2009 General Meeting ● Assemblée générale 2009Ottawa, Ontario ● Ottawa (Ontario)

2009 General Meeting ● Assemblée générale 2009Ottawa, Ontario ● Ottawa (Ontario)

Canadian Institute

of Actuaries

Canadian Institute

of Actuaries

L’Institut canadien desactuaires

L’Institut canadien desactuaires

Session/séance : November 20, 2009 - IFRIC14 Speaker(s)/conférencier(s) : Lorraine Gignac, Mercer

Alan Van Weelden, KPMG

IFRIC 14

• IFRIC 14 is intended to clarify the IASB’s interpretation of Paragraph 58 of IAS 19 which places a limit on a defined benefit asset

• Effective for annual periods beginning on or after January 1, 2008

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Paragraph 58 (b) of IAS 19

• Similar to requirement under paragraph .101(b)(i) of CICA 3461, Paragraph 58(b) of IAS19 requires a defined benefit asset to be limited to the total of :

• Any unrecognized net losses and past service costs

+• Present value of any economic benefit available in the form of

surplus refunds or reductions in future contributions

• Any adjustment arising from the limit under paragraph 58(b) is recognized in OCI if gain and losses are being recognized in OCI or in P&L otherwise20

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Why Limit of Pension Asset?

• A company should not report an asset on its balance sheet at an amount in excess of its economic benefit

• Economic benefit can be in the form of a refund of surplus and/or a reduction in future contributions

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Conceptual Framework

• DB Asset 20X1 = DB Asset 20X0 plus Funding Contributions 20X0 less Pension Expense 20X0

• If company can take contributions holidays, funding contributions will be set to zero and DB asset will be drawn down over time

• If sum of future funding contributions exceed sum of future pension expense, DB asset will grow

• If company does not have a right to withdraw surplus, DB asset has no economic value

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Economic Benefit Available From Surplus Refund

• In order for a surplus refund to be considered an economic benefit, the company must have an unconditional right to a refund:• During the life of the plan, or

• Assuming gradual settlement of the obligations over time until all members have left the plan, or

• Assuming full wind-up

• Rare for companies to have an unconditional right to a surplus refund under 1st of 3rd scenario

• Under 2nd scenario, regulators would likely declare a plan wind-up before all members have been paid, which leads to the 3rd scenario

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Economic Benefit Available From Surplus Refund (Continued)

• Questions:• does the fact that a regulator would likely declare a wind-up before

all members have left the plan remove the possibility of claiming the company has an unconditional right to surplus under the gradual settlement scenario?

• if surplus would be shared with members, can the company claim it has an unconditional right to the remaining portion of the surplus?

• IFRIC14 states that if the company’s right to a refund or surplus depends on the occurrence or non-occurrence of one or more uncertain events not wholly within its control, the company does not have any unconditional right and is not to recognize an asset

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Economic Benefit Available From Reductions in Future Contributions

• Where no minimum funding requirements exist, the economic benefit of a surplus available as a reduction in future contributions is the lower of:• the IAS 19 surplus, less any associated costs; and

• the present value of the future IAS 19 service cost, excluding employee contributions, for each year over the shorter of the life of the plan or the entity

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Economic Benefit Available From Reductions in Future Contributions

• When determining the economic benefit available from reductions in future contributions, must deduct the present value of any minimum employer contributions in respect of future service accruals taking into account the effect of any existing surplus on the MFR basis (“minimum funding requirement”)

• Economic benefit available from reductions in future contributions is calculated as the maximum of $0 and :

• the present value of the IAS19 employer current service cost

less• the present value of the employer funding current service cost that

must be contributed in future years

• Present value is calculated using the IAS 19 discount rate

• Calculations are done over the shorter of the life of the plan or the life of the company

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What Constitutes a Minimum Funding Requirement (“MFR”)?

• IFRIC 14 defines a MFR as:• any statutory or contractual requirement for the entity

to make contributions to fund a post-employment or other long-term defined benefit plan

• Calculation of the future minimum funding contributions in respect of future accruals is to take into account:• the effect of any existing surplus on a MFR basis • any changes expected as a result of the company

paying the minimum contributions due• but not the effect of expected changes in the terms

and conditions of the MFR that are not substantially enacted or contractually agreed at the balance sheet date

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What Constitutes a Minimum Funding Requirement (“MFR”)?

(Continued)• Interpretations vary

• Interpretation 1: Minimum funding requirement is based on the schedule of contributions set out in the most recent funding report

• Interpretation 2: If a company is currently contributing its current service cost because there is either a going-concern or solvency deficit, once the deficit is fully amortized, current service cost will be contributed in all future years

• Interpretation 3: Surplus derived from the best estimate expected rate of return on assets exceeding the going-concern or solvency discount rate will allow for contribution reductions in future years

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Discussion of Interpretations of MFR

• Interpretation 1 (MFR limited to current schedule of contributions):• Could be more relevant in countries in which plan

trustees agree on a schedule of contributions

• Interpretation 2 (current service cost must be made in all future years if there is currently a deficit on a MFR basis)• An economic benefit in the form of a future reduction

in contributions is not considered “available” in this circumstance

• Would pretty much result in accounting on a cash basis

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Discussion of Interpretations of MFR (Continued)

• Interpretation 3 (reflect build up of surplus due to EROA exceeding MFR discount rate):• An economic benefit may be available even if it is not realisable

immediately at the balance sheet date (IFRIC 14.8) and a reduction in future contributions is available if it could be realisable at some point during the life of the plan (IFRIC 14.BC9)

• In general, the employer’s right to obtain a reduction in future contributions (as required by IFRIC 14.BC10) exists under Canadian pension legislation, has been established by the Supreme Court of Canada, and does not require negotiation with the plan members or trustees or the approval of plan members or trustees or the pension regulators

• the MFR should take into account the effect of any existing surplus on the MFR basis (IFRIC 14.21) and the calculation shall include any changes expected as a result of the entity paying the minimum contributions due (IFRIC 14.21)

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Minimum Funding Requirements May Give Rise to a Liability

• If a plan has a going-concern and/or solvency deficiency such that special payments are required, and

• If those special payments, once made, are not available to the company as either a refund or contribution holiday, then• The present value of the special payments forms an

additional minimum funding liability that is netted against the balance sheet asset or if there is a balance sheet liability, the balance sheet liability is adjusted to include the present value of special payments

• Additional minimum funding liability (and any subsequent re-measurement of it) is recognized immediately through P&L or OCI, depending on the accounting policy adopted for recognizing gains or losses

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Significance of IFRIC14• Magnitude of impact of IFRIC14 will depend on:

• Surplus ownership provisions • Contribution holiday provisions• Interpretation of MFR

No Impact Significant Impact

• Unconditional right to withdraw surplus

• No unconditional right to withdraw surplus and no right to take a

contribution holiday

• No unconditional right to withdraw surplus or unconditional right to withdraw only a portion of surplus, and/or

• Limited contribution holidays anticipated in future years, and/or

• Closed plans

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Significance of IFRIC14 versus CICA 3461

• Implicit in the test in CICA EFBIG Q&A #88 for an “early indication” of a CICA 3461 limit was the understanding that for most plans future contribution holidays could be reasonably assumed

• Primary target was a plan overfunded to the extent that the expected return on the surplus exceeded the CICA 3461 service cost

• Regardless of the interpretation of IFRIC 14, practice under IFRIC 14 will differ from that under CICA 3461 in at least the following areas:• Calculations of economic benefit will be required whenever an IAS

19 surplus exists to determine whether a valuation allowance is necessary

• Calculations of economic benefit will be required whenever an adjusted IAS 19 surplus exists to determine whether a MFR for past service may give rise to a liability

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Proposed changes to IFRIC 14

• Exposure Draft issued in May 2009• Economic benefit would include any

prepayment of a minimum funding requirement in respect of future service funding contributions

• Exposure draft does not deal with prepayment of a minimum funding requirement in respect of past service since such a prepayment will naturally be reflected in the calculation of the additional liability

• Unlikely to be an important issue in Canada

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IFRIC 14

• Impact of IFRIC 14 could be significant• Impact of IFRIC 14 should be considered when

developing plans for transition to IFRS• Could impact both plans with a balance sheet asset or

liability• Plan sponsor is responsible for deciding if they have an

unconditional right to a surplus refund under one of the scenarios outlined in IFRIC 14

• Possibility of IFRIC 14 having an impact on a company’s financial statements should be considered when choosing between OCI and corridor approach for amortizing gains and losses under IAS19

• Calculation of future minimum funding requirements is subject to interpretation

• No further clarification from IASB will be provided

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