Pension accounting changes impact HR

New disclosure requirements for pension and benefit plans and why HR should get involved

The Canadian Accounting Standards Board has put new disclosure requirements in place for pension and benefit plans.
The new requirements for “employee future benefits,” including pension benefits, post-retirement and post-employment benefits, are in effect for years ending after June 30, 2004.

Joe Nunes, an actuary and pension consultant with Actuarial Solutions Inc. in Windsor, Ont., said it’s important for HR practitioners to be able to wrap their heads around the new changes, even if they aren’t earthshaking. That’s because while finance may ultimately be responsible for ensuring compliance, a little knowledge can go a long way in making HR a strategic partner.

“There’s a propensity with things that look complicated for people to say ‘well, HR shouldn’t bother understanding it, they should just let the actuary or a lawyer take care of it,’” said Nunes. “But if HR is going to be that strategic player that wants to be in the boardroom, then they’re going to have to understand some of these things and be able to contribute.”

Leaving this work entirely up to finance effectively takes control out of HR’s hands, he said.

“HR says, ‘Gee, we would like a plan that provides this kind of benefit or that kind of benefit,’ and in the end finance says, ‘We can’t afford it or we can afford it,’” said Nunes. “And finance kind of takes control of design from an affordability perspective and if HR wants to offer progressive things, like flex time, unless someone can demonstrate to finance that it’s economically advantageous, finance just shoots it down.”

One of the new requirements means organizations must disclose the effects of a one-percentage-point increase and decrease in the assumed health-care cost trend rates.

That’s because it’s difficult for people who read financial statements to comprehend those figures. If the actuary states the health-care liability is $10 million, there are a bunch of different assumptions that go into that figure. But if health-care costs rise and go just one percentage point higher than predicted, that could see the liabilities rise by 20 per cent, Nunes said.

“It’s a useful measure of just how volatile these liabilities are and how subject these liabilities are to inflational changes,” he said.

Nancy Estey, a principal with the Canadian Accounting Standards Board (AcSB), said there has been a greater focus on accounting for pensions because of the amount of volatility and the number of organizations facing pension shortfalls.

New disclosure requirements for employee future benefit plans, including pensions, were first released for public comment by AcSB in October 2003. They are designed to make clearer the impact of pension costs on a company’s financial statements and to ensure that reliable, transparent information about the performance and funded status of the plan is provided.

She said HR professionals will want to meet with their accountants and actuaries to assess any information they may need to meet the new and existing requirements.

“HR professionals will be most interested in understanding the relationship between the benefit plan design and the benefit obligation,” said Estey. “One of the objectives of the accounting for employee future benefits is to measure that obligation. Therefore HR professionals will be interested in how that obligation is measured and the disclosures surrounding it. The measurement of that obligation involves various actuarial assumptions such as rates of employee turnover and future salary and benefit levels.”

The new disclosures have been incorporated into section 3461 of the CICA Handbook – Accounting and include:

•a description of the type(s) of plans;
•improved disclosure of costs recognized in the income statement, separately identifying the effects of “smoothing”;
•improved disclosures about balance sheet amounts;
•total cash outflow;
•asset plans by category;
•the measurement date for accounting; and
•actuarial variation dates.
AcSB staff has put together a special presentation, complete with slides and audio commentary in English and French. It’s available online at www.knotia.ca/Courses/Main Menu.cfm?courseID=17.

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