1. 2008 General Meeting Assemblée générale 2008 Toronto, Ontario 2008 General Meeting Assemblée générale 2008 Toronto, Ontario Canadian Institute of Actuaries Canadian Institute of Actuaries L’Institut canadien des actuaires L’Institut canadien des actuaires

2. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 IFRS CONVERSION: IMPLICATIONS FOR SPONSORS OF PENSION AND POSTRETIREMENT PLANS Mark Walsh, Principal Accounting Standards Board Ken Choi, Principal Towers Perrin

3. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Canada’s Decision to Adopt IFRS Improve access to capital Reduce cost of capital Make Canada more attractive to foreign investors and foreign businesses Facilitate financial reporting –External reporting –Internal reporting

4. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Why Change? Growth of global capital markets –Canada < 3% Reconciling national GAAPS too costly Large and small companies are struggling –Too many new requirements –Too few resources “Harmonization” strategy was leading us too far into US detailed rules

5. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 IFRS IFRS are the basis for accounting in 100+ countries –Includes Europe, Australia, Russia FASB and IASB strategy of convergence –E.g. joint projects on revenue, business combinations, concepts US likely to adopt IFRS –SEC roadmap issued

6. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 IFRS vs Canadian GAAP IFRS fundamentally similar to Cdn GAAP –Principles and concepts closely match –Harmonization over last several years has eliminated many key differences Limited number of major differences –Devil is in the details –Differences in details can have significant impact

7. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Adoption of IFRS IFRS will be adopted “as is” –No modifications, interpretations –Less rules, more judgment Exception: Pension plans –Pension plans are separate entities –IAS 26 is inferior to Section 4100 –Pension plans to follow 4100 plus IFRS for assets and liabilities not in 4100

8. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Implications of Adopting IFRS A significant project More than accounting: –Actuaries –Systems –Debt covenants –Compensation linked to financial performance –Management reporting, budgets –Controls –Shareholders, analysts

9. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 When will IFRS become Canadian GAAP? Years beginning on or after January 1 2011 –First reporting Q1 2011 –Comparatives (i.e. Q1 2010) –Opening balance sheet January 1, 2010 –Early adoption –US filers may continue to use US GAAP

10. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Adopting IAS 19 IFRS 1 provides overall IFRS transition rules Basic approach is to restate prior years Unrealistic to expect companies to calculate unamortized actuarial gains and losses on transition IFRS 1 permits recognition of ALL actuarial gains and losses at date of transition (not past service costs) This is a choice – but must be same for all plans

11. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Private Enterprises IFRS will only be required for publicly accountable enterprises New private enterprise standards under development – ED in Q1 2009 For certain IPPs this will permit use of funding valuation, with a roll forward Other plans – existing Section 3461 Reduced disclosures Private enterprises may use IFRS

12. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Not-for-profit Organizations AcSB strategy under development –Invitation to comment by end of year Proposal is to permit use of IFRS or private enterprise standards –Some may fall under public sector standards –Most would likely adopt private enterprise standards

13. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Pension and Postretirement Benefit Plans

14. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 CICA vs IFRS – What's Different? CICA 3461IFRS Accrued Benefit Obligation (ABO)Defined Benefit Obligation (DBO) Accrued Benefit Asset/Liability (ABA/ABL) Defined Benefit Asset/Liability Terminology differences…

15. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 CICA vs IFRS – What's Different? CICA 3461IFRS Allows early measurement dateMust use fiscal year end date Allows smoothed asset values in expense calculation Market values must be used for expense calculation Recognize gains/losses over service lifetime (or faster) through P&L Can recognize through OCI Recognize plan changes over service lifetime Recognize plan changes over period to vesting (immediately if vested) For "inactive" plans, recognize gains/losses and plan changes over expected lifetime For "inactive" plans, plan changes and gains/losses are recognized fully and immediately

16. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 CICA vs IFRS – What's Different? CICA 3461IFRS Accrued benefit asset limited by economic value of surplus Similar, but asset ceiling is calculated differently and future minimum contributions and surplus ownership issues are more complex B/S recognition of plan's funded status, less unamortized amounts Allows B/S recognition of plan's funded status, less unrecognized cost of plan changes (non-vested) Complex rules for settlement and curtailment recognition and timing Somewhat consistent, but more simplified approach; curtailment gains may be recognized earlier

17. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Gains/Losses CICA 3461 –Immediate recognition through P&L, or –Deferred recognition through P&L –Amounts in excess of 10% corridor are amortized over future working lifetime –Amortization over future lifetime for inactive plans IAS 19 –Same options, plus immediate recognition in OCI (no recycling) –Recognition of entire amount outside corridor for inactive plans

18. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Past Service Costs Past service cost/credit recognized more rapidly under IAS 19 –Immediately for vested portion –Amortized over average service to vesting date for non-vested portion –Definition of "vesting period" - Expected time to first eligibility for any benefit –Under IAS, amortization period relates to affected active members only; under CICA/FAS, amortization period relates to all active members

19. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Past Service Costs EXAMPLE: Benefits are improved for plan with 5-year vesting: –DBO increase for vested participants is 70M –DBO increase for non-vested participants is 30M Average service until vested is 3 years –70M recognized immediately through P&L –10M/year recognized over each of the next 3 years

20. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Curtailments and Settlements More straightforward under IAS 19 –Measure as change in DBO + related unrecognised amounts –Under CICA 3461, settlements affect NTAs and experience gains/losses, while curtailments affect NTOs and prior service costs; under IAS, no such distinction –Under CICA 3461, recognise curtailment gain when employees terminate and plan is amended; under IAS 19, recognition can be earlier –There is no SC+IC threshold for settlements under IAS 19

21. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Note Disclosures IAS 19 requires: –DBO split between wholly unfunded and partly/wholly funded plans –Gains/losses recognized through OCI in current year and cumulatively –5-year history of DBO, FVA, FS, Experience G/L (assets and liabilities separately) CICA 3461 requires: –Cost incurred, and deferred components of expense recognized –Interim disclosures for DB pension/postretirement benefit costs

22. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Limit on Balance Sheet Asset CICA 3461 limits the Accrued Benefit Asset –Based on economic value of future surplus withdrawals and contribution holidays in perpetuity –Considers effect on ABA of recognizing deferred losses

23. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Limit on Balance Sheet Asset IAS 19/IFRIC 14 also limit the Defined Benefit Asset –Conceptually similar to CICA 3461 limit but different in a number of ways: Availability of surplus refunds must be “unconditional” Must consider MFR’s – statutory or contractual minimum funding requirements for past and future service Accounting treatment depends on whether actuarial gains and losses are recognized through P&L or OCI

24. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Limit on Balance Sheet Asset A refund is considered to be available only if the company has an unconditional right to a refund –During life of the plan, without having to settle the DBO, or –Assuming full settlement of the DBO in a single event, or –Assuming gradual settlement of the DBO CICA 3461 Q&A 89 requires that we look only at surplus refunds available from an ongoing plan

25. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Limit on Balance Sheet Asset Under IFRIC 14: Past Service MFRs –To the extent a contribution to fund deficits would not be recoverable in the future (through contribution holiday or refund), the unrecoverable portion reduces the balance sheet asset or increases the balance sheet liability

26. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Example: Past Service MFR

27. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Example: Past Service MFR 200 400 150 After MFR of 100 has been contributed  no change because XYZ doesn’t have unconditional right

28. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Limit on Balance Sheet Asset Under IFRIC 14: Future Service MFRs –Reduce economic value of future contribution holidays to: PVFSC in perpetuity, less PVFNC in perpetuity Where NCs are required to be funded in accordance with current funding valuation report Did you know? CICA 3461 also has future service MFRs –CICA refers to “minimum contributions the entity is required to make regardless of any surplus” –IFRIC 14 refers to “any requirement to fund”

29. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Limit on Balance Sheet Asset Changes in effect of asset limits and MFRs –Are recognised through P&L if company amortizes gains/losses –Are recognised through OCI otherwise

30. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 IASB Discussion Paper In March 2008, the IASB published a Discussion Paper –Initial ideas to address perceived deficiencies in IAS 19 –Suggests several fundamental changes in the way pension accounting would work –Comment period ended Sept. 26 th with 147 letters submitted to IASB –Final changes not expected to be effective until 2013, and could end up being very different

31. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 IASB Discussion Paper Concept of "contribution-based promise" which would change accounting for certain types of plans Elimination of all delayed recognition (i.e. amortization) Considering alternative approaches to display changes in FVA and DBO in P&L vs OCI

32. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Contribution Based Promises Defined Broadly –Only plans with “earnings risk” and traditional retiree medical plans would maintain DB status –Includes career-pay plans, flat dollar plans, and possibly defined- dollar medical reimbursement plans Implications –Valuation, accounting and disclosures are different from DB Obligation is a market consistent measure of fair value reflecting all possible outcomes Changes in funded status (net of contributions) reflected in P&L

33. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Cost Recognition/Presentation If DB promise, three possible approaches presented for comments: ApproachOngoing cost items in P&L 1All changes in unfunded obligation 2Service costs, DBO gain/loss except discount rate 3Service costs, DBO gain/loss except discount rate, interest cost, “interest income” All other changes in unfunded (net of contributions) are recognized in Other Comprehensive Income (OCI) “Interest income” is not clearly defined, but doubtful that it will be based on EROA as it is in the current standard

34. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Keeping up-to-date www.acsbcanada.org Register to be notified of changes Questions? Comments? nancy.estey@cica.ca