Background
In 2010, the Accounting Standards Board (AcSB) issued Accounting Standards for Pension Plans (ASPP) in Part IV of the CPA Canada Handbook—Accounting, Section 4600. Since then, there have been amendments to clarify that the section also applies to benefit plans providing benefits to employees during their active service, as well as clarification pertaining to certain investment fair value disclosures.
In 2021, the AcSB established a Pension Plan Working Group (PPWG) to better understand and address challenges stakeholders experience relating to Section 4600 to ensure consistency across the pension industry.
After considering the advice of the PPWG, the AcSB is proposing to amend Section 4600 to address various issues that were felt to have the most diversity in practice. The AcSB, however, has also indicated that there are other issues that they will continue to research and will consider addressing in the future.
2022 Exposure draft
The exposure draft issued for comment proposes updates to Section 4600 with the purpose of ensuring financial reporting consistency across the pension and benefits sector in Canada. Stakeholders have until June 15, 2022 to provide their comments on the proposed amendments.
Additionally, the exposure draft includes illustrative examples that may be helpful in the application of the proposed changes.
The following are the primary issues addressed in the proposals in the exposure draft:
The exposure draft defines an amalgamation date as the date on which a pension plan obtains the legal right to the assets and becomes liable for the obligations of the pension plans it is amalgamating with. Likewise, the definition of a split date is proposed as the date on which a pension plan loses the legal right to the assets and is no longer liable for the obligations of the pension plan it is splitting from.
The exposure draft proposes that the legal right is considered to have been met at the later of:
- upon receiving regulatory approval;
- plan assets and liabilities are transferred to the recipient plan; and
- the effective date of the legal contract underlying the transaction.
The exposure draft also proposes that if the pension plans are still in the process of the amalgamation or split process, the pension plan should disclose information pertaining to the transaction.
Many pension plans now include both defined benefit and defined contribution components in a single registered pension plan, referred to in the exposure draft as combination plans. In the pension sector, many refer to such plans as hybrid plans. Although the best practice has been to provide information about the defined benefit and defined contribution components separately in the financial statements, the existing standard has no such requirements.
The exposure draft proposes a separate presentation of this information, which provides users of the financial statements with important information about the respective pension plan components.
A buy-in annuity contract is entered into when a pension plan purchases an annuity from a third party that allows the cash inflows from the third party to match the cashflows of the outgoing benefit payment that is paid by the pension plan.
The proposals clarify that the investment should be measured at a value equal to the benefit obligation, assuming the annuity contract is fully collectible. Any gain or loss from the purchase of the annuity contract is recognized in the year that the annuity is purchased.
A buy-out annuity contract is entered into when a pension plan purchases an annuity contract from a third party and the third party takes over the pension obligation and related benefit payments of the pension plan.
The proposals clarify that the investment asset and pension obligation are derecognized when the third party takes on the risk. One of the considerations in the derecognition process is whether the pension plan's regulator provides a discharge of the pension obligation to the pension plan.
The exposure draft also requires disclosure of relevant factors pertaining to the contract for the period of time that the pension plan is subject to the annuity contract.
Many pension plans use master trust structures to hold investments for multiple pension plans as this results in pooled investments and lower administration costs. Under the current standards, there is little guidance with respect to the presentation of master trust investments and related risk disclosures.
Using investment presentation and risk disclosure best practices provides users of the financial statements with more relevant information pertaining to master trust investments. The exposure draft proposes that pension plans disclose information about the types of investments, fair value disclosures, and the pension plan's proportionate holding in the master trust investment.
Conclusion
If the exposure draft is finalized as proposed, the impact of these changes on some pension plans may be minimal, but for others, it could be significant.
The exposure draft is a positive development that, if finalized as proposed, will result in financial reporting consistency across the pension and benefit plan sector.