Employee Benefits — Promises Revealed

Reproduced from the AcSB's FYI Newsletter June Issue

Financial statement users often stress the need for information that is more useful and understandable on financial reporting for employee benefits. Wait no longer! New proposals issued by the International Accounting Standards Board (IASB) in April 2010 on accounting for employee benefits under defined benefit plans expect to meet that need by:

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  requiring the full amount of the defined benefit obligation, net of plan assets, to be reported on the balance sheet;
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  reporting changes in the carrying amounts of defined benefit obligations and plan assets in the income statement in a more understandable way;
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  clarifying requirements that have resulted in diverse practices; and
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  improving information about an entity’s defined benefit plans, including the risks to the entity arising from these plans.

The IASB’s Exposure Draft, “Defined Benefit Plans (Proposed amendments to IAS 19, Employee Benefits),” has significant implications for both financial position and income reporting. Deferred recognition and smoothing of gains and losses would be eliminated — the full amount of defined benefit obligations, net of plan assets, would be reported in the statement of financial position. All changes in defined benefit obligations and in the fair value of plan assets would be recognized when those changes occur. The Exposure Draft also proposes a new presentation approach — entities will split changes in the defined benefit obligation and the fair value of plan assets into service cost, finance cost and remeasurement components, and present:

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  the service cost component in profit or loss;
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  the finance cost component (i.e., interest on the net defined benefit liability or asset, as part of finance costs in profit or loss); and
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  the remeasurement component in other comprehensive income.

Thus, this new presentation approach makes it easier for financial statement users to understand how defined benefit plans affect an entity’s financial position and financial performance, and how they may affect its future cash flows.

But that’s not all! The Exposure Draft also proposes improved disclosures focused on the characteristics of an entity’s defined benefit plans, the amounts in the financial statements resulting from those plans, and the risks arising from defined benefit plans (including sensitivity analyses of changes in significant actuarial assumptions). Additional disclosures about participation in multi-employer plans are also proposed.

The Exposure Draft contains some additional proposals that address issues arising in practice. These include how expected future salary increases affect the attribution of benefits to different periods and questions received by the former IFRIC (now known as the IFRS Interpretations Committee). As well, it proposes to incorporate the requirements of IFRIC 14 IAS 19 — The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction directly into IAS 19.

The Accounting Standards Board (AcSB) will adopt the amendments to IAS 19 into Part I of the CICA Handbook – Accounting when they are finalized, which is expected to be in mid-2011. As part of this adoption process, the AcSB plans to expose the IASB proposals for public comment in Canada shortly.