For many companies, compliance with generally accepted accounting principles(GAAP)in the United States is a requirement driven by the need to raise capital in the U.S. For that reason, Canadian companies should take note of Statement of Financial Accounting Standards No. 158 (FAS 158), which the Financial Accounting Standards Board (FASB)in the U.S. recently issued. FAS 158 applies to all plan sponsors, but there are differences in the disclosure requirements between for-profit business entities and not-for profit organizations. Further, the effective date of the Statement varies for publicly held and nonpublicly held organizations.

Canadian companies don’t really need to care about U.S. pension law with respect to non-U.S. citizens, but because money talks, changes to U.S. GAAP, as they may impact retirement plan sponsors’ capital structures, are, and should be, relevant to Canadian organizations. In addition, because the Accounting Standards Board(AcSB) in Canada strives to harmonize our standards with U.S. GAAP(unless there are specific Canadian circumstances to justify a difference), it is expected that the AcSB will prepare an exposure draft to amend the section of the Canadian Institute of Chartered Accountants Handbook to be consistent with FAS 158. And, FAS 158 is just the first of a two-phase initiative. Phase II, which may take at least three years to complete, will focus on both the balance sheet and the income statement. It will address how to measure, account for and display the cost of post-retirement benefits, and might provide new guidance on assumptions and “smoothing” of plan asset investments.


Given that both assets and liabilities are essentially marked-to-market every year-end for balance sheet purposes, the change to reflect the plans’ immediate funded position on balance sheets will add a great deal of volatility, especially in low interest rate environments. Because post-retirement benefit plans(other than pension plans) are mostly unfunded, companies that sponsor them will now reflect the volatile transient funding position of their program. Even plans that were previously well funded will see potentially large swings in other comprehensive income going forward. A Merrill Lynch analysis estimates a 6% drop in aggregate U.S. shareholder equity in response to the changes. Employers may wish to consider risk mitigation techniques to dampen the volatility from year to year.

Employers complying with FAS 158 should look at decisions they made concerning benefits and funding policy and be aware of the implications that may now result under the new rules. The immediate recognition of plan amendments will put additional pressure on balance sheets if an increase in benefits is considered. The annual net periodic benefit cost will no longer be directly tied to the annual balance sheet. Gains and losses caused by changes in the economic environment or demographic patterns and asset results other than were expected will still go directly to the balance sheet. Affected companies, particularly sponsors of postemployment benefit plans, should review loan covenants and other agreements to ascertain the effect these changes have on them because of the balance sheet impact.

The new rules no longer allow sponsors to set their measurement date up to three months before the fiscal year-end. The effect on the balance sheet should prove minimal for most employers, although the change will likely place additional demands on the administrative and financial departments of companies and their service providers in a shorter time period. Transition from using one measurement date to another can create irregularities in profit and loss because the period of measurement will not be one year. Companies complying with FAS 158 should make sure that their service providers and departments are ready for the additional workload that will be associated with collecting and compiling end-of-year information, setting assumptions and producing budgets, which are all required in a shortened time period.

Ronald Olsen is a retirement plan consultant with Segal/Sibson in Toronto.

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