| The views expressed in this article are those of Accounting Standards Board (AcSB) staff in consultation with an ad-hoc group of accountants and actuaries knowledgeable in the area of employee benefits. Official positions of the AcSB are determined only after extensive due process and deliberations. |
Many pension plans have experienced losses due to the significant market downturn over the last three years. This downturn may call into question an entity's discount rate and salary inflation assumptions and assumptions about the expected rate of return on plan assets. Since the assumptions on which pension and non-pension benefit plans are based are important information for users of the financial statements, entities should ensure the reasonableness of these underlying assumptions. Furthermore, entities should provide disclosures to improve a user's understanding of their reasonableness and effect on the bottom line. Users would also benefit from a discussion of the meaningfulness of underlying assumptions within an entity's MD&A commentary.
Employee Future Benefits, Section 3461 of the CICA Handbook - Accounting, requires the use of a long-term rate of return on plan assets, which is not as volatile as short-term rates. When there are significant changes in economic expectations, however, entities should reevaluate the reasonableness of all their assumptions. Such an environment highlights the importance of measurement uncertainty disclosures under Measurement Uncertainty, Section 1508. Section 1508 provides guidance to ensure that the nature and extent of the measurement uncertainty associated with employee benefit plans is properly disclosed in an entity's financial statements (in addition to other disclosures required by Section 3461). Such disclosure would include a description of the key assumptions used and the sensitivity of the range of possible amounts to changes in assumptions.
Disclosing information on the nature of measurement uncertainty provides a broad understanding of the processes by which actuarial assumptions are determined and how uncertainties are provided for in the actuarial valuation process. Such information would include:
- The major factors and assumptions. One important assumption is the rate of return on plan assets, expressed according to the entity's asset mix. Disclosure of this assumption should include any equity risk premium and active portfolio management premium, net of investment expenses.
- The major sources of data and key elements of methodologies applied in the computation of plan liabilities.
- How measurement uncertainty is incorporated in the actuarial valuation process.
The entity should describe the assumptions that have the greatest impact on the computation of plan liabilities (e.g., how the discount rate assumption takes into account the expected duration of the liabilities of the plan and the shape of the yield curve). Also, the entity should disclose the methodologies applied in determining plan liabilities, as this will help explain how past experience, current conditions and other relevant benchmarks (such as consensus views) are taken into account in developing estimates. Differences between past and expected future experience should be explained and the extent of the difference indicated. |
In addition to information about the nature of measurement uncertainty, Section 1508 requires information about the extent of measurement uncertainty - which possible changes in assumptions may affect the future financial condition and reported earnings of the entity. This uncertainty could be indicated by quantifying the extent to which plan liabilities or benefit expense would change if a key assumption changed by a specified amount (e.g., quantifying the extent to which actuarial gains and losses have been sheltered by the use of market-related values [if applicable]; disclosing the extent to which actual experience on certain factors has varied from actuarial assumptions in the past; quantifying the impact of a change of specified magnitude in the assumption; or disclosing the relationship between current actuarial assumptions and recent experience).
Issues regarding plan assumptions continue to garner media attention in Canada and the US, although, the Canadian experience on the use of these assumptions could be quite different than in the US and in some respects, more conservative. In any case, financial statement preparers should ensure that they review measurement uncertainty disclosures for employee benefit plans with their auditors and actuaries prior to year-end.
