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Canadian Accounting Standards Board's Submission in Response to Finance Canada's Regulatory Framework for Federally Regulated Defined Benefit Pension Plans consultation:

September 14, 2005

Ms. Diane Lafleur
Financial Sector Policy Branch
Department of Finance
L'Esplanade Laurier
20th Floor, East Tower
140 O'Connor Street
Ottawa, ON K1A 0G5

(Sent via e-mail to pension@fin.gc.ca)

Dear Ms. Lafleur,

Re: Strengthening the Legislative and Regulatory Framework for Defined Benefit Pension Plans Registered under the Pension Benefits Standards Act, 1985

The staff of the Canadian Accounting Standards Board (AcSB) provides its comments below on the above named Consultation Paper (Paper). Our comments focus solely on the last paragraph under "Context" that discusses pension accounting, on page 3 of the Paper.

Elimination of smoothing

We point out that the statement "Most countries have adopted accounting standards that eliminate a company's ability to smooth gains and losses in order to recognize the pension liability of the company based on market value" does not reflect our understanding of the current state of financial reporting standards. The European Union, Australia, New Zealand and some other countries have moved recently to adopt the standards issued by the International Accounting Standards Board (IASB). International Accounting Standard No. 19 (IAS 19), Employee Benefits, permits deferred recognition of actuarial gains and losses for defined benefit plans, with a minimum amount required to be recognized annually. Similar accounting treatment for such gains and losses prevails in Canada (employee future benefits, Section 3461 of the CICA Handbook – Accounting) and in the US (FASB Statement of Financial Accounting Standards No. 87, Employers' Accounting for Pensions).

We suggest that confusion may have arisen since the United Kingdom's Financial Reporting Standard 17, Retirement Benefits, which became mandatory for accounting periods after January 1, 2005, requires recognition of all actuarial gains and losses as they occur, but outside profit or loss in a "statement of total recognised gains and losses". A December 2004 amendment to IAS 19 introduced an additional recognition option for actuarial gains and losses arising in post-employment defined benefit plans similar to the approach in FRS 17, as an alternative to deferred recognition or immediate recognition in profit or loss.

The Basis for Conclusions for IAS 19, states in paragraph 2:

"The Board believes that the new IAS 19 is a significant improvement over the old IAS 19. Nevertheless, the Board believes that further improvement may be possible in due course. In particular, several Board members believe that it would be preferable to recognise all actuarial gains and losses immediately in a statement of financial performance. However, the Board believes that such a solution is not feasible for actuarial gains and losses until the Board makes further progress on various issues relating to the reporting of financial performance. When the Board makes further progress with those issues, it may decide to revisit the treatment of actuarial gains and losses."

More recently with its Exposure Draft, Amendment to International Accounting Standard 19, Employee Benefits — Actuarial Gains and Losses, Group Plans and Disclosures, the IASB stated in paragraph IN2 of its Introduction that:

"The International Accounting Standards Board has reservations about aspects of IAS 19, including concerns about deferred recognition of actuarial gains and losses. The Board believes that deferred recognition is inconsistent with the IASB Framework for the Preparation and Presentation of Financial Statements because it results in amounts presented in the balance sheet that do not meet the definition of a liability or an asset. The Board intends to undertake a major project on accounting for post-employment benefits."


It is unclear whether the Paper is suggesting that volatility within financial statements is either desirable or undesirable. A number of authors have commented on the issue. For example, Skinner and Milburn note in respect of pensions that:

"Some are highly critical of any deferral of experience gains and losses. They argue that, since actuarial assumptions are supposed to be best estimates and the latest actuarial evaluation should provide the best data, any experience gain or loss should be recognized as part of the pension cost immediately it is determined. They ask, what information value can there be in these deferrals and arbitrary amortization? The FASB itself expressed the belief that it would be preferable conceptually for there to be no delay in recognizing experience gains or losses, but it concluded that this would be too great a change from past practice."

Wiedman and Weir also acknowledge the argument against smoothing of gains and losses as they report that "The critics argue that the volatility is a financial reality, and ignoring it misrepresents the financial status of the pension plan and the company."

It is important to recognize that some favour recognizing volatility in reported financial results in the period in which it occurs while others oppose it. The issue will be considered in a major convergence project at the international level on accounting for post-employment benefits.

Future review of pension accounting

The AcSB's intention with respect to the future of pension accounting is documented in the Basis for Conclusions, Employee Future Benefits — Additional Disclosures, that accompanies the recent amendments to Section 3461 (paragraph 70):

"The AcSB agreed that a re-evaluation of the measurement and recognition basis used in accounting for employee future benefits is required to determine whether the current accounting model is appropriate or should be changed. However, the AcSB saw this re-evaluation as a significant issue that is best addressed through the international partnership with other standard setters, and it was beyond the scope of the current AcSB project."

We appreciate this opportunity to comment on the Paper and we would be pleased to elaborate on these points in more detail. If you so require, please contact Peter Martin, Director, Accounting Standards at +1 416-204-3276 (e-mail peter.martin@cica.ca) or Nancy Estey, Principal, Accounting Standards at +1 416-204-3271 (e-mail nancy.estey@cica.ca).

Yours very truly,

Peter Martin, CA
Director, Accounting Standards

cc: Paul Cherry, Canadian Accounting Standards Board Chair