Open the financial section of the paper in the year 2011, and you might see headlines like these: “XYZ Co. to cut dividend due to new accounting standards”, “Strike hits ABC Inc. following huge cuts in benefits program” “IJK & Partners forced to rethink as bank gets tough”, and “Shareholders demand changes as stock price plummets”.

While 2011 seems far away, there are changes coming down the pike that will drastically affect how Canadian companies report their employee benefits on financial statements. These changes aren’t to be taken lightly-the move to new accounting and reporting rules may present some risks to your organization, and you should start preparing to manage those risks today.

IFRS-the new International Financial Reporting Standards-will replace the current CICA standards by the first quarter of fiscal year 2011. Already planned for Canada’s publicly accountable enterprises, it is likely that IFRS will soon apply to all entities. So private companies and not-for-profits should listen up, too. With more than 100 countries currently reporting under IFRS, the international approach has become the uniform accounting language around the world.

For pension and benefits reporting, there will be a transitional impact on reported earnings (especially if you currently have an unfunded plan with a balance sheet asset). There is the potential for increased volatility of results, further increases in the amount and complexity of disclosures, and significantly less lead time to collect and prepare the required information. Even though the first IFRS financial statements need not be prepared for some time, companies will have to begin phasing in their transition to IFRS right from the start of 2008.

IFRS Convergence Timeline

2008: Disclosure notes at end of FY 2008 expected to be required to highlight the potential impact and IFRS convergence plan.

2009: Detailed disclosure notes at end of FY 2009 likely to be required to provide a more detailed implementation plan and a more precise quantification of the impact of moving to IFRS at end of fiscal year 2009. In reality, once the results are in the notes many feel that it might as well be in the numbers.

2010: Need to restate opening balance sheet and be in a position to report under both CICA and IFRS for FY 2010. Restated statements under IFRS are currently due to be filed in FY 2011. In reality, peer pressure and analysts may create expectations for FY 2010 IFRS results to be filed in 2010.

2011: Full compliance with IFRS beginning in the first fiscal quarter of 2011. IFRS statements are published including comparators for FY 2010.

Start planning now

Benefits and pension managers and their governing committees need to start planning now for a number of transitional steps. The transition has to take into account not only new approaches to financial reporting, but also the need to communicate with plan members and other key stakeholders, negotiate possible benefit changes with unions and associations, and revisit the plan’s investment strategies and the organization’s compensation plans in general.

Your transition plan should probably look something like this:

FY 2008: The amount of lead time previously afforded to get results ready will now be measured in days or weeks, not months. It is recommended that you start communicating delivery expectations for data, asset information, assumptions, results, and disclosures now with the plan administrator, the trust company, the actuary, and everyone in between and be ready for “as at” measurement date for 2010 reporting. Though not required at this time, many feel that IFRS reporting in 2010 may become what’s expected by peers and analysts. At a minimum, it is a good idea to plan for 2010 reporting as a dry run for first quarter fiscal year 2011.

FY 2008: Quantify the transitional impact on reported earnings as a result of convergence to IFRS, and review the transition options available.

FY 2008, ’09, ’10: Monitor and understand both the market situation and company financial situation that may make early adoption of IFRS in 2008, 2009, or 2010 instead of 2011 beneficial for the company (note: early adoption is not an option for OSFI-regulated entities).

FY 2008/09: Do a full scale review of employee benefit plans to assess if human resources and corporate objectives are aligned. How does the benefit plan help with attraction and retention challenges? For example, generous early retirement subsidies in the face of a knowledge retention objective is problematic. Include the IFRS impact in the mix to optimize solutions.

FY 2009: Begin discussions with any unions involved with benefit plans. Benefit accrual increases for past service will hit reported earnings all at once (no more smoothing). Looking for alternatives today may provide the lead time needed in negotiations to find common ground that will work for both sides.

FY 2009: Study bank covenants and distributable reserves, since additional liabilities and expenses from the accounting changes may impact important financial ratios that, in turn, affect dividend payments and possibly a credit facility.

FY 2009: Start to position the financial implications of IFRS with all key stakeholders, including employees.

FY 2009: Consider the pension plan’s investment strategy and assess whether the increased profit and loss volatility created by IFRS should be factored in.

FY 2009: Review executive and employee evaluation and compensation plans tied to reported earnings. Given the change to IFRS, how will this impact executives and employees in the year of transition (2011)? And is the pay-for-performance program still aligned with corporate objectives? Does it make sense with the impact of IFRS?

FY 2009: Understand the accounting impact of business decisions like layoffs and downsizing that can sometimes cause a big one-time hit to reported earnings. Understanding the IFRS principle on these business decisions will eliminate unexpected earnings surprises caused by the pension or post-retirement benefits plan.

So what are you waiting for? There is much to do and now is the time to take action!

 

Known changes to accounting for employee benefits under IFRS

Measurement date: There will no longer be a three-month lag. IFRS will require companies to value all employee benefits at the balance sheet date.

Asset values: There will be no more smoothing of assets. The IFRS will call for the market value of assets.

Surplus recognition: Technical change to the calculation of the limit on the balance sheet likely to be further limited under IFRS.

Prior service costs: Must be recognized over the vesting period, resulting in their faster recognition. For prior service benefits that are fully vested, the entire cost is expensed immediately.

Settlements and curtailments: IFRS requires recognition when the entity is demonstrably committed.

Gains and losses: IFRS currently allows amortization of actuarial gains and losses or full recognition to the balance sheet.

 

Kevin Sorhaitz is a principal and consulting actuary with Buck Consultants in Toronto.