As of January, International Financial Reporting Standards (IFRS) are in effect for publicly traded Canadian companies. What’s pertinent to DB plans and other post-retirement benefits those companies offer is International Accounting Standard 19. IAS 19 is being modified, with the changes effective in January 2013.

Here is a summary of the major changes, derived, in part, from Towers Watson.

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1. Immediately recognize all changes in the funded position of retirement plans—gains and losses arising from experience differing from what was assumed, changes in assumptions, investment gains and losses on plan assets and the effect of plan changes.

This does not affect the funding status of DB plans; it affects how the funding is presented on the income statement and balance sheet. Gains and losses are to be recognized as a charge or addition to the balance sheet—to shareholder equity—rather than reflected on the earnings statement. The same applies to plan improvements (or curtailments), such as inflation-linked increases.

2. Replace interest cost and the expected return on plan assets with a measure of net interest income/expense on the plan surplus or deficit, with this interest income or expense measured based on the plan’s discount rate. Essentially, this is mark to market. The prevailing rate on high-quality corporate bonds is to be used to calculate existing plan liabilities.

What’s important here is that there is no longer a divergence between existing plan liabilities (interest cost) and assumed future returns.

3. Disaggregate the components of retirement plan costs into service cost, net interest income/expense and re-measurement components for purposes of reporting the costs in the comprehensive income statement. The re-measurement component would include gains and losses (including investment returns in excess of, or less than, the implied investment returns in the net interest income/expense calculation) and the effect of settlements; it would be reported in other comprehensive income. The service cost and net interest income/expense components would be reported separately in profit and loss as employment cost and financing cost, respectively.

Here, accrued service costs are allocated to operating expenses. It’s what the company pays out in employment expenses each year. Net income/expense is the discount rate (the yield on high-quality corporate bonds) used to estimate the annual funding of those accrued costs. Re-measurement refers to gains or losses beyond the discount rate and is categorized as other comprehensive income—the term for income that goes to the balance sheet as retained earnings/losses for shareholders.

Scot Blythe is a freelancer in Toronto.

Copyright © 2020 Transcontinental Media G.P. Originally published on

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