New accounting standard for not-for-profit organizations
In January 2012, the Canadian Accounting Standards Board (AcSB) issued an Exposure Draft, which proposed changes to the accounting for defined benefit plans for private enterprises and (private) not-for-profit organizations (NFPO).
The current Section 3461 would be replaced by new Section 3462. The most significant proposal was the inclusion of the full amount of the defined benefit liability (asset) of the defined benefit plan in the balance sheet. Also, changes in that amount due to “remeasurements” (i.e. actuarial gains and losses) and other items would be included in the income statement for the year. It’s important to note that the current Section 3461 already allows this form of accounting under the “immediate recognition approach”. New Section 3462 would remove the other option currently allowed in Section 3461, the “deferral and amortization approach”. For a more detailed list of the proposed changes, please refer to the News & Views of February 23, 2012.
Comments by the public were sent to the AcSB in May 2012. Following its meeting in November 2012, the AcSB determined that no major changes to the Exposure Draft proposals were required as a result of the feedback received from stakeholders, but agreed to make several clarifications, namely:
- when an event should be considered “significant” and thus require an updated actuarial valuation;
- that administration costs, other than the cost of managing plan assets, should not be deducted in determining the return on plan assets;
- how a gain or loss arising from a settlement or curtailment should be determined; and
- the disclosure requirements, specifically in respect of the nature of the valuation method.
The AcSB approved the revised standard, but for private enterprises only, subject to final drafting (scheduled for mid-2013) and a written ballot. The revised standard is expected to be issued in the second quarter of 2013 and will be effective for annual periods beginning on or after January 1, 2014.
However, the AcSB decided to put on hold the application of the revised standard for NFPOs, as it needed more time to discuss the potential impact of the standard for this type of organization.
AcSB decision for NFPOs
Following its meeting in December 2012, the AcSB ultimately decided that NFPOs should apply the new standard, except that they should:
- present remeasurements and other items for a defined benefit plan as a separate component of changes in net assets (rather than in the statement of operations); and
- continue to make disclosures substantially similar to the disclosures required by Section 3461, Employee Future Benefits, as written in Part V of the Handbook (standard used by NFPOs prior to the January 1, 2012 change).
Comments in response to the Exposure Draft identified that if NFPOs were required to apply Section 3462, the inclusion of remeasurements and other items in the statement of operations in the current period could be potentially problematic for these organizations, some of which could have a more precarious financial health than for-profit organizations, as they constantly search for various means of financing. By removing the remeasurements from the statement of operations, it reduces the volatility of the pension expense and thus, NFPOs will find it easier to manage their annual budget accordingly. However, this would still affect the statement of financial position of the organization, by adding a component in the statement of the changes in net assets.
With regard to the disclosure requirements for NFPOs, the AcSB decided that they should be more extensive than disclosures made by private enterprises, due to different information needs of financial statement users. The AcSB thinks that the disclosures should be substantially similar to those required by Section 3461, as written in Part V of the Handbook (standard used by NFPOs prior to the January 1, 2012 change).
As a result, the AcSB intends to issue an exposure draft on accounting for employee future benefits by NFPOs in mid-2013, to reflect its views on presentation and disclosure. The objective is to issue the final standard in time to be effective for periods beginning on or after January 1, 2014 (the same date as the new standard applies for private enterprises).
Reporting prior to January 1, 2014
In the interim, NFPOs will have to consider which type of disclosures to include in their financial statements. Indeed, the issue that was addressed in terms of disclosure requirements for the proposed new standard (see previous section) could be applied to the current standard as well, according to the AcSB. The disclosures that are required for NFPOs since January 1, 2012 under the current standard (Section 3461 of Part II of the Handbook) could be deemed not sufficient enough to meet the requirements of Section 1401 (General standards of financial statement presentation for NFPOs). As a result, the AcSB encourages NFPOs to continue to provide the disclosures that were required prior to 2012 (Section 3461 of Part V of the Handbook), until the proposed Section 3462 comes into effect in 2014.
What does it mean for private enterprises and NFPOs?
Barring any last minute reversal, all private enterprises and private NFPOs will recognize actuarial gains and losses in their balance sheet/statement of financial position, just as required already for publicly accountable enterprises applying international accounting standards.
NFPOs will have to decide which approach to use for their 2012 year-end reporting under Part II (deferral and amortization vs immediate recognition), knowing that only one of these will be applied from 2014 going forward. NFPOs and private enterprises will also have to decide in 2014 which type of actuarial results will be used for the purpose of their financial statements, i.e. either from a distinct accounting valuation (with its own set of actuarial methods and assumptions) or from the most recent actuarial valuation for funding purposes (the latter being compulsory at the moment if the immediate recognition approach is applied).
More importantly, for an entity with a substantial balance of unamortized losses (or past service costs), the impact of recognizing this balance in the retained earnings (private enterprises) or the net assets (NFPOs) at the date of transition will have to be analyzed and dealt with. This could have even more negative consequences for NFPOs, where financing is often a constant challenge.