Background
In response to feedback to its July 2021 Exposure Draft the Public Sector Accounting Board (PSAB) has issued the Re-exposure Draft “Employee Benefits, Proposed Section PS 3251.”
The Employee Benefits project is in the first phase of its multi-phase approach, and is focusing on the development of key principles regarding discount rate and deferral provisions for defined benefit employee benefit plans.
Objective of the project
The objective of PSAB’s Employee Benefits project is to issue a new employee benefits standard to replace existing Section PS 3250, Retirement Benefits, and Section PS 3255, Post-employment Benefits, Compensated Absences and Termination Benefits.
In July 2021, PSAB issued the Exposure Draft that focused on the topics of discount rate and deferral provisions. The Re-exposure Draft aims to finalize discount rate proposals, which have been further amended in response to feedback received to the July 2021 Exposure Draft. The Board may consider other topics in a future phase of the project, including further proposals related to risk-sharing provisions in public sector pension plans in Canada and other types of non-traditional plans.
Consistent with the July 2021 Exposure Draft, the Re-exposure Draft uses the principles of International Public Sector Accounting Standard (IPSAS) 39, Employment Benefits, as a starting point. The principles were amended if they were:
In response to feedback to the July 2021 Exposure Draft, PSAB determined that amendments to the proposals related to discount rate for defined benefit plans were in the Canadian public interest.
Why is PSAB re-exposing the standard?
Most respondents to the July 2021 Exposure Draft supported PSAB’s proposal to apply a discount rate to defined benefit plans based on a plan’s level of funding. However, many respondents requested the Board simplify the proposed approach for assessing a plan’s funding status, to address application concerns regarding:
- technical complexity;
- administrative and financial costs; and
- flexibility to capture the diversity of pension funding arrangements in the Canadian public sector.
PSAB determined that amendments made to the previously exposed discount rate principles may have a significant impact on public sector entities that participate in defined benefit plans. In alignment with its due process, the Board decided that re-exposing the amended proposals was warranted to obtain additional input necessary to finalize the standard.
What are the amended proposals for discount rate?
The Re-exposure Draft proposes that post-employment benefit plans use the following discount rates, based on the funding status of a plan:
- Fully funded plans – Plans where sufficient assets have been set aside to satisfy post-employment obligations to current plan members and beneficiaries would use a discount rate based on the expected market-based return of plan assets; and
- Underfunded plans – Plans where insufficient assets have been set aside to satisfy post-employment obligations to current plan members and beneficiaries would use a discount based on the market yield of government bonds, high-quality corporate bonds, or another appropriate financial instrument.
How is funding status determined?
The Re-exposure Draft proposes a simplified approach to determine a plan’s funding status. This approach leverages existing qualitative and quantitative evidence of a plan’s funding status, rather than the previously exposed proposals requiring the preparation of an additional quantitative funding status assessment.
In determining a plan’s funding status, a public sector entity would consider the following primary indicators of whether a plan meets the definition of a fully funded plan:
- Qualitative indicators – Existence of regulatory, legislative, or contractual funding requirements for the plan; and
- Quantitative indicators – Evidence to support a fully funded status based on the plan’s most recently prepared actuarial valuation for funding purposes.
For many plans, the consideration of primary indicators may be sufficient to determine a plan’s funding status. However, where insufficient evidence exists to support a fully funded status based on primary indicators, professional judgment may be applied in considering secondary indicators of a plan’s funding status, such as:
- any corrective actions a public sector entity has taken to address funding shortfalls;
- accuracy in assessing historical short-term funding fluctuations; or
- unique facts and circumstances of the plan that may impact the determination of funding status.
This simplified approach places greater reliance on professional judgment to determine a plan’s funding status, while affording flexibility in applying the proposals to the diverse forms of defined benefit arrangements that exist in the Canadian public sector.
Discount rate disclosure requirements
Although the Re-exposure Draft proposes that the discount rate for a defined benefit plan reflect the plan’s funding status, defined benefit plans are often both a material balance and subject to significant measurement uncertainty for many public sector entities. This measurement uncertainty may impact financial statement users’ assessments and judgments.
For fully funded plans, the Re-exposure Draft proposes that sensitivity analysis disclosure requirements include the impact on a plan’s defined benefit liability if measured on an underfunded basis. Although PSAB acknowledges the additional cost of additional disclosure requirements for fully funded plans, the Board determined that these costs are balanced by the expected benefit to financial statement users to whom public sector entities are accountable.
Non-substantive amendments
For most other topics, the Re-exposure Draft’s proposed principles remain substantively unchanged from when they were previously exposed in July 2021. However, the Re-exposure Draft does propose several non-substantive amendments, in response to feedback to the July 2021 Exposure Draft. These include the following:
Deferral provisions
The proposals have been amended to present remeasurement gains and losses as a component of accumulated remeasurement gains and losses on the statement of financial position, rather than as a component of accumulated other.
Amendments have also been made to permit reclassification of remaining accumulated remeasurement gains and losses on settlement of a plan to accumulated surplus and deficit. Reclassification would be permitted on a net basis, with no recognition on the statement of operations in the period of settlement.
Social benefit programs
The proposals have been clarified to prescriptively exclude contributory social benefit programs, where the benefits provided do not meet the proposed definition of an employee benefit.
Valuation of plan assets
The Re-exposure Draft includes transitional provisions permitting entities to apply the proposed definition of plan assets prospectively. Public sector entities may continue to recognize non-transferable financial instruments that met the definition of plan assets under existing Section PS 3250, Employee Future Benefits.
Category-wide plans
The Re-exposure Draft removes proposals for category-wide plans, previously exposed in the July 2021 Exposure Draft. Public sector entities would apply the proposals for multi-employer plans.
Disclosures for other long-term employee benefits and termination benefits
The Re-exposure Draft does not include prescriptive disclosure requirements for other long-term employee benefits and termination benefits. However, public sector entities would include relevant disclosures similar to short-term employee benefits, defined contribution plans, or defined benefit plans based on the substance of the benefits.
Joint defined benefit plans
The Re-exposure Draft proposes that public sector entities that participate in a joint defined benefit plan follow defined benefit accounting for the measurement of their proportionate share of the plan, instead of previously proposed multi-employer plan accounting.
When are the proposals effective?
A proposed effective date of April 1, 2029, will allow for three complete budget cycles prior to transition.
The proposals require retroactive application, with or without prior period restatement, in alignment with the requirements of Section PS 2120, Accounting Changes.
Early adoption is encouraged.
Next steps
- Read the Re-exposure Draft.
- Submit your feedback through Connect.FRASCanada.ca or a comment letter uploaded via our online form.
- Provide your feedback by January 20, 2025.
We value your input and look forward to your feedback.
Stay informed
To learn more about the project and stay current with updates, subscribe to The Standard and visit our Employee Benefits project page.