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I am happy to welcome back Clair Grindley, deputy leader of our Canadian IFRS Centre of Excellence. This time, she discusses issues that impact all organizations: strategies to mitigate the impact of longer life expectancy and low interest rates on employee benefit obligations and, ultimately, how standard-setters are trying to keep up with new forms of retirement plans.

Warm regards,



Chantal Rassart
Partner | Audit Knowledge Management Officer

Against the backdrop of the current economic environment, the cost of funding employee benefits is a significant issue for entities in all sectors. While the accounting for employee benefits varies by financial reporting framework, concerns around potential cost and uncertainty are areas of collective interest to all entities. This is particularly true for those that offer one or more defined benefit plans to employees. The accounting rules in some frameworks have made the cost of defined benefit plans more transparent in recent years due to the elimination of prior options, which allowed an entity to defer and amortize certain cost components

So what are some of the reasons for the increased focus in this area? Improvements in expected mortality have been reported in the most recent mortality studies and, while this is good news for us all, it does translate into an increase in the cost of funding retirement. The longer we live, the more years there are to fund. For defined benefit plans, this increases both the magnitude of the reported obligation on the statement of financial position as well as the periodic costs that are recorded in income. Lower interest rates also reduce the impact of discounting the obligation and result in a higher obligation (since the amount recorded is a present value measurement). In some cases, defined benefit plans established decades ago are now reaching a stage of maturity where it has become difficult to ignore a rising deficit, given that a reversal of the deficit through strong and sustained investment performance is unlikely.

In response to the real economic issues at play, many Canadian entities are starting to consider or implement derisking strategies that strike an appropriate balance between managing the costs of a benefit arrangement and addressing the needs of the workforce. I’ll consider some of these strategies in the balance of this article.

Establishment of new defined contribution plans: While an entity may have historically provided defined benefit plans, it is not uncommon for a defined benefit plan to become closed to new employees joining an entity. Existing members under the defined benefit plan retain the benefits they are entitled to, while new employees joining the entity are permitted only to join the defined contribution plan. This strategy enables an entity to honour promises made to the existing workforce and eliminate the risk (and manage the cost) associated with new entrants. The accounting is clean and not subject to interpretation. The disadvantage is of course that this does not reduce the costs and risks associated with the existing plan. As a result, this route in isolation may not be a solution for all entities.

Shared-risk and target benefit plans: In a defined benefit plan, the risks reside with the entity. In a defined contribution plan, the risks reside with the employee. In a shared-risk plan, the risks are shared between the entity and the employees. How does this work? Well, the benefits are targeted, rather than guaranteed, and the plan is set up so as to create a very high probability that the targets will be met. This isn’t done by guesswork or an optimistic outlook but through a combination of actuarial modelling, a focused investment strategy and a funding mechanism that manages contributions from employers and employees. Contributions are generally set at an initial level but increased or decreased depending on the deficit or surplus position of the benefit plan in question. The ability to implement or convert to a shared-risk plan depends on the nature of the entity and the Provincial or Federal legislation that the plan must comply with. Right now, we have seen more of these plans in the public sector but changes in federal legislation may open the door to other entities in the future.

The accounting frameworks do not currently explicitly address these types of benefit plans, which has resulted in much discussion about how such plans should be accounted for within the practice of accounting. Both the IFRS discussion group and PSAS discussion group have formally discussed shared-risk plans (the IFRS meeting minutes can be accessed through this link and the PSAS link is accessible here). As legislation changes, we can expect to see progression in the accounting frameworks over time. The IASB has recently embarked on a research project where the accounting for shared-risk plans will be addressed and PSAB has announced the establishment of a taskforce designed to tackle, amongst other issues, the subject of shared-risk plans.

Annuity purchases: In an annuity transaction, an entity locks in the cost and risk associated with a defined benefit plan through a contract with an insurer who, for a premium, takes on the risk associated with providing benefits for all or some portion of the plan members. Such transactions are most common in the private sector and we see them under both IFRS and ASPE. For example, Entity A may have an estimated obligation for $200 million for the retired members of its defined benefit pension plan. Setting aside the time value of money, the actual amount paid could be more or less than this. Entity A may therefore decide to transfer this obligation to a third party in return for an agreed-upon premium. The actual extent of the risk transfer will vary depending on the insuring entity and the nature of the annuity contract. Of course, the ability of an entity to enter into such a transaction will depend on applicable pension regulations and the approval of the Trustees in their oversight responsibility as it relates to the protection of plan members. The accounting requires a careful assessment of the nature of the annuity contract, the extent to which risk is transferred to the insuring entity and any restrictions applicable to the pension regulations that govern the plan in question. In some cases, the transaction may meet the definition of a plan settlement, thereby extinguishing the obligation and generating an income statement entry. In other cases, the annuity is not considered to be a settlement but the acquisition of a plan asset – the valuation of which depends on some of the detail in the specific accounting rules that apply as well as the terms of the annuity contract itself.

Longevity swaps: Longevity swaps are a more recent product on the market but are starting to attract interest in Canada (following more than a handful of multi-billion dollar transactions in Europe). These contracts have some similarities with annuity contracts in that they transfer risk to an insuring entity. The risk in this case is focused on longevity and the risk of increased costs due to a member population living longer than expected is transferred (wholly or in part) to the insuring entity. The actual pattern of cash flows associated with a longevity swap differs from an annuity contract. In the latter, there is generally a lump-sum payment made to the insurance entity. With a longevity swap, there is typically no cash paid by an entity at inception of the contract. Instead, there will be a net cash flow made each month (or other agreed upon time interval) based on the difference between an agreed upon fixed amount (plus a risk premium) and the actual benefits due. Effectively, the entity is locked into paying the fixed amount and receiving (paying) the differential from (to) the insuring entity.

These instruments are not specifically addressed in the accounting literature of any of our Canadian frameworks. At the time of writing, however, the IFRIC have issued a tentative agenda decision that states, in part: “predominant practice is to account for a longevity swap as a single instrument, and measure it at fair value as part of plan assets.” The agenda decision is expected to be finalized later this month.

Derisking benefit arrangements is a common interest area to many entities across all frameworks and there are a variety of strategies that can be adopted to manage them – some of which are outlined above. The financial reporting for these transactions is evolving and is not always clear cut. In working with entities on derisking transactions we typically use a team combined of a professional with financial reporting expertise in this area and an actuarial professional from our Deloitte practice. As always, if you want to know more, don’t hesitate to reach out and we’ll be happy to discuss with you.

Clair Grindley, CPA, CA, ACA
Partner | Deputy Leader, Canadian IFRS Centre of Excellence
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Standard-setting activities & insights

International Financial Reporting Standards

FYI Article – IFRS 15: The New Revenue Standard – Are You Ready?
On April 2, 2015, the Accounting Standards Board published an article that discusses the International Accounting Standards Board’s new standard on accounting for revenue and the more significant changes from current requirements. It also identifies a number of considerations for planning to implement the standard.

Agenda for the first face-to-face meeting of the ITG
On April 2, 2015, the agenda was released for the upcoming meeting of the Transition Resource Group for Impairment of Financial Instruments, which is being held at the offices of the International Accounting Standards Board on April 22, 2015.

Deloitte's comments on the proposed amendments to IAS 7
On April 1, 2015, we published our comment letter on the IASB's Exposure Draft ED/2014/6 “Disclosure Initiative (proposed amendments to IAS 7)”.

TRG discusses implementation of new revenue standard
On March 31, 2015, the joint revenue Transition Resource Group (TRG) and board members from IASB and FASB discussed issues raised by stakeholders related to implementing the boards’ new revenue standard.

March 2015 IFRS Interpretations Committee meeting notes — Part 2 (concluded)
On March 30, 2015, we posted the Deloitte observer notes on the final session on IFRS 5 from the IFRS Interpretations Committee meeting held in London on March 24, 2015.

IASB Chairman discusses non-GAAP measures
On March 31, 2015, in a speech given in Seoul, Korea, Hans Hoogervorst, Chairman of the International Accounting Standards Board, stressed that “greater discipline” is needed in the use of non-GAAP measures.

March IASB meeting podcast now available
On March 30, 2015, the IASB released the March 2015 IASB meeting podcast. The IASB meeting podcast is issued following the monthly board meeting and provides a summary of the topics discussed. This episode covers: (i) Leases (ii) Research Update (iii) Disclosure Initiative (iv) Revenue from Contracts with Customers – Issues emerging from TRG discussions (v) Conceptual Framework and (vi) Insurance Contracts.

FYI Article – IFRS 9: Finally…Much-needed Improvements to the Financial Instruments Standard
On March 27, 2015, the Accounting Standards Board published an article that discusses the key features of IFRS 9 and potential financial reporting impact.

Second issue of the IASB's new publication series for investors
On March 27, 2015, the IASB has issued the second edition of its newsletter, “The Essentials,” that aims to increase investors' awareness of IFRS and enhance the insights they obtain when analyzing information produced by IFRS financial statements.

March 2015 IFRS Interpretations Committee meeting notes – Part 1
On March 27, 2015, we posted the Deloitte observer notes on the IFRS Interpretations Committee meeting in London on March 24, 2015. We cover sessions on IAS 12, IAS 19, IAS 21, IFRS 10, IFRS 11, IFRIC 14, and the Committee's work in progress.

SEC commissioner discusses global accounting standards
On March 26, 2015, Kara Stein, a Commissioner of the Securities and Exchange Commission, gave her opinion on the future of IFRS in the United States during a speech at the Brooklyn Law School in New York City. Ms. Stein discussed international cooperation in the wake of the global financial crisis and called for worldwide collaboration on data aggregation and disclosure.

March 2015 IASB meeting notes posted – part 3 (concluded)
On March 26, 2015, we posted the Deloitte observer notes from the sessions on revenue recognition, fair value measurement and dynamic risk management during the International Accounting Standards Board meeting held at its offices in London on March 17-19, 2015, where some of the meeting was a joint session with the Financial Accounting Standards Board.

IASB issues work plan update
On March 26, 2015, following its March meeting, the IASB published a new work plan. The most notable changes were the inclusion of a new project on Clarifications to IFRS 15 and the announcement of delays in the Conceptual Framework project and the Principles of disclosure project.

Deloitte's comments on the proposed amendments to IFRS 2
On March 25, 2015, we have published the Deloitte comment letter on the International Accounting Standards Board's Exposure Draft ED/2014/5 “Classification and measurement of share-based payment transactions”.

March 2015 IASB meeting notes posted – Part 2
On March 23, 2015, we posted the Deloitte observer notes from the sessions on insurance contracts and the conceptual framework during the International Accounting Standards Board meeting held at its offices in London on March 17-19, 2015.

IASB issues 'Investor Perspectives' on cash flows
On March 23, 2015, the International Accounting Standards Board released a new edition in its “Investor Perspectives” series. In this edition, guest contributors Nick Anderson, Gunnar Miller and Tanya Branwhite discuss the proposed debt amendments to IAS 7 "Statement of Cash Flows".

Accounting Standards for Private Enterprises

Private Enterprise Advisory Committee Notes – December 17, 2014
On April 1, 2015, the Accounting Standards Board released a summary of discussions held by the Private Enterprise Advisory Committee. The Committee discussed the following issues raised by stakeholders: (i) 2015 Annual Improvements; (ii) Post-implementation Review of Financial Instruments; (iii) Subsidiaries; and (iv) Review of Recently Issued or Amended IFRS.

Basis for Conclusions – Subsidiaries – Section 1591
On March 30, 2015, the Accounting Standards Board (AcSB) published a document that sets out how it reached its conclusions. The document discusses significant matters arising from comments received in response to its Exposure Draft and indicates how the AcSB dealt with the issues raised. Section 1591 Subsidiaries, in Part II of the Handbook, was developed by modifying Section 1590 to incorporate additional guidance on accounting for subsidiaries controlled through rights other than equity interests and necessary consequential changes. The additional guidance was developed based on adapting guidance from IFRS 10 Consolidated Financial Statements.

Basis for Conclusions – Joint Arrangements – Sections 3051 and 3056
On March 30, 2015, the Accounting Standards Board (AcSB) published a document setting out how it reached its conclusions. In addition, the document sets out significant matters arising from comments received in response to its Exposure Draft and indicates how the AcSB dealt with the issues raised. New Section 3056, Interests In Joint Arrangements, and amendments to Section 3051, Investments, in Part II of the CPA Canada Handbook – Accounting which replaced Section 3055, carries forward much of the content of Section 3055. The AcSB used Section 3055 as a starting point and incorporated specific significant improvements into Section 3056, including eliminating the free choice in accounting for joint arrangements and simplifying the accounting for contributions and transactions.

Public Sector Accounting Standards

PSAB Decision Summary – March 19-20, 2015
On April 2, 2015, the Public Sector Accounting Board issued an executive summary of discussions and decisions with respect to the topics addressed at this meeting.

The following items were discussed: i) PSAB approved its 2015-2016 work plan and reviewed its 2014-2015 interim performance report; ii) Standards for Public Sector Entities; iii) Standards for Not-for-Profit Organizations; iv) PSAB Governance.

IPSASB finalizes proposals on reporting service performance information
On March 31, 2015, the International Public Sector Accounting Standards Board (IPSASB) published Recommended Practice Guideline 3 (RPG 3) that provides guidance on the reporting of service performance information. The RPG is designed to allow public sector entities to be held accountable through the provision of high quality service performance information by providing guidance on how such information should be presented and its recommended characteristics.

IPSASB Meeting March 10 - 13, 2015
On March 30, 2015, the International Public Sector Accounting Standards Board released its summary of the March 10-13 meeting held in Santiago, Chile. Discussion points included: (i) Governance update; (ii) Government business enterprises – review of responses to consultation paper; (iii) Emissions trading schemes; (iv) Sovereign debt restructurings under IPSAS; (v) Reporting service performance; (vi) Social benefits – approval of consultation paper; (vii) Public sector combinations – discussion of issues and review of draft sections of exposure draft; (viii) Approve final work plan for 2015 and 2016; (ix) Government finance statistics update; (x) Public sector financial instruments; and (xi) IFRS 15: Education session.

US GAAP

FASB tentatively decides to defer the new revenue standard
On April 1, 2015, the Financial Accounting Standards Board tentatively decided to defer for one year the effective date of the new revenue standard (ASU 2014-09 Revenue From Contracts With Customers) for public and non-public entities reporting under U.S. GAAP.

It is currently unclear whether the IASB will defer the effective date of IFRS 15 Revenue from Contracts with Customers. The IASB plans to discuss this issue later in April.

Securities regulatory matters

OSC publishes 2015-2016 Draft Statement of Priorities for comment
On April 2, 2015, the Ontario Securities Commission (OSC) published for comment its 2015-2016 Draft Statement of Priorities (Draft Statement). The Draft Statement sets out priority areas where the OSC intends to focus key resources and actions for the coming fiscal year, as well as the expected outcomes.

CDSB and WBCSD to develop mapping tool for sustainability reporting
On April 2, 2015, the Climate Disclosure Standards Board (CDSB) and the World Business Council for Sustainable Development (WBCSD) announced that they were jointly developing a web-based tool and database to help companies understand and navigate the corporate sustainability reporting landscape.

Canadian Securities Regulators Propose Significant Amendments to Canada’s Take-Over Bid Regime
On March 31, 2015, the Canadian Securities Administrators (CSA) published for comment proposed amendments to the Canadian take-over bid regime. These changes would provide increased flexibility for boards of targeted companies, as well as allow for collective decision-making by shareholders.

Assurance

Comprehensive Review of the Auditor – What Audit Committees are Saying
On April 2, 2015, the Canadian Public Accountability Board (CPAB) released its Comprehensive Review of the Auditor – What Audit Committees are Saying. In this document, CPAB speaks with audit committee chairs about observations and lessons learned on performing, or planning to perform, a comprehensive review.

CPAB 2014 All Firm Inspections Report
On March 31, 2015, the Canadian Public Accountability Board (CPAB) issued its 2014 All Firm Inspections Report. The Report notes that, overall, results for all firms inspected in 2014 improved over 2013. This is attributed largely to the effectiveness of action plans implemented by the Big Four firms beginning in 2012, and later on by the 10 other annually inspected firms.

CPAB Special Report 2015: Auditing in Foreign Jurisdictions
On March 31, 2015, the CPAB issued a special report on its inspections of audits of companies with operations in foreign jurisdictions. The scope encompassed a variety of foreign jurisdictions including, China, Mexico, Africa, and South America. Although progress has been made, CPAB believes continued attention is required to ensure that audits of these entities appropriately identify and respond to significant risks, especially those that are unique to the foreign jurisdiction.

CPAB Annual Report 2014
On March 31, 2015, the CPAB issued its annual report. During 2014, CPAB identified a total of 32 files containing significant inspection findings in the 174 engagement files examined.

AASB Decision Summary – March 9-10, 2015
On March 30, 2015, the Auditing and Assurance Standards Board released an executive summary of discussions and decisions with respect to the topics addressed at this meeting. The following topics were discussed: (i) Auditor Reporting; (ii) Financial Statement Disclosures; (iii) Responsibilities Relating to Other Information; (iv) IAASB Projects; (v) Auditor’s Consent to the Use of the Auditor’s Report in Connection with Designated Documents; (vi) Auditor’s Consent to the Use of a Report of the Auditor Included in an Offering Document; (vii) Special Reports – Assurance on Compliance with Agreements, Statutes and Regulations; (viii) Standards for Assurance Engagements; and (ix) AASB Planning.

Exposure Draft – Auditor’s Consent to the Use of a Report of the Auditor Included in an Offering Document
On March 27, 2015, the Auditing and Assurance Standards Board issued an Exposure Draft that proposes limited amendments to Section 7150 primarily to address the requirement on the part of stock exchanges (recognized by securities regulatory authorities in Canada) that auditors include certain statements in their consent.

Webcasts & learning resources

Upcoming events

Past events

Publications & tools

A roadmap to accounting for share-based payment awards

Publication date: April 2015
Our U.S. firm released its third edition of "A Roadmap to Accounting for Share-Based Payment Awards". This Roadmap combines the share-based payment accounting rules from ASC 718 (for employee awards), ASC 505 (for non-employee awards), and other topics (such as ASC 740 and ASC 805) with Deloitte’s interpretations and examples in a comprehensive, reader-friendly format.

Audit Committee Brief — AQIs: Measuring quality through metrics

Publication date: March 2015
There are several active projects focused on the question of whether metrics that provide insight into audit quality (often referred to as audit quality indicators or AQIs) can be developed. The goals of these projects are for all stakeholders in the audit process to be aware of and agree on the fundamental elements that contribute to a quality audit, and to spur productive dialogue among the various stakeholders on how to support and enhance audit quality. In this edition, our U.S. firm provides a discussion of the ongoing AQI projects, as well as an overview of Deloitte’s pilot of internal performance indicators.

Implementing IFRS 15, Revenue from Contracts with Customers - A practical guide to implementation issues for the travel, hospitality and leisure sector

Publication date: March 2015
Our Global firm released this guide to provide an overview of applying IFRS 15 within the travel, hospitality and leisure sector. The guidance provided here is not intended to be exhaustive, but aims to highlight some of the potential issues to consider and to indicate how those issues might be approached.

Business news highlights

We continuously review relevant business e-publications and publish below a selection of newsworthy items that we believe you will find interesting and relevant.

Canadian news

U.S. news

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Chantal Rassart, CPA, CA
Partner | Audit Knowledge Management Officer