Highlights of Canadian disclosure
improvements What’s Ahead Understanding “smoothing” The “Corridor” approach Move to presentation format
4 Employee Future Benefits – February 2004
Recent Headlines
Rates, high dollar erase pension gains (G&M, Jan 22/04)
Pensions seen as key factor in executive pay (G&M, Jan 7/04)
Pension smoothing hides the facts (G&M, Oct 15/03)
Pension shortfalls threaten to explode (G&M, May 12/03)
5 Employee Future Benefits – February 2004
Environment Driving Change
Significant losses sustained by many pension plans in the last few years + lower market interest rates
– Increased benefit obligation– Growing deficit position– Drain on cash flow– Increased pension costs
Post-Enron era– “Smoothing” results in off-balance sheet debt, which draws
attention– Poor plan performance increases this debt– Need for transparency
6 Employee Future Benefits – February 2004
Current Financial Statement Impacts
$0
$5
$10
$15
$20
$25
2000 2001 2002
Average Pension Expense ($ million)
Source: Towers Perrin review of financial statements of 90 major Canadian Companies that sponsor defined benefit plans.
7 Employee Future Benefits – February 2004
Current Financial Statement Impacts
-$150
-$100
-$50
$0
$50
$100
$150
$200
$250
Average Deferred Pension Cost ($ million)
Source: Towers Perrin review of financial statements of 90 major Canadian Companies that sponsor defined benefit plans.
2000 2001 2002
8 Employee Future Benefits – February 2004
A Compensation Package
This Year When Retired•Salary
•Fringe benefits
•Bonus
•Profit sharing
•Pension benefits
•Vision Care
•Drug Plan
•Life Insurance
Cash Paid
•Stock options
9 Employee Future Benefits – February 2004
Types of Employee Future Benefits
Accounting for future promises– promised pension and other benefits when they retire
Eligibility via age and service Pension Benefits
– Defined benefit plans now a major cost of doing business Low interest rates Decline in equity markets
Post-retirement benefits Life insurance Extended health care
– double-digit growth due to Rising drug costs, aging membership
10 Employee Future Benefits – February 2004
F/S Objectives
Plan performance affects– Financial Position (B/S)– Operating Results (I/S)– Changes in Financial Position (Cash flows)
Employee Future Benefits Accounting– CICA Section 3461– FAS 87, 88, 106, 112, 132(r) in the US
11 Employee Future Benefits – February 2004
Deferred Compensation
Estimate amounts to be paid out in the future (future benefit payments)
Discount those future payments to reflect the time value of money
Allocate the resulting amount “deferred compensation cost”
– Over the periods of service required of the employees in exchange for the promise of those future payments
So, cost of future benefits recognized as the employees render service to the company
12 Employee Future Benefits – February 2004
Discount Rate
Market-driven rate Controversial
– Revalue at each balance sheet date Discount rate Obligation Discount rate Obligation
– Volatility in I/S Corridor method (element of smoothing) helps But volatility unwelcome
13 Employee Future Benefits – February 2004
Developments in Canada
Long-term– Participate in global project
Start over from 1st principles
Short-term– Limited-scope disclosure enhancements – Revised disclosure requirements to be issued on
or about March 1, 2004
14 Employee Future Benefits – February 2004
Highlights of CDN Disclosure Enhancements
Disclosures related to the reporting entity’s financial statements
– Total cash payments – Balance sheet classification of the accrued benefit
asset/liability– Clarification on the accounting policy disclosures that
should be made– Components of costs recognized (in addition to the total) – Reconciliation of the accrued benefit obligation to the
balance sheet asset or liability– Effects of a one-percentage-point increase and decrease in
the assumed health care cost trend rates
An entity shall recognize
a liability and an expense
for post employment benefits
and compensated absences
that do not vest or accumulatewhen(a) the event obligating the
15 Employee Future Benefits – February 2004
Highlights of CDN Disclosure Enhancements (cont’d)
Disclosures related to the benefit plan– Description of the type of plans – Actual allocation of plan assets by major asset category– Date used to measure the plan assets and the benefit
obligations – Effective date of the last (as well as the next required)
actuarial valuation for funding purposes – Significant assumptions – Reconciliations - plan obligation and plan assets
An entity shall recognize
a liability and an expense
for post employment benefits
and compensated absences
that do not vest or accumulatewhen(a) the event obligating the
16 Employee Future Benefits – February 2004
Highlights of CDN Disclosure Enhancements (cont’d)
Distinction between “public” and non-”public” entity requirements
“Public” implies public enterprises, co-operative organizations, deposit-taking institutions or life insurance companies
Covers pension benefits, but also post-retirement and post-employment plans
Interim financial statements– Total benefit cost
An entity shall recognize
a liability and an expense
for post employment benefits
and compensated absences
that do not vest or accumulatewhen(a) the event obligating the
17 Employee Future Benefits – February 2004
What’s Ahead?
Developments Around the World UK – FRS 17, mark to market
– Aborted; punted to IASB
IASB– Plans to issue ED of improvements to IAS 19 in Q2 2004 with
final standard Q1 2005 the removal of options for the deferred recognition of actuarial
gains and losses enhancing disclosure
18 Employee Future Benefits – February 2004
What’s Ahead?
Developments Around the World (cont’d) US FASB
– Disclosure ‘quick fix’ – Final statement issued with effective date for fiscal years
ending after December 15, 2003 more complete information about plan assets, obligations, cash
flows, and net cost assists users of f/s in assessing the market risk of plan assets, the
amount and timing of cash flows, and reported earnings.
19 Employee Future Benefits – February 2004
Understanding “Smoothing”
Delayed recognition of events (spread changes over the future)
– Amortize to expense over a period of time rather than immediate recognition
Past service costs Actuarial gains/losses [also corridor approach]
Treatment of returns on pension plan assets– Expected return, not actual return (difference amortized to
expense over time)– Market-related value of plan assets deferring recognition of
recent investment gains and losses for up to 5 years
20 Employee Future Benefits – February 2004
The “Corridor” approach
21 Employee Future Benefits – February 2004
Move to Presentation format
Debate “smoothing” i.e., deferred recognition of events