British Columbia Utilities Commission Page Information ... · British Columbia Hydro & Power Authority Revenue Requirements Application 2004/05 and 2005/06 192.0 Reference: Vol. I,

British Columbia Utilities CommissionInformation Request No. 2.192.6 Dated: 2 March 2004BC Hydro Response issued 29 March 2004

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British Columbia Hydro & Power Authority Revenue RequirementsApplication 2004/05 and 2005/06

192.0 Reference: Vol. I, Chapter 2, p. 1.8 and Chapter 3, Table 3-37, p. 3-57

2.192.6.1 The provision for contingencies has increased from $2.4 millionin F2003 actual to $6 million in F2005 and $6.2 million inF2006. Please explain the increased contingency.

RESPONSE:The $2.4 million reported in Chapter 3, Page 3-57, Table 3-37 as “contingency” inF2003 are actual costs incurred by the corporate groups and offset against thecontingency budget. The contingency budget for F2003 was $13.6 million. Theremainder of the F2003 contingency budget was applied to an increase inemployee future benefit costs that resulted from an actuarial valuation of thepension plan that was completed subsequent to the budgets being finalized.

At the time of filing the Application the budget process had not been completed,and the F2005 and F2006 contingency budgets were set at $6 million orapproximately 1% of OMA costs. Since then the following items have beenidentified and the contingency accordingly reduced:

F2005 F2006 ($ Millions)Contingency in Application $6.0 $6.2

Infrastructure costs for the EJAS, EDW, EAI systems 1.9 1.9Shift in regulatory costs for rate design project (1.0) 1.0Increase in Intervenor funding on regulatory projects 1.0 1.0 Baseline audit of the BCTC assets [BCH costs] 1.0 --Organizational Development group 0.9 0.9Legal costs for the contract management of BCTC 0.6 0.3Costs of Space Planning not included in recoveries 0.5 0.5Net Contingency remaining $1.1 $0.6

Reviews are underway on the sustainment costs for the Indus Work managementand for the Peoplesoft Financial system. The amounts required for thissustainment are likely to exceed the remaining funds in the contingency.

British Columbia Utilities CommissionInformation Request No. 2.192.6.2 Dated: 2 March 2004BC Hydro Response issued 29 March 2004

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British Columbia Hydro & Power Authority Revenue RequirementsApplication 2004/05 and 2005/06

192.0 Reference: Vol. I, Chapter 2, p. 1.8 and Chapter 3, Table 3-37, p. 3-57

2.192.6.2 Page 1.8 describes the increase in BC Hydro’s pension costs due todemographic changes and the accounting changes required by thegenerally accepted accounting principles for other post retirementbenefits. Table 3-37 shows the non-current pension costs increasingfrom $31.9 million in F2003 to $48 million in F2005 and $47 million inF2006.

Please provide the section of the Handbook that deals with thechange from the cash basis to an accrual basis for pension costs.Please identify the pension cost in F2005 and F2006 if BC Hydrocontinued to record on a cash basis.

RESPONSE:The section of the CICA Handbook that deals with the change from a cash basis toan accrual basis for all employee future benefit costs is section 3461. A copy ofthis section is provided on the enclosed CD-ROM. The mandatory adoption of thisnew section was in F2001. Employee future benefits are those post retirementbenefits that employees are entitled to from BC Hydro when they retire. Suchbenefits include pension, medical, extended health, life insurance, and dental.

Prior to the introduction of section 3461, only pension benefit plans had to beaccounted for on an accrual basis. The other post retirement benefit plans wereaccounted for on a pay as you go basis (cash basis). Section required all otherpost retirement benefit plans to be accounted for on an accrual basis.

If the other post retirement benefit plans were still accounted for on a cash basis,the future employee benefit costs for F2005 and F2006 would be approximately$16 million less in each year.

The accrual method matches the accounting of the cost to when the liability isincurred by BC Hydro.

Knotia - CICA Standards & Guidance Collection

?? Accounting Handbook?? Accounting Recommendations?? Specific items (Sections 3000 - 3870)?? 3461 - Employee Future Benefits

SPECIFIC ITEMSSECTION 3461employee future benefits

TABLE OF CONTENTS ParagraphPurpose 001

Objective and basic principles 002- 004Scope 005- 008Definitions 009Defined contribution plans compared to defined benefit 010- 013plansDefined contribution plans

Current service costInterest cost on contributionsPast service costsInterest income on plan surplus

Defined benefit plansDefinitionsIntroductionRecognitionMeasurement

Actuarial valuation methodAttributionAttribution methodMeasurement date of plan assets and accrued benefitobligationMeasurement of cost for employee future benefitsActuarial assumptionsDiscount rateFuture changes in compensation levels , benefits andcost sharing

Medical costs

Plan assets

Determination of cost for the periodComponents of cost for the period

Additional .Resources .

...

014- 023016- 017018019- 021022- 023024- 134024025- 028029- 033034- 065034- 037038- 041042- 043044

045- 046047- 049050- 055056- 063

064- 065066- 068069- 095070

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Current service costInterest cost on accrued benefit obligationExpected return on plan assetsPast service costs

Actuarial gains and lossesTemporary deviation from the benefit plan

Entities with two or more plansLimit on the carrying amount of an accrued benefit assetSettlements , insurance contracts and arrangements , andcurtailments

Definitions

Settlements compared to curtailmentsSettlements

071- 074075076- 078079- 086087- 093094- 095096- 100

101- 110111- 134

111

112113- 121

122- 126127- 133134135- 142143- 144

Insurance contracts and arrangementsCurtailmentsRelationship between settlements and curtailments

Termination benefitsDiscontinued operations and disposal of a portion of abusiness segmentMultiemployer and multiple-employer benefit plansDisclosure

GeneralDefined contribution plans

Defined benefit plansMultiemployer plansSpecial termination benefits

Transitional provisionsGlossary of defined termsIllustrative examples

PURPOSE001 This Section establishes standards for the recognition , measurement, and

disclosure of the cost of employee future benefits. It requires an entity torecognize the cost of retirement benefits and certain post-employmentbenefits over the periods in which employees render services to the entityin return for the benefits. Other post-employment benefits are recognizedwhen the event that obligates the entity occurs.

. OBJECTIVE AND BASIC PRINCIPLES002 The objective of accounting for the cost of employee future benefits is to

recognize a liabilty and a cost 1 in the reporting period in which anemployee has provided the service that gives rise to the benefits. Benefit

. plans are considered part of an employee s compensation arrangement.Certain benefit plans oblige an entity to provide benefits to an employee infuture periods for service provided by the employee in the current period.The cost of providing future benefits under such plans is recognized in theperiod in which benefits are earned by the employee because the obligationto provide benefits arises as the employee renders the service.

145- 149150- 163150- 152153154- 160161- 162163

164- 172Gloss

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003 As set out in FINANCIAL STATEMENT CONCEPTS , Section 1000 , liabilitieshave three essential characteristics , as follows:(a) they embody a duty or responsibility to others that entails settlement

by future transfer or use of assets, provision of services or otheryielding of economic benefits, at a specified or determinable date , onoccurrence of a specified event, or on demand;

(b) the duty or responsibility obligates the entity leaving it little or nodiscretion to avoid it; and

(c) the transaction or event obligating the entity has already occurred.An obligation for employee future benefits possesses these characteristics.First, an entity has a responsibility to its employees to provide the benefitsat a specified time in the future, i.e. , when an employee retires or leavesthe entity. Second , although the responsibility is not always contractualthe obligation is constructive or equitable in almost all cases , therebyleaving an entity litte or no discretion to avoid it. Finally, an entity isobligated either by the rendering of service by the employee or, in the caseof certain post-employment benefits, by an event such as an application forlong-term disability benefits or parental leave.

Employee future benefits may be provided as part of a definedcontribution plan or a defined benefit plan (see paragraphs 3461.010- 013).When an entity provides future benefits as part of a defined contributionplan , the entity s only obligation is to make the required contributions (seeparagraphs 3461.014- 023). When an entity provides future benefits aspart of a defined benefit plan , the entity s obligation is for the provision ofthe benefits in future periods. Estimating the cost for the current period ofthese future benefits involves an actuarial valuation and an attributionmethod (see paragraphs 3461.024- 134). Termination benefits may beoffered under the terms of a benefit plan or as a special arrangement for ashort period of time only (see paragraphs 3461.135- 142).SCOPEThis Section applies to benefits earned by active employees and expected

to be provided to them when they are no longer providing active servicepursuant to the terms of an entity s undertaking to provide such benefits.Employee future benefits include:(a) pension and other retirement benefits expected to be provided after

retirement to employees and their beneficiaries. These benefitsinclude pension income , health care benefits, life insurance, and othermiscellaneous benefits provided to employees after retirement.

(b) post-employment benefits expected to be provided after employmentbut before retirement to employees and their beneficiaries. Thesebenefits include long- and short-term disabilty income benefits(including workers ' compensation), severance benefits, salarycontinuation, supplemental unemployment benefits, job training andcounsellng, and continuation of benefits such as health care benefitsand life insurance.

(c) compensated absences for which it is expected employees wil bepaid. These benefits include parental leaves, accumulating sick daysthat vest or are paid without an ilness-related absence, andsabbaticals that provide compensated , unrestricted time off for pastservice.

(d) termination benefits.Active employees are those currently rendering service to the entity.

Former employees are those who are retired, whose employment has been

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terminated or who have left the entity. Inactive employees are those who are notcurrently rendering service to the entity but whose employment has notbeen terminated. Active , former and inactive employees are referred to inthis Section collectively as "employees

007 An entity s arrangement to provide future benefits to employees may takea variety of forms and may be financed in different ways. Future benefitsmay be provided either directly by an entity or through an intermediary,such as a pension plan or an insurance enterprise. This Section applies toany arrangement that is in substance a benefit plan regardless of its formor the manner or timing of its funding. Absent evidence to the contrary, it ispresumed that an entity that has provided benefits in the past and iscurrently promising those benefits to employees will continue to providethose benefits in the future. This Section applies to future benefits for whichan entity pays all or part of the cost. This Section applies to entities withfunded and unfunded benefit plans.

008 This Section does not apply to benefits provided by an entity to employeesduring their active employment. Examples of these benefits are:(a) salaries , wages, bonuses , fringe benefits, and similar items that are

provided by an entity in the current reporting period , or within twelvemonths thereafter, in exchange for services rendered by employees inthe current reporting period;

(b) occasional sick days and vacation days that do not vest or accumulatebeyond twelve months after the current reporting period; andbenefits provided under stock-based compensation arrangements. Astock-based compensation arrangement is a compensationarrangement under which one or more employees receive shares ofstock, stock options , or other equity instruments, or an entity has anobligation to employees for amounts based on the value of theentity' s shares.

DEFINITIONS009 The definitions that follow have been adopted for the purpose of this

Section. The application of some of this Section requires an understandingof additional technical terms that are defined in paragraphs 3461.0243461.101 , 3461.111 , 3461.135 and 3461.145. The Glossary of definedterms contains all of the definitions in this Section.(a) Actuarial assumptions are estimates of future events that will

affect an entity's costs, and obligation, for employee future benefis.Examples of these estimates are rates of return on plan assets,administration expenses and taxes (other than income taxes),termination rates, disabilty claim rates, rates of employee turnoverretirement age, mortality, dependency status, per capita claims costsby age and by type of benefit, health care cost trend rates, discountrates to reflect the time value of money, and future salary and benefitlevels.

(b) An actuarial valuation is an assessment of the financial status of abenefit plan. It includes the valuation of plan assets, if any, and theaccrued benefit obligation.

(c)

(c) A benefit plan is any arrangement that is mutually understood by anentity and its employees whereby the entity undertakes to provide itsemployees with benefits after active service in exchange for theirservices. Benefits may commence immediately upon termination o.rsuspension of active service or may be deferred until an employeeattains a specified age. Generally, a written plan provides the best

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010

evidence of the terms of the benefit plan. However, the terms of a benefitplan may also be discernible from a well-defined , although unwrittenpractice of paying benefits or from oral representations made toemployees. For example , an indication that the terms of a benefitplan differ from the written plan may be discerned from an entitypast practice of providing regular increases in certain monetarybenefits. An entity could have a present commitment to amend thebenefit plan , either in writing or through practice or oralrepresentations. Evidence of an entity s commitment to amend thebenefit plan includes its past practices of amending the planidentification of strategies to effect future changes, and theassessment of the feasibility and likelihood of making those changesin light of the expected economic and social costs. Anticipatedamendments that are subject to negotiations do not constitute termsof a benefit plan until such amendments have been negotiated andagreed to by the entity and its employees.

(d) Benefits that accumulate are those for which the right to thebenefit is earned but unused and may be carried forward to one ormore periods subsequent to that in which they are earned , eventhough there may be a limit to the amount that can be carriedforward.

(e) A defined benefit plan is a benefit plan that specifies either thebenefits to be received by an employee, or the method of determiningthose benefits, such as a benefit of $10, 000 of life insurance or apension benefit equal to one and a half percent of the average of thefinal five years' salary times the total years of service. Any benefitplan that is not a defined contribution plan is a defined benefit plan.

(f) A defined contribution plan is a benefit plan that specifies how anentity' s contributions to the plan are determined rather than thebenefits to be received by an employee or the method of determiningthose benefits. The plan also allocates the entity's contributions tospecific individuals. The future benefit for each employee is theaccumulated amount of the contributions made by the entity on thatemployee s behalf together with the accumulated amount of anycontributions made by the employee and the investment earnings onthe contributions.

(g)

Employee future benefits that vest are those for which , after aspecific or determinable date , the entitlement ceases to be conditionalon an employee remaining in the service of an entity.

DEFINED CONTRIBUTION PLANS COMPARED TO DEFINED BENEFITPLANSEmployee future benefits are provided under either a defined contribution

plan or a defined benefit plan. When an entity provides benefits under adefined benefit plan, it is at risk with respect to the amount of the benefitthat each employee wil receive because the amount is not known withcertainty until the benefits have all been paid or cease (actuarial risk). Theentity is also at risk with respect to the investment returns on any assetsset aside to pay for the cost of the benefits because any shortall fromexpected returns must be funded by the entity (investment risk).

When an entity provides benefits under a defined contribution plan, itdoes not assume the actuarial and investment risks inherent in a definedbenefit plan. A defined contribution plan specifies how contributions aredetermined rather than the amount of benefits an employee is to receive orthe method for determining those benefits. The entity contributes a certain

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amount to the fund in each period in exchange for services rendered by theemployee and has no responsibility to make any further contributions. Theemployees are at risk because the amount of the benefit that will bepayable to an individual employee is entirely dependent upon the amountof funds accumulated in the employee s account and the investmentearnings on the accumulated funds.

012 A particular benefit plan is classified as either a defined benefit plan or adefined contribution plan depending on the economic substance of the planestablished by its terms and conditions. A benefit plan may containcharacteristics of both defined benefit and defined contribution plans but

, in substance , one or the other. For example , a benefit plan maystipulate the basis of contributions on which future benefits are determinedand , because of this , appear to be a defined contribution plan. Howeverthe plan may make the entity responsible for specific employee futurebenefits or a specified level of future benefits. In such a case, the plan is , in

substance , a defined benefit plan. Another example is a pension plan inwhich the benefits provided are the greater of the benefits under a definedbenefit plan and the benefits under a defined contribution plan. Such a planis accounted for as a defined benefit plan.

013 In some circumstances, a benefit plan may incorporate both a definedcontribution component and a defined benefit component. The componentsare accounted for separately according to their substance. For example , anentity may have changed a defined benefit plan to allow employees achoice of remaining in the defined benefit plan or switching to a definedcontribution plan. The defined contribution plan is not set up separately butremains combined with the defined benefit plan for plan funding purposes.In such cases, the defined benefit component is accounted for as a definedbenefit plan and the defined contribution component is accounted for as adefined contribution plan.DEFINED CONTRIBUTION PLANS

014 In accounting for a defined contribution plan , an entity s obligation foreach reporting period is determined by the amounts to be contributed forthat period. Consequently, no actuarial valuation is required to measure theliability or the cost. When contributions are due in periods after anemployee retires, the liabilty is measured on a discounted basis andactuarial gains or losses may occur. The liability is measured on anundiscounted basis when the contributions fall due within the period orwithin twelve months thereafter.

. For a defined contribution plan, an entity should recognize a cost for aperiod comprising:(a) the current service cost for the period;(b) the interest cost for the period on the estimated present value of any

contributions required in future periods related to employee servicesrendered during the current period or prior periods;the amortization for the period of past service costs; anda reduction for the interest income for the period on any unallocatedplan surplus. (JAN. 2000

Current service cost. For a defined contribution plan, an entity should recognize as the

current service cost of employee future benefits for a period:(a) the contributions required to be made by the entity in the period in

exchange for employee services rendered during the period; and

015

(c)(d)

016

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(b)

017

the estimated present value of any contributions required to be madeby the entity in future periods related to employee services renderedduring the period. (JAN. 2000)

An entity s current service cost of the future benefits related to anemployee s services rendered during a period is the present value ofcontributions it is required to pay for those services. Any differencebetween that amount and the net amount paid is recognized as a liability oran asset. When a plan calls for contributions in future periods, such as inperiods following retirement or termination of employment, the estimatedcost is recognized during the employee s service period.

Interest cost on contributionsWhen an entity has accrued contributions required to be made in future

periods as a result of employee services rendered during the current periodor prior periods , the entity recognizes interest on those accruedcontributions. The interest cost for the period is calculated by applying thediscount rate determined in accordance with paragraph 3461.050 as of thebeginning of the period (or end of the prior period) to the present value ofthe accrued contributions throughout that period. An undiscounted basis isinappropriate when a benefit plan requires contributions in a period morethan twelve months into the future. A discounted basis most closely reflectsthe current actual cost of such contributions.

Past service costs. For a defined contribution plan/ an entity should amortize past service

costs arising from a plan initiation or amendment in a rational andsystematic manner over the period during which the entity expects torealize economic benefits from the plan initiation or amendment. (JAN.2000)

When a defined contribution plan is initiated or amended , an entity mayagree to make contributions in respect of past service. The cost ofcontributions arising from a plan initiation or amendment is recognized in arational and systematic manner over the period during which the entityexpects to realize economic benefits from the plan initiation or amendment.This period may be the average remaining service period of activeemployees expected to receive benefits under the plan. However, a shorterperiod may be appropriate. For example , when an entity negotiates itsunion contracts, including the benefits package, every three years andusually agrees to changes in employees ' benefit entitlements , it may beappropriate for the entity to amortize any resulting past service costs overthree years.

Sometimes contributions for past services are made only for certainemployees and are, in effect, made in exchange for services rendered inthe current period. For example, some contributions in the current periodmay be part of remuneration based on current or prior years ' profits orother measures of performance. The cost of such contributions is notdeferred for amortization in future periods, since the entity has realized therelated economic benefits in the current period.Interest income on plan surplus. For a defined contribution plan/ an entity should deduct the interest

earned on any unallocated plan surplus in determining the cost for a period.(JAN. 2000

When a defined benefit plan is converted to a defined contribution plansome plan assets may not be allocated to employees ' individual accountsthereby creating a surplus in the defined contribution plan. Interest earned

018

019

020

021

022

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in periods subsequent to the conversion on any such unallocated plan surplus isdeducted in determining the cost for the defined contribution plan for theperiod. Any such plan surplus, which would be recognized as an accruedbenefit asset, is subject to the limit on the carrying amount of an accruedbenefit asset (see paragraphs 3461.101- 110).DEFINED BENEFIT PLANSDefinitionsThe following definitions are associated primarily with paragraphs

3461.025- 134:(a) An accrued benefit asset is the amount of any asset recognized on

an entity s balance sheet in respect of employee future benefitsbefore deducting any valuation allowance that may be required. It isthe sum of the entity's accumulated cash contributions less the sumof the current and prior years ' benefit costs (before any change invaluation allowance).

(b) An accrued benefit liabilty is the amount of any liability recognizedon an entity s balance sheet in respect of employee future benefits. Itis the sum of the current and prior years ' benefit costs less theentity s accumulated cash contributions.

(c) Accrued benefit methods are a family of actuarial valuationmethods in which a distinct unit of future benefit is attributed to eachyear of credited service and the actuarial present value of that unit ofbenefit is computed separately for the period during which it ispresumed to have accrued. Two accrued benefit methods are:(i) Accumulated benefit method Benefits earned to date are

based on the plan formula , the employee s history of pay,

service and other factors, as of the date of determination.(ii) Projected benefit method prorated on services

Generally, an equal portion of the total estimated future benefit(i.e. , with salary projection or cost escalation, whenappropriate) is attributed to each year of service in theattribution period. Some plans define different amounts ofbenefits for different years of service. For such plans, thismethod will not necessarily attribute an equal portion of thetotal estimated future benefit to each year of service in theattribution period (see paragraph 3461.042).

(d) An accrued benefit obligation is the actuarial present value ofbenefits attributed to employee services rendered to a particulardate. As of a particular date prior to an employee s full eligibilty datean entity's accrued benefi obligation in respect of the employee isthe portion of the obligation for employee future benefits attributed tothat employee s service rendered to that date. On and after the fulleligibility date, the accrued benefit obligation and obligation foremployee future benefits for an employee are the same.

(e) Actuarial gains and losses are changes in the value of the accruedbenefit obligation and the plan assets resulting from:(i) experience different from that assumed; or(ii) changes in an actuarial assumption.

(f) Actuarial present value is the discounted value of an amount orseries of amounts payable or receivable at various times, determinedas of a given date by the application of a particular set of actuarialassumptions.

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(g)

An attribution period is the period of an employee s service towhich an obligation for employee future benefits is assigned.A credited service period is the employee service period for whichbenefits are earned pursuant to the terms of a benefit plan. Thebeginning of a credited service period may be the date of hire or alater date. For example , a plan may provide benefits only for servicerendered after a specified age or period of employment.

Fair value is the amount of the consideration that would be agreedupon in an arm s length transaction between knowledgeable , willingparties who are under no compulsion to act (see additional guidancein FINANCIAL INSTRUMENTS - DISCLOSURE AND PRESENTATIONDisclosure , Fair value , Section 3860).The full eligibilty date is the date at which an employee hasrendered all of the service necessary to earn the right to receive all the benefits expected to be received by that employee (including anybeneficiaries and dependants expected to receive benefits).Determination of the full eligibility date is affected by plan terms thatprovide incremental benefits expected to be received by or on behalfof an employee for additional years of service , unless thoseincremental benefits are insignificant.A funded benefit plan is a benefit plan in which the reporting entityis setting aside assets to pay the costs of benefits as they becomedue. The assets are set aside by the reporting entity in a separatelegal entity, generally a trust, and the reporting entity cannot use theassets so set aside for its own purposes. When benefits becomepayable, they are paid out of the trust directly to the employees.Pension plans are generally funded because of legal requirements toset assets aside.

An obligation for employee future benefits is the actuarial presentvalue as of a particular date of benefits expected to be paid under adefined benefit plan. The obligation is measured on the basis of theexpected amount and timing of future benefits, taking intoconsideration the expected future cost of providing the benefits andthe extent to which the costs are shared by employees or others.Plan assets are assets that have been segregated and restricted in

a trust or other legal entity separate from a reporting entity toprovide for employee future benefits under the following conditions:(i) The assets of the separate entity are to be used only to settle

the related accrued benefit obligation , are not available to thereporting entity's own creditors, and either cannot be returnedtothe reporting entity or can be returned to the reportingentity only if the remaining assets of the trust are sufficient tomeet the plan s obligations.

(ii) To the extent that suffcient assets are in the separate entity,the reporting entity wil have no obligation to pay the relatedemployee future benefits directly.

Plan assets include any financial instruments issued by thereporting entity and held by the trust or other legal entity. For thepurposes of this Section , plan assets do not include amounts held bythe reporting entity and not yet paid into the trust or other legalentity. Plan assets may include certain arrangements with insuranceenterprises (see paragraphs 3461.122- 126);

(h)

(i)

(k)

(I)

(m)

(n) A transitional asset is the unreeognized amount, if any, as of the

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025

beginning of the fiscal year to which this Section is first applied , determinedas:(i) the fair value of plan assets less the accrued benefit obligation;(ii) less any accrued benefit asset or plus any accrued benefit

liability.An entity may have adopted a method of accounting in accordance

with this Section prior to its issuance. In that case , a transitionalasset is not re-determined.

(0) A transitional obligation is the unrecognized amount, if any, as ofthe beginning of the fiscal year to which this Section is first applieddetermined as:(i) the accrued benefit obligation less the fair value of plan assets;(ii) plus any accrued benefit asset or less any accrued benefit

liability.An entity may have adopted a method of accounting in accordance

with this Section prior to its issuance. In that case , a transitionalobligation is not re-determined.

(p)

An unamortized transitional asset or unamortized transitionalobligation is the portion of a transitional asset or transitionalobligation that has not been recognized in the financial statements.

(q)

An unfunded benefit plan is a benefit plan in which an entity paysall of the costs of benefits directly to its employees, their beneficiariesor estates , or to a third-party service provider on behalf of theemployees , as the amounts become due.

IntroductionThe objective of accounting for a defined benefit plan is to provide an

appropriate allocation of the cost of the plan to the periods in which therelated employee services are rendered. Accounting for defined benefitplans involves the use of an actuarial valuation and actuarial assumptions.The accrued benefit obligation is measured on a discounted basis because itmay be discharged many years after an employee renders the relatedservice. There is a possibility of actuarial gains and losses as a result ofdifferences between actuarial assumptions and actual experience. The costrecognized for a defined benefit plan for a period is not necessarily theamount of any contribution required for that period for funding purposes.The actuarial assumptions used for funding purposes may differ from thoseused for accounting purposes because funding is a financing procedure thatconsiders cash requirements and other matters such as pension legislation.When an entity has more than one defined benefit plan , the entity accountsseparately for each separately measured plan (see paragraphs 3461.096-100).Defined benefit plans may be unfunded, or they may be wholly or partly

funded by contributions by an entity and, sometimes, by its employees.Contributions are paid into a fund or a trust that is legally separate fromthe reporting entity and from which the employee benefits are paid. Theadequacy of the fund to make all benefit payments as they fall due dependson the investment performance of the assets in the fund and the extent towhich the amount and timing of benefit payments coincide with previousestimates made in funding valuations. The payment of benefits depends notonly on the financial position of the fund but also on an entity s ability tomake good any shortfall in the fund's assets. Therefore, the entity is, in

substance, underwriting the actuarial and investment risks associated withthe plan.

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027 Accounting by an entity for a defined benefit plan includes the followingsteps:(a) making estimates (actuarial assumptions) about demographic

variables (such as employee turnover and mortality) and financialvariables (such as future increases in salaries and medical costs) thatwill affect the cost of employee future benefits (see paragraphs3461. 047 - 065);

(b) determining the obligation for employee future benefits , usingactuarial techniques to make a reliable estimate of the present valueof employees ' future benefits;

(c) attributing the cost of benefits to employee service periods in order todetermine the accrued benefit obligation and the current service cost(see paragraphs 3461.034- 043);

(d) determining the interest cost on the accrued benefit obligation (seeparagraphs 3461.050- 055 and 3461.075);

(e) determining the fair value of any plan assets (see paragraphs3461.066- 068);

(f) determining the expected return on plan assets (see paragraphs3461.076- 078);

(g)

when a plan has been initiated or amended , determining the resultingpast service costs and the amount of those past service costs to berecognized (see paragraphs 3461.079- 086);

(h) determining the total amount of actuarial gains and losses and theamount of those actuarial gains and losses to be recognized (seeparagraphs 3461.087- 093);

(i) when a plan has an accrued benefit asset which is subject toimpairment, determining the necessary valuation allowance (seeparagraphs 3461.101- 110); and

(j) when a plan has been curtailed or settled , determining the resultinggain or loss (see paragraphs 3461.111- 134).

In some circumstances, estimates, averages and computational shortcutsmay provide a reliable approximation of the detailed computations requiredby this Section.Recognition

. For defined benefit plan, an entity should recognize liabilty and

cost for employee future benefits, other than post-employment benefits andcompensated absences that do not vest or accumulate, in the period inwhich employees render services to the entity in return for the benefits. Anentity should recognize liabilty and cost for post-employment benefitsand compensated absences that do not vest or accumulate when the eventthat obligates the entity occurs. (JAN. 2000 A liability for pension benefits and other retirement benefits, as well as

certain post-employment benefits and compensated absences, is accruedover the period in which service is rendered. For pension benefits, the rightto benefits usually vests and the amount usually increases with the lengthof service provided by the employee. For other retirement benefits , theamount of benefits is not necessarily increased by the length of serviceprovided by the employee but the right to benefits is earned either by theemployee working a specified period of time, attaining a specified age whilein service, or both. For certain post-employment benefits and compensatedabsences, the right to the benefit is earned by the employee renderingservice and , based on the length of service provided , the amount of the

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benefit can increase.031 For post-employment benefits and compensated absences that vest or

accumulate, a liability is accrued as employees render the service that givesrise to the benefits. Examples of these types of post-employment benefitsand compensated absences are service-related long-term disabilitybenefits , sabbaticals in which the leave is granted to provide unrestrictedtime off for past service , or vacation days that accumulate and are paid outwhen the employee retires. However, under some sabbatical arrangementsleave is granted only for an employee to perform research or public serviceto enhance the reputation of, or otherwise benefit, the entity. In suchcircumstances, a liability is not accrued in advance for the cost of theemployee s services during such leave. In addition , as a practical matteran entity is not required to accrue a liability for sick-pay benefits thataccumulate but do not vest.

032 For post-employment benefits and compensated absences that do not vestor accumulate , a liability is recognized when an event that obligates theentity occurs. Examples of these types of benefits and absences areparental leave and non-service- related, short-term and long-term disabilitybenefits.

033 The terms of a plan may allow an entity to cancel the benefits. It isusually difficult for an entity to cancel benefits and retain its employeeswithout providing some form of compensation. In the absence of evidenceto the contrary, accounting for the cost of employee future benefits isbased on the premise that an entity that is currently providing futurebenefits to employees under an existing plan will continue to do so over theremaining service lives of those employees, whether or not a legalobligation exists. Actuarial valuation methods allow the obligation foremployee future benefits to be measured with sufficient reliability to justifyrecognition of the cost of those benefits during employees ' working livesand, to the extent the cost is unpaid or unfunded , the related liability.Examples(a) Pension benefits - Employees are eligible to join a pension plan when

they are hired. The pension benefit is $30 a month for each year ofservice. The benefits vest after ten years of service. A liability and acost are recognized as an employee provides service from the date ofhire, even though the benefits do not vest until after ten years ofservice.

(b) Sabbatical - Employees are entitled to take a sabbatical leave of oneyear with full pay after each six years of service. There is norestriction on employees ' activities during their sabbatical leave. Aliabilty and a cost are recognized over the six years following thedate of hire or the date of completion of the last sabbatical leave, asthe case may be.

(c) Parental leave - Employees are entitled to receive 50 percent of theircurrent salary for up to six months when they take parental leave onthe birth or adoption of a child. The entity does not recognize anyliability until an employee applies for parental leave, at which pointthe entity recognizes a liability for the full duration of the leave. Inthis case, the application for leave is the event that obligates theentity .

MeasurementActuarial valuation method

034 . For a defined benefit plan, an entity should determine its accrued benefitobligation using:

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035

(a) the projected benefit method prorated on services, when future salarylevels or cost escalation affect the amount of the employee futurebenefits; or

(b) the accumulated benefit method, when future salary levels and costescalation do not affect the amount of the employee future benefits.(JAN. 2000)

An accrued benefit method attributes a distinct unit of future benefit toeach year of credited service , and the actuarial present value of that unit iscomputed separately for the period in which it is deemed to have beenearned.

For certain benefit plans , such as career-average and final- pay pensionplans and retiree health care plans, future salary levels or cost escalationaffect the amount of the future benefits. For these plans, the cost ofbenefits provided in exchange for employee services is determined usingthe projected benefit method prorated on services. For flat-benefit plans inwhich benefits vary only with periods of service rendered without anycommitment to change the benefit level , the projected benefit methodprorated on services is equivalent to the accumulated benefit method.The amount of an obligation for employee future benefits is determined

from actuarial valuations performed periodically. In the years betweenvaluations, an extrapolation of the actuarial valuation of the obligation isused. Each year, management reviews matters such as changes to theplan , the actuarial assumptions , occurrence of settlements andcurtailments, changes to the employee group and the rate of return on planassets, and determines whether such matters necessitate any adjustmentsto the extrapolations. When the effect of any change is significant, a newvaluation may be necessary.Attribution. For a defined benefit plan, the attribution period should begin on an

employee s date of hire unless the plan s benefit formula grants credit forservice only from a date after the date of hire. When the plan s benefitformula grants credit for service only from a date after the date of hire, theattribution period should begin at the commencement of the creditedservice period. However, when the plan s benefit formula grants credit forservice only from a date after the date of hire and the credited serviceperiod is insignificant relative to the total service period, the obligation foremployee future benefits should be attributed from the date of hire. Theattribution period should end on the full eligibilty date. (JAN. 2000)

An obligation for employee future benefis is attributed to the periods inwhich an employee renders the service that gives rise to the benefis. Forplans in which an employee starts earning benefis when hired, attributionstarts from the date of hire. Some plans require an employee to work for ashort period of time after the date of hire before earning benefits. When aplan has a credited service period that is significant, and a qualificationperiod that is insignificant, in relation to the employee s total years ofservice prior to full eligibilty, the obligation for employee future benefits isattributed from the start of the credited service period stipulated by theplan. When a plan has a credited service period that is insignificant, and aqualification period that is significant, compared to an employee s total

years of service prior to full eligibility, the obligation for employee futurebenefits is attributed from the date of hire and not from the start of thecredited service period stipulated by the plan.

Some benefit plans provide incremental benefits for additional years ofservice beyond the end of the credited service period. For example, in

036

037

038

039

040

Page 13 of75


certain pension plans that limit credited service periods to a maximum number ofyears but take subsequent salary increases into account in determining theamount of pension entitlements , significant incremental benefits can beearned beyond the end of the credited service period. In suchcircumstances, the attribution period may end either at retirement or at theend of the credited service period. For benefit plans, other than pensionplans, that provide significant incremental benefits after the creditedservice period , the attribution period ends at the full eligibility date whenadditional benefits are no longer earned by rendering further service. For allbenefit plans , when incremental benefits are insignificant, the attributionperiod is not extended for additional years of service.Examples(a) A company has a defined benefit plan specifying that employees join

the plan when they are hired. The plan provides a final averageearnings pension upon retirement and employees become eligible forsupplemental health care benefits when they become eligible for earlyretirement. The earliest age at which someone can retire and receivebenefits under the plan is 55 , the expected retirement age is 63 andthe normal retirement age is 65.

----- -------------..........................................-...,..............

Dffe ofm Age 65 Nonnretiement ageAge 55 Eary

retiementAge 63

Expected

...............

attbution period for supplemental health care plan

attbution p erio d for pension plan

- -

(b)

The attribution period for the supplemental health care plan startsat the date of hire and ends when an employee becomes eligible toretire, at age 55. The attribution period for the pension plan alsostarts at the date of hire but ends at the expected retirement age of63. The attribution period for the supplemental health plan is shorterbecause the employee has fulfilled the eligibilty provisions of the planupon becoming eligible for early retirement and is entitled to thebenefits upon retirement. No further benefit is conferred on theemployee in the years between becoming eligible for early retirementand expected retirement age. The attribution period for the pensionplan is longer because the employee continues to earn additionalpension benefits in the years between becoming eligible for earlyretirement and the expected retirement age.A company has a benefit plan with a formula that provides 100percent benefit coverage for service for the year in which anemployee attains age 60. The plan has a one-year credited serviceperiod. Employees are expected to have rendered an average of 20years of service at the age of 60. Accordingly, the credited service

Page 14 of75


period is insignificant in relation to total years of service prior to fulleligibility. In these circumstances , the service cost is recognized fromthe date of hire to age 60.

--- -------- --- -- -----

Date of hie Insignficant period

Age 60

Ful eligibilty date

- - - - - attbution period

...............

credited servce period

(c) A company has a pension plan for its employees providing a pensionfor each year of membership in the plan equal to one and a halfpercent multiplied by the average of the highest five consecutiveyears of pensionable earnings. Employees become eligible to join theplan after two years of service. Employees do not earn any benefits inthe two years of service after the date of hire and before joining theplan. Employees do not earn additional pension benefits after havingprovided 30 years of service. The earliest age at which an employeemay become eligible for retirement is 55 , the expected retirementage is 63 and the normal retirement age is 65. Employees areexpected to have rendered an average of 30 years of service at age60.

Page 15 of75


Age 55

ly retemente1e gibilty

------------ ---------

....................,.................................",.0..........""'" ""0""""""

Sta 0 credited

serce perod

Age 60

Completion of30 years of

sernce

Date of hie

Page 16 of75

Age 63

E.xpectedretiement age

Age 65

Normretement age

The attrbution perod may end either at:

- - - - -

completion anD years of servce (credited servce period); or

. .. .. . . . .. .. . . ..

exp e cte d retiement age

The attribution period for an employee starts two years after thedate of hire and may end either at the attainment of the expectedretirement age or at the completion of 30 years of service (thecredited service period).A company has a plan that provides life insurance benefits toemployees who render 20 years of service and attain the age of 55while in service. The benefit amount under the policy is equal to 20percent of salary in the final year of service. A 55-year-old employeecurrently earning a salary of $90,000 has worked for the company for22 years. The employee is expected to retire at age 60 and isexpected to be earning $120,000 at that time. The employee iseligible for life insurance coverage under the plan at age 55, when theemployee h()s met the age and service requirements. Howeverbecause the employee s salary continues to increase each year, theemployee is not eligible for the full expected benefit until retirementat age 60 because an incremental benefit is earned for eachadditional year of service beyond age 55. That is, the employee earnsan additional benefit, from age 55 to retirement at age 60, equal to20 percent of the increase in salary for service during each of thoseyears.

(d)


--------------------- ------

Date a f hieAge 55

Benefitelgibilty

. . . . . . . .

Signficantbenefit eaedin ths p eno d

Age 60

Exectedretement age

- - - - -

attrbution p eno d

041 For plans providing post-employment benefits and compensated absencesthat vest or accumulate, the attribution period generally starts at the dateof hire and ends at the expected date of the event giving rise to theobligation for employee future benefits.Attribution method

. For defined benefit pension plan, the obligation for employee futurebenefits should be attributed to each year of service in the attributionperiod based on the plan s benefit formula, except when the plan does notstate or imply benefit formula or when an employee s service in lateryears wil lead to significantly higher level of benefit than in earlier years.In those circumstances, the obligation should be attributed on straight-line basis to each year of service in the attribution period. For definedbenefit plan other than pension plan, the obligation for employee futurebenefits should be attributed on straight-line basis to each year of servicein the attribution period unless the plan formula attributes significantlyhigher level of benefits to employees ' early years of service. In thosecircumstances, the obligation should be attributed based on the planbenefit formula. (OCT. 2000)

Different plans have different formulae for determining benefits:(a) Some plans have benefit formulae that attribute all , or a significantly

higher level, of the total benefits to later years of service, therebyachieving, in substance, a delayed vesting of benefits. The obligationfor employee future benefits for these types of plans is attributed ona straight-line basis over each year in the attribution period becausethe employee has earned benefits in each of the years in the creditedservice period.

. (b) Some plans have terms that make it diffcult to attribute benefis toyears of service following a plan benefit formula. Plan terms may beambiguous and quite diffcult to apply at dates between the beginningand end of the attribution period. Thus, for a defined benefit planother than a pension plan , the obligation for employee future benefitsis attributed on a straight- line basis over each year in the attributionperiod unless the plan s benefit formula attributes a significantlyhigher level of benefits to the employees ' early years of service , in

which case, attribution is based on the plan s benefit formula.

042

043

(c) For plans providing post-employment benefits and compensated

Page 17 of75


044

absences that vest or accumulate , the attribution method may follow thestandards for a defined benefit pension plan or a defined benefit planother than a pension plan , provided the basis chosen is appliedconsistently from year to year.

Measurement date of plan assets and accrued benefit obligation+ For defined benefit plan, the plan assets and the accrued benefit

obligation should be measured as of the date of the annual financialstatements, except that they may be measured as of date not more thanthree months prior to that date provided the entity adopts this practiceconsistently from year to year. (JAN. 2000)Measurement of cost for employee future benefits

+ For defined benefit plan, the measurement of cost in both interim andannual financial statements should be based on the assumptions used inmeasuring the plan assets and the accrued benefit obligation at thepreceding year end, unless more recent measurement of both the planassets and the accrued benefit obligation is available. When available, more

recent information should be used. (JAN. 2000 A remeasurement is usually called for when a significant event such as a

plan amendment, settement or curtailment occurs. The assumptionsadopted for a remeasurement are used in determining the cost foremployee future benefits from the date of the significant event to the year-end measurement date. The measurement of the cost for the period fromthe beginning of the year to the date of the significant event is based onthe assumptions at the beginning of the year.Actuarial assumptions

+ For defined benefit plan, each actuarial assumption should bemanagement' s best estimate solely with respect to that individualassumption, determined on the basis that the plan wil continue to be ineffect in the absence of evidence to the contrary. The set of actuarialassumptions for each plan should be internally consistent. (JAN. 2000)

Actuarial assumptions include:(a) demographic assumptions about the future characteristics of

employees and their beneficiaries who are eligible for benefitsincluding:(i) mortality, both during and after employment;(ii) rates of employee turnover, disability and early retirement;(iii) the proportion of employees with their beneficiaries eligible for

benefits; and(iv) per capita claims cost by age and by type of benefit;

and(b) financial assumptions, including:

(i) the discount rate for future cash flows;(ii) future salary and benefit levels;(iii) future medical costs, in the case of medical benefits; and(iv) the rate of return on plan assets.

045

046

047

048

049 In making actuarial assumptions, management takes into account therelationships between the factors for which assumptions are required , andkeeps the assumptions internally consistent. For example , the level ofinflation underlying the assumption about future rates of return on planassets is the same as the level of inflation underlying the assumption aboutfuture salary levels. All assumptions are based on the presumption that the

Page 18 of75


plan will continue in effect in the absence of evidence that it will not continue.

050Discount rate

. For a defined benefit plan, the discount rate used to determine theaccrued benefit obligation should be an interest rate determined byreference to:(a) market interest rates at the measurement date on high-quality debt

instruments with cash flows that match the timing and amount ofexpected benefit payments; orthe interest rate inherent in the amount at which the accrued benefitobligation could be settled. (JAN. 2000)

The objective of selecting a discount rate is to measure the single amountthat, if invested at the measurement date in a portfolio of high-quality debtinstruments, would provide the necessary pre-tax cash flows to pay theaccrued benefits when due. For example, the current market value of aportfolio of high-quality zero coupon bonds acquired to pay the cost ofbenefits , when due , equals the amount of the actuarial present value of thebenefits because cash inflows equal cash outflows in timing and amount.There is no reinvestment risk in the yields to maturity of the portfolio.However, in other than a zero coupon portfolio, such as a portfolio of long-term debt instruments that pay interest semi-annually or have maturitiesthat do not extend far enough into the future to meet expected benefitpayments, the discount rate (the yield to maturity) needs to incorporatereinvestment rates expected to be available in the future. Thosereinvestment rates are extrapolated from the existing yield curve at themeasurement date.When rates on high-quality corporate bonds are available , they are used

to determine the discount rate. When the maturities of corporate bonds donot extend far enough into the future to match the cash flows inherent inthe accrued benefit obligation , the rates on government bonds are used todetermine the discount rate for the expected benefit payments that arefarther into the future than the corporate bond maturities.The discount rate reflects the estimated timing of benefit payments. When

some benefits are payable after the maturity of all available corporate orgovernment bonds, the present value of that portion of the benefits isunlikely to vary significantly as a result of the selected discount rate. Forthat portion of the benefits , an entity may use a discount rate based on theyield of the last maturing corporate or government bond available.The discount rate is re-evaluated at each measurement date. When long-

term interest rates rise or decline, the discount rate changes in a similarmanner.Immediate settlement of an accrued benefit obligation may be possible

through, for example, the purchase of an insurance contract, such as anannuity contract, that transfers the significant risks associated with theaccrued benefit obligation to a third-part insurer. In such circumstances,the interest rate inherent in the amount at which the accrued benefiobligation could be settled may be used in determining the discount rate.Future changes in compensation levels, benefits and cost sharing

. For a defined benefit plan, the accrued benefit obligation should bemeasured on a basis that takes account of:(a) future compensation levels;(b) expected changes in benefits defined in monetary terms;

(b)

051

052

053

054

055

056

(c) automatic benefit changes specifed by the plan that are expected to

Page 19 of75


057

occur; and(d) expected amendments in the cost-sharing provisions of the benefit

plan. (JAN. 2000)An accrued benefit obligation is measured using assumed future

compensation levels when the benefit formula is based on futurecompensation levels. Therefore, all expected changes in futurecompensation , whether due to general price level inflation , seniority,promotion , productivity increases or other factors , such as supply anddemand in the employment market, are included in the measurement ofthe accrued benefit obligation. Examples of the types of plans in which thebenefit formula is based on future compensation levels are career-averagefinal-pay benefit plans and salary-related life insurance benefit plans. Forcertain flat-benefit plans , benefits vary only with periods of servicerendered. For these plans , future compensation levels do not enter into thedetermination of the accrued benefit obligation.A past practice of regular increases in future benefits defined in monetary

terms (i. , a defined dollar amount of benefit or a defined percentage ofsalary) may indicate that an entity has a present commitment to providemonetary benefits attributable to past service that are greater than themonetary benefits defined by the written plan. When an entity has asubstantive commitment to increase benefits, the increased level ofbenefits forms the basis to measure the accrued benefit obligation. Forexample, a regular practice of updating the base year of a career-averagepension plan or of providing regular increases in the benefit under a flat-benefit plan may indicate that the benefit plan encompasses theseincreases.Automatic benefit changes specified by a benefit plan and expected to

occur are included in the measurement of the accrued benefit obligation.Examples of automatic benefit changes are:(a) specified cost-of- living adjustments; and(b) changes in the cost of benefits in kind, such as health care benefits

that are provided through the direct rendering of services, paymentdirectly to service providers or reimbursement of employeespayments for those services.

A plan amendment is taken into account in the measurement of anaccrued benefit obligation once it is agreed to, even when some provisionsbegin to take effect only in future periods. For example , if a planamendment grants a different benefit level for employees retiring after aspecified future date, the current period measurements of the accruedbenefit obligation and the benefit cost take into account the increased orreduced benefit level for employees expected to retire after the specifiedfuture date.

Except in the circumstances discussed in paragraph 3461.062, an entity'cost-sharing policy constitutes part of the substance of the cost-sharingprovisions of a benefit plan. An entity's cost-sharing policy is evident when:(a) the entity has had a practice of:

(i) maintaining a consistent level of cost sharing with itsemployees; orincreasing or reducing its share of the cost of covered benefitsconsistently through changes in employees ' contributionstowards their benefits, deductibles , co- insurance provisionsout-of-pocket limitations , or some combination thereof;

058

059

060

061

(ii)

Page 20 of 75


062

the entity has the ability, and has communicated to affectedemployees and their beneficiaries its intent, to institute different cost-sharing provisions at a specified time or when certain conditions exist(for example , when health care cost increases exceed a certain level).

An entity s past practice of maintaining a consistent level of cost sharing isnot part of the substance of a benefit plan when accompanied byidentifiable offsetting changes in other benefits or compensation or whenthe entity has incurred significant costs, such as work stoppages , to effectthat cost-sharing policy. Similarly, an entity s communication of its intent isnot part of the substance of a benefit plan when employees are unwilling toaccept the change, thereby creating the potential for adverse consequencesto the entity s operations , or when some compensation , including othermodifications to plan benefits , is required to gain the employeesacceptance.In the case of benefit plans providing medical coverage, certain medical

claims may be covered by governmental programs under existing law or byother providers of health care benefits. Benefit coverage by governmentalprograms is assumed to continue as provided by the present law and byother providers pursuant to their present plans. Enacted changes in the lawor amendments to the plans of other health care providers that will takeeffect in future periods and affect the future level of their benefit coverage,are taken into account in current period measurements of plan benefitsexpected to be provided in those future periods. Future changes in lawsconcerning medical costs covered by governmental programs and futurechanges in the plans of other providers are not anticipated.Medical costs

. For defined benefit plan, actuarial assumptions about medical costsshould reflect expected future changes in the cost of medical servicesresulting from general price-level inflation, specific changes in the prices

medical services, and changes in medical practices and technology. (JAN.2000)

Measurement of the cost of future medical benefits requires assumptionsabout the level and frequency of future claims and the cost of meetingthose claims. The level and frequency of claims are particularly sensitive tothe age of employees (and their beneficiaries) and may be sensitive toother factors, such as gender and geographical location. An entityestimates future medical costs on the basis of historical data about its ownexperience, supplemented when necessary by historical data from otherentities, insurance enterprises, medical providers or other sources.Historical data from other entities is adjusted to reflect any differences indemographic mix of the population. Historical data, either from thereporting entity or other entities, is also adjusted when there is reliableevidence that historical trends wil not continue.Plan assets

. For defined benefit plan, plan assets should be measured at fair value.(JAN. 2000)The fair value of plan assets is used in the determination of plan surplus

or deficit (funded status) and is disclosed in accordance with paragraph3461.154(e)(i). Either fair value or market-related value is used for thecalculation of the expected return on plan assets (see paragraph 3461.076)and the determination of the minimum amount of amortization of netactuarial gains and losses (see paragraph 3461.087).The fair value of plan assets is normally market value. When market

values are not readily available for certain assets, such as real estate

(b)

063

064

065

066

067

068

Page 21 of75


investments , a method that provides an approximation of market value is used.For example , an entity may obtain independent appraisals or review marketvalues of similar assets. (See FINANCIAL INSTRUMENTS - DISCLOSUREAND PRESENTATION , Disclosure , Fair value , Section 3860 , for additionalguidance concerning the determination of fair value.Determination of cost for the period

069 The following paragraphs apply to the determination of the cost for aperiod arising from a defined benefit plan. An entity that has a separatelymeasured plan for post-employment benefits and compensated absencesthat do not vest or accumulate recognizes past service costs and actuarialgains and losses in income in accordance with the following paragraphseither on a delayed basis or immediately. The selected method ofrecognition is applied consistently from year to year. Any transitionalobligation or transitional asset resulting from the initial application of thisSection is accounted for in accordance with paragraphs 3461.164- 172.Ilustrative computations are provided in Example 1 at the end of thisSection.Components of cost for the period. For a defined benefit plan, cost for a period should comprise:

(a) the current service cost, determined in accordance with paragraph3461.071;

(b) the interest cost on the accrued benefit obligation, determined inaccordance with paragraph 3461.075;

(c) the expected return on plan assets, determined in accordance withparagraph 3461.076;

(d) the amortization of past service costs arising from a plan initiation oramendment, determined in accordance with paragraph 3461.079;

(e) the amortization of a net actuarial gain (/055), determined inaccordance with paragraph 3461.087;

(f) the amount recognized as a result of a temporary deviation from theplan, determined in accordance with paragraph 3461.094;

(g)

the increase or decrease in a valuation allowance against the carryingamount of an accrued benefit asset, determined in accordance withparagraph 3461.102;

(h) the gain or 1055 on a settlement or curtailment, determined inaccordance with paragraphs 3461.113- 114 and 3461.127- 128;

(i) the expense recognized for a termination benefit, determined inaccordance with paragraphs 3461.136- 138;

(j)

the amortization of a transitional asset or transitional obligationdetermined in accordance with paragraph 3461.167; and

(k) the amortization of an amount carried forward arising on the initialapplication of this Section related to the limit on the carrying amountof an accrued benefit asset, determined in accordance with paragraph3461.167. (JAN. 2000

070

071Current service cost

. For a defined benefit plan, an entity should determine its current servicecost for a period as the actuarial present value of benefits attributed to

employees ' services rendered during that period in accordance withparagraphs 3461.038 and 3461.042 reduced to reflect employeecontributions. (JAN. 2000)

072 Contributions towards the cost of retirement benefits may be received

Page 22 of 75


from active employees or from retirees. For example , employees may contributeto a pension plan during their service life and retirees may contributetowards the cost of a drug plan.

Contributions received during a period from active employees towards thecost of a pension plan reduce the current service cost in the period.

074 When contributions are expected to be received from employees in futureperiods towards the cost of retirement benefits other than pensions, anentity' s accrued benefit obligation is measured as the actuarial presentvalue of the benefits expected to be provided , reduced by the actuarialpresent value of contributions expected to be received from employees infuture periods. In determining the amount of those contributions , an entityconsiders any related plan provisions , such as its past practice ofconsistently increasing or reducing the contribution rate as described inparagraphs 3461.061- 062. An obligation to return contributions receivedfrom employees who do not attain eligibility for future benefits, togetherwith any interest accrued on those contributions , is recognized as acomponent of an entity s accrued benefit obligation. These factors arereflected also in an entity s current service cost.

Interest cost on accrued benefit obligation

+ For a defined benefit plan, the interest cost on an accrued benefitobligation for a period should be determined by applying the discount ratedetermined in accordance with paragraph 3461.050 as of the beginning ofthe period (or end of the prior period) to the accrued benefit obligation forthat period. (JAN. 2000 Expected return on plan assets

+ For a funded defined benefit plan, the expected return on plan assetsshould be based on the expected long-term rate of return on plan assetsand the fair value, or a market-related value, of plan assets. (JAN. 2000)

077 A market-related value is a calculated amount that recognizes changes inthe fair value of plan assets in a systematic and rational manner over aperiod not exceeding five years. Different ways of calculating market-related value may be used for different classes of assets. For example, anentity may use a fair value for bonds and a five-year moving average valuefor equities, but the basis of determining market- related value is appliedconsistently from year to year for each asset class.

078 When plan assets are held in a taxable entity, the expected return on planassets reflects the income and related tax expense or benefit for the perioddetermined in accordance with INCOME TAXES , Section 3465. In othercircumstances, no provision for income and related taxes is included in theexpected return on plan assets.Past service costs

+ For a defined benefit plan, an entity should amortize past service costsarising from a plan initiation or amendment by assigning an equal amountto each remaining service period up to the full eligibilty date of eachemployee active at the date of the plan initiation or amendment who wasnot yet fully eligible for benefits at that date. However, when all, or almostall, of the employees are no longer active, an entity should amortize pastservice costs on a straight-line basis over the average remaining lifeexpectancy of the former employees. (JAN. 2000)

073

075

076

079

080 When a defined benefit plan is initiated or amended , an entity may grantbenefits calculated by reference to past service. Plan initiations that grantbenefits for past service and plan amendments that improve benefits aregranted with the expectation that the entity will realize economic bene.fits in .

Page 23 of 75


future periods. Therefore, the past service costs resulting from the plan initiationor amendment are not recognized fully in income in the period in which theinitiation or amendment takes place. Rather, the past service costs areamortized over the service periods in which the entity expects to realize theeconomic benefit. This period ends when an employee reaches the fulleligibility date under the plan. At the full eligibility date , the entity will haveaccrued all of the obligation for employee future benefits including any pastservice costs relating to that obligation. When a plan is initiated that grantsbenefits solely in exchange for employee service after the date of the planinitiation or a future date , the credited service period for employees whoare active at the date of the plan initiation and expected to receive benefitsunder the plan begins at the date of the plan initiation or the future date.

081 To reduce the complexity and detail of required calculations, an entitymay use an alternative amortization approach that amortizes past servicecosts more rapidly. Once chosen , the alternative amortization approach isused consistently from year to year. For example, it is usually acceptable toamortize past service costs on a straight- line basis over the averageremaining service period of active employees expected to receive benefitsunder the plan up to the full eligibility date.

082 In some circumstances, the period to the full eligibility date of employeescovered by a benefit plan is not the period during which the benefits of pastservice costs will be realized and a shorter amortization period isappropriate. In those circumstances, the amortization of past service costsis accelerated to reflect a more rapid expiration of the entity s economicbenefits. A history of regular plan amendments and other evidence mayindicate that the period during which an entity expects to realize economicbenefits from an amendment granting increased benefits is shorter than theaverage remaining service period of active employees to the full eligibilitydate for benefits covered by the plan. For example, when an entitynegotiates its union contracts, including the benefits package, every threeyears and as a result the entity generally renegotiates its benefits, it maybe appropriate to amortize the past service costs over three years.Identification of such situations requires an assessment of thecircumstances of each plan.

083 In some circumstances, an entity may amend a benefit plan to provideincreased benefits calculated by reference to past service and all, or almostall , of those entitled to the increased benefits are no longer active becausethey have retired, left the entity or had their employment terminated bythe entity prior to the plan amendment. The entity amortizes past servicecosts and other amounts, such as actuarial gains and losses and anytransitional obligation or transitional asset, on a straight-line basis over theaverage remaining life expectancy of the former employees. The averageremaining life expectancy of the former employees is an actuarialassumption underlying the computation Of an entity's accrued benefitobligation and the related unamortized amounts.

084 A plan amendment may reduce, rather than increase , an entity's accruedbenefit obligation. A reduction in the accrued benefit obligation is appliedfirst to reduce any existing unamortized past service costs and then toreduce any existing unamortized transitional obligation. The excess, if any,is amortized on the same basis as specified in paragraph 3461.079 for pastservice costs.

085 When a defined benefit plan is cancelled and replaced by another definedbenefit plan , the cancellation of the first plan is treated as a planamendment. In such circumstances, any gain or loss is associated with the

Page 24 of75


services to be rendered by employees over the expected period to their fulleligibility date under the new plan and , accordingly, is amortized over thatperiod.

086 For a separately measured plan providing post-employment benefits orcompensated absences that do not vest or accumulate , an entity recognizespast service costs:

(a) immediately in the period in which they arise; or(b) over a period linked to the type of benefit.For example , past service costs arising under a plan providing long-termdisability benefits to former employees may be amortized over the averageexpected period during which benefits will be paid. Once chosen , the basisfor recognizing past service costs is applied consistently from year to year.Actuarial gains and losses. For a defined benefit plan, an entity should use a systematic method of

recognizing actuarial gains and losses in income. An entity should recognizeat least the minimum amortization determined in accordance withparagraph 3461.088 in each period, and may recognize actuarial gains andlosses in income immediately. The method adopted should be appliedconsistently to both gains and losses. (JAN. 2000). For a defined benefit plan, an entity should recognize amortization of

actuarial gains and losses in a period in which, as of the beginning of theperiod, the unamortized net actuarial gain or loss exceeds 10 percent of thegreater of:(a) the accrued benefit obligation at the beginning of the year; and(b) the fair value, or market-related value, of plan assets at the

beginning of the year.When amortization is required, the minimum amortization should be thatexcess divided by the average remaining service period of active employeesexpected to receive benefits under the plan. However, when all, or almostall, of the employees are no longer active, an entity should base theamortization on the average remaining life expectancy of the formeremployees. (JAN. 2000)

089 Although periodic reviews of benefit plans to determine whether theassumptions remain valid may result in changes in assumptions, short-termexperience wil often vary from the assumptions without necessarilyindicating that those assumptions are incorrect. In the short term , actuarialgains and losses are expected to occur because assumptions about benefitplans relate to a long time frame. The experience of the benefit plan mayindicate that the assumptions need to be revised. When assumptions arerevised, an adjustment to the accrued benefit obligation may be required.Because actuarial gains and losses may include changes in assumptions aswell as experience gains and losses and because gains in one period maybe offset by losses in another, or vice versa, delayed recognition ofactuarial gains and losses is appropriate.

090 An actuarial gain or loss on plan assets is the difference between theactual return on plan assets during a period and the expected return onplan assets for that period. When the expected return on plan assets isdetermined using a market- related value, the actuarial gain or loss on planassets includes both:(a) amounts reflected in the market-related value of plan assets (i.e.

that portion of the prior periods ' actuarial gain or loss on plan assetsthat has been incorporated in the market- related value); and

(b) amounts not yet reflected in the market-related value of plan assets

087

088

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Knotia - CICA Standards & Guidance Collection Page 26 of75

091

092

093

094

095

(i.e. , the effects of changes in the fair value of plan assets not yet amortizedinto the market-related value).

An actuarial gain or loss not yet reflected in the market-related value ofplan assets (i.e. , item (b) above) is not required to be amortized accordance with paragraphs 3461.087- 088. That part of the actuarial gainor loss is amortized when it is included in the market-related value of planassets over future periods.

An actuarial gain or loss on an accrued benefit obligation is the differencebetween the expected accrued benefit obligation and the actual accruedbenefit obligation at the end of the period. The expected accrued benefitobligation includes the effect of the current service cost, benefit paymentsduring the period , and the interest cost on the accrued benefit obligationfor the period.

For a separately measured plan providing post-employment benefits orcompensated absences that do not vest or accumulate , an entity recognizesany actuarial gain or loss:(a) immediately in the period in which it arises; or(b) over a period linked to the type of benefit.For example , actuarial gains and losses arising under a plan providing long-term disability benefits to former employees may be amortized over theaverage expected period during which benefits will be paid. Once chosenthe basis for recognizing actuarial gains and losses is applied consistentlyfrom year to year.

When an entity recognizes actuarial gains and losses immediately forbenefit plans other than pension plans , any gain that does not offset a losspreviously recognized in accordance with paragraphs 3461.087- 088 is firstapplied to reduce any unamortized transitional obligation. Similarly, anyloss that does not offset a gain previously recognized in accordance withparagraphs 3461.087- 088 is first applied to reduce any unamortizedtransitional asset. This treatment ensures that actuarial gains and lossesare not recognized in the financial statements before the underlyingaccrued benefit obligations or plan assets.Temporary deviation from the benefit plan. For a defined benefit plan, the effect of any temporary deviation from

the plan should be recognized in income immediately. (JAN. 2000)

An entity may decide to deviate temporarily from the provisions of abenefit plan to increase or decrease the entity s share of the benefit costs

incurred in the current period or prior periods. For example:(a) An entity may forgive a retrospective adjustment of current or prior

years ' cost sharing relating to benefit costs already incurred on behalfof retirees.

(b) An entity's health care plan may require that contributions fromretirees in future years be increased to cover a shortall in the currentyear. A shortfall arises when the benefit payments in a given year aregreater than the total of the entity's stated share of the benefitpayments for the year and the contributions from retirees for thatyear. The entity may determine that it would be onerous to increaseretirees ' contributions to meet a shortfall in a particular year, anddecide to bear the cost of the shortall for that year. Decisions by theentity to bear shortalls in a number of subsequent years mayindicate that the benefit plan has been amended, giving rise toamounts to be accounted for in accordance with paragraph 3461.079.

Entities with two or more plans


096 . An entity that has two or more defined benefit plans should determine acost, an accrued benefit obligation, and plan assets by applying this Sectionto each separately measured plan or aggregation of plans. (JAN. 2000

For purposes of paragraph 3461.096 , each funded benefit plan is aseparately measured plan. Unfunded benefit plans may be aggregated formeasurement purposes only when:(a) they provide different benefits to the same group of employees and

their beneficiaries; or

(b) they provide the same benefits to different groups of employees andtheir beneficiaries.

An entity may have two or more unfunded benefit plans that providedifferent benefits to the same group of employees and their beneficiaries.For example, the entity may have separate medical care , dental care andeye care plans that provide benefit coverage to all retirees of the entity.The entity may combine those plans for measurement purposes. Similarly,an entity may have two or more unfunded benefit plans that provide thesame benefits to different groups of employees and their beneficiaries. Forexample, an entity may have substantially the same retirement medicalcare plans at each of its operating locations. The entity may combine thoseplans for measurement purposes.When an entity has a benefit plan in which the accrued benefit obligation

exceeds the fair value of the plan assets, and another benefit plan in whichthe fair value of the plan assets exceeds the accrued benefit obligation , theamounts in the two plans are generally not netted. Netting in suchcircumstances is appropriate only when the entity has a clear right to usethe assets of one plan to pay for the benefits to be provided by the otherplan.

. For an entity that has two or more defined benefit plans, an accruedbenefit asset of one defined benefit plan and an accrued benefit liability

another defined benefit plan should be presented separately in the balancesheet except when an entity:(a) has a right to use the assets of one plan to pay for the benefits to

provided by the other plan; and(b) intends to exercise that right. (JAN. 2000)Limit on the carrying amount of an accrued benefit assetThe following definitions are associated primarily with paragraphs

3461.102- 110:(a) An adjusted benefit asset is an accrued benefit asset less the

amount, if any, by which the aggregate of any unamortized pastservice costs, unamortized actuarial losses and unamortizedtransitional obligation exceeds the aggregate of any unamortizedactuarial gains and unamortized transitional asset.

(b) An expected future benefit is a calculated amount representing thebenefit an entity expects to realize from a plan surplus. An expectedfuture benefit includes any withdrawable surplus or reduction infuture contributions. An entity determines its expected future benefitas the sum of:(i) the present value of its expected future annual accruals for

service for the current number of active employees, less thepresent value of required employee contributions and minimumcontributions the entity is required to make regardless of anysurplus; and

097

098

099

100

101

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102

the amount of the plan surplus that can be withdrawn inaccordance with the existing plan and any applicable laws andregulations.

When a defined benefit plan gives rise to an accrued benefit asset, anentity should recognize a valuation allowance for any excess of the adjustedbenefit asset over the expected future benefit. The accrued benefit assetshould be presented on the entity s balance sheet net of the valuationallowance. A change in the valuation allowance should be recognized inincome for the period in which the change occurs. (JAN. 2000)

As a result of following this Section , an entity with a defined benefit planmay have recognized an accrued benefit asset. An accrued benefit assetarises when the entity s accumulated cash contributions exceed the benefitcosts recognized since the inception of the plan. The accrued benefit assetcomprises the plan surplus for accounting purposes, if any, net of allunamortized balances for past service costs , actuarial gains and losses andtransitional asset or transitional obligation. The accrued benefit asset maybecome impaired when there is a plan surplus that the entity is not entitledto benefit from fully. For example , there may be a regulatory moratoriumon pension surplus withdrawals or uncertainties as to an entity s legal right

to use a plan surplus.

An accrued benefit asset may be fully realized or may become an accruedbenefit liability over time through the amortization of unamortized balancesin future periods in accordance with this Section. To determine the extentto which an accrued benefit asset may be impaired , the entity firstdetermines the portion of the accrued benefit asset that will not beamortized to future periods ' income. This amount is the adjusted benefitasset. When the expected future benefit exceeds the adjusted benefitasset, the accrued benefit asset is not impaired and , accordingly, novaluation allowance is required.An entity s expected future annual accruals for service for the current

number of active employees are determined on a basis consistent with thatused to determine its accrued benefit obligation at the measurement dateincluding the discount rate determined in accordance with paragraph3461.050. These expected future annual accruals for service, less requiredemployee contributions and minimum contributions the entity is required tomake regardless of any surplus, are then discounted back to the currentperiod to determine the present value. The interest rate used to calculatethis present value is the expected rate of return on plan assets used todetermine benefit costin the period (see paragraph 3461.076).The objective of paragraph 3461.102 is to limit an entity's accrued benefit

asset to the amount that it can realize in the future. Any surplus currentlyin the plan may be available to reduce an entity's future contributions. Thevalue of the accrued benefit asset is limited, therefore, to the present valueof the future cash flow streams described in paragraph 3461.105. Theappropriate rate for discounting these future cash flow streams is the rateat which an amount invested today would earn the return required to paythe cash flow streams in the future. This rate, therefore, is the expectedreturn on plan assets.

The present value of expected future annual accruals for service for thecurrent number of active employees is determined on the basis of thecurrent work force. An entity normally assumes that the current number ofactive employees and the demographic composition of the employee groupstay constant. However, when an entity has existing plans to makesignificant reductions in its work force , the entity reflects these planned

(ii)

103

104

105

106

107

Page 28 of 75


reductions in the number of employees used to compute the expected futurebenefit amount.

108 When administration expenses are paid by the plan and included in thenormal cost calculation , a best estimate of the future administrationexpense is included in the expected future annual accruals for service.When administration expenses are paid by the plan and not included in thenormal cost calculation , the rate of return on plan assets is adjusted toreflect the deduction of the administration expenses.

109 Key factors in determining an entity s expected future benefit from adefined benefit plan with a plan surplus are the ability and intent of theentity to withdraw assets from the plan. The expected future benefitincludes amounts to which an entity has a legally enforceable right ofwithdrawal. It excludes any withdrawable plan surplus an entity is currentlyrequired, or intends , to allocate to employees. An entity may not anticipateobtaining a legally enforceable right to withdraw a portion of a plan surplusto which it is not currently entitled , whether on the basis of precedent orotherwise. Accordingly, when withdrawal of plan surplus requires theapproval of employees or an appropriate regulatory authority or a court oflaw, an entity excludes any amount subject to this restriction from itsexpected future benefit until such approval has been obtained. A change inthe allocation of surplus between an entity and its employees isincorporated into the calculation of the expected future benefit only when ithas been agreed to and , when required , approved by the appropriateregulatory authorities.

110 When an entity is required to continue making contributions in the futureeven though plan assets currently exceed the accrued benefit obligationthe amount of these contributions reduces the expected future benefit.ExampleThe following example illustrates the application of the limit on the carryingamount of an accrued benefit asset.The defined terms used in applying this limit are related in the followingway:

Accrued benefit asset paragraph 3461.024(a)

Less: the aggregate of unamortized costs / losses /obligation in excess of the aggregate of unamortizedgains / assetAdjusted benefit asset paragraph 3461.101

(a)paragraph 3461.101(b)

Expected future benefit

Difference

---- - ---- --- - - - - -- - - -- - - - - - - - - - - -- - ---- - ---- - - - - - - - - - - - -- - - - - - - - - - - -- -

Valuation allowance = difference, when difference;: 0 paragraph 3461.102

These relationships are ilustrated in the following diagrams:

Situation I - Adjusted benefit asset;: expected future benefit (as in Year 3in the numerical example following these diagrams)

Page 29 of 75


Unaorted co stsllo s s es/obligation les s unortedgaasset (5)

Adjusted benefitasset (25)

Accrued benefitasset (30)

Ex ected futurebenefit (20)

a1e sheet crn 8muntf accrud benefit asset, net of

uation alwae (25)

Situation II - Adjusted benefit asset 0( expected future benefit (as in Year 1in the numerical example following these diagrams)

Adjusted benefitasset (10)

Accrued benefitasset (30)

Expecte d futuebenefit (20)

No vauation alowacerequied because exec;ted

future benefit;: adjustedbenefit asset

Unaorted co stsllo s ses/ obligationless unorted gas/asset (20)

The following numerical example ilustrates the application of the limit to anentity' s financial statements over a four year period:

Year 1 Year 2 Year 3 Year 4

Plan assets $200 $210 $220 $230

Accrued benefit obligation 190 150 195 205

Plan surplusLess: the aggregate of unamortized 2.Q runcosts / losses / obligation less the

Page 30 of75


aggregate of unamortized gains /assetAccrued benefit asset $30 $30$30 $30

(a) Expected future benefit $20 $20 $15$20

--- ---

(b) Adjusted benefit asset:Accrued benefit asset(b) Less: the aggregate ofunamortized costs / losses / obligationin excess of the aggregate ofunamortized gains / asset

$30 $30 $30$30

If (a) is greater than or equal to (b):No valuation allowance is requiredIf (a) is less than (b):Valuation allowance required , equal tothe difference between (a) and (b)

$10 $30

---

$10 $10

--- ---

$(5)

--- ---

$25 $20

--- ---

$25 $25

---

Charge (credit) to income $10

---

Carrying amount of accrued benefitasset net of valuation allowance

$30 $20

--- ---

Settlements, insurance contracts and arrangements, andcurtailmentsDefinitions

111 The following definitions are associated primarily with paragraphs3461.112- 134:(a) A curtailment is an event that, under a defined benefit plan , results

in:

(i) a significant reduction of the expected years of future service ofactive employees; or

(ii) the elimination, for a significant number of active employees,of the right to earn defined benefits for some, or all , of theirfuture services.

An insurance contract is a policy in which an insurance enterpriseassumes an unconditional legal obligation to provide specifiedbenefits to specific individuals in return for a fixed consideration orpremium. An insurance contract is irrevocable and involves thetransfer of significant risk from the entity (or the plan) to theinsurance enterprise. When the insurance enterprise providing thepolicy is a captive insurer (an insurance enterprise that does businessprimarily with the entity and related parties), or when there is anyreasonable doubt that the insurance enterprise will meet itsobligations under the policy, the policy is not considered an insurancecontract. Insurance contracts include annuity contracts.

(b)

Page 31 of 75


112

(c) A settlement is a transaction in which an entity substantiallydischarges or settles all , or part, of an accrued benefit obligation. Asettlement is a transaction that is irrevocable , relieves the entity ofprimary responsibility for the accrued benefit obligation andeliminates the significant risks associated with the accrued benefitobligation and the assets used to effect the settement. Examples oftransactions that constitute a settlement include:

(i) making lump-sum cash payments to employees in exchange fortheir rights to receive specified benefits; and

(ii) purchasing non-participating insurance contracts.Settlements compared to curtailmentsA settlement differs from a curtailment. A settement eliminates actuarial

and investment risks but employees continue to earn benefits by providingfuture services. Accordingly, a settlement is accounted for by recognizingthe gain or loss resulting from remeasuring the accrued benefit obligationand plan assets at the date of settlement together with the relatedunamortized actuarial gain or loss. However, unrecognized past servicecosts are not recognized at the date of settlement since employees willcontinue to provide services in the future (see paragraphs 3461.113- 121).Following a curtailment, employees are no longer able to earn benefits byproviding future service but actuarial and investment risks are noteliminated. Accordingly, a curtailment is accounted for by recognizing as aloss the unamortized past service costs attributable to the employeeswhose ability to earn benefits has been curtailed , together with the gain orloss from remeasuring the related accrued benefit obligation to the extentthis gain or loss does not represent a reversal of unamortized actuarialgains or losses or prior years ' service costs (see paragraphs 3461.127-133). A settlement and a curtailment may occur together (see paragraph

3461.134 ).Settlements

. For defined benefit plan, an entity should recognize settlement gain

or 1055 in income for the period in which settlement occurs. Except

specified in paragraph 3461.114, a settlement gain or 1055 shouldcomprise:(a) any gain or 1055 as a result of remeasuring all of the accrued benefit

obligation and all of the plan assets at the date of settlement;(b) any unamortized actuarial gain or 1055 at the date of settlement; and(c) any unamortized transitional asset at the date of settlement.

When purchase of participating insurance contract constitutes

settlement, any settlement gain (but not any settlement 1055) should bereduced by the amount attributed to the participation right. When an entitysettles only part of an accrued benefit obligation, the settlement gain orloss recognized in income in accordance with this paragraph should be only

pro rata portion of that gain or 1055, based on the percentage reduction in

the accrued benefit obligation. (OCT. 2000 *

When an entity settles all, or part, of an accrued benefit obligation of defined benefit plan other than pension plan, any settlement gaindetermined in accordance with paragraph 3461.113 should reduce anyunamortized transitional obligation at the date of settlement. Any remaininggain, or settlement 1055 determined in accordance with paragraph3461. 113, should be recognized in income. (JAN. 2000)

The deferral of actuarial gains and losses in an ongoing plan is based , in

part, on the possibility that gains or losses occurring in one year will offset

113

114

115

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losses or gains in subsequent years. When all of an accrued benefit obligation hasbeen settled , the possibility of future gains and losses related to thataccrued benefit obligation and the assets used to effect the settlement iseliminated. The settlement is viewed as the realization of past gains orlosses associated with the accrued benefit obligation that is settled and theassets used to effect the settlement. When only part of an accrued benefitobligation has been setted , the possibility of future gains and losses relatedto that portion of the accrued benefit obligation and the assets used toeffect settlement is eliminated. The partial settement is viewed as therealization of past gains or losses associated with that portion of theaccrued benefit obligation that is settled and the assets used to effect thesettlement. For example , an accrued benefit obligation for retirees, but notactive employees , may be settled. Thus , a partial settement of the accruedbenefit obligation has occurred.

116 In a settlement, any unamortized past service costs continue to beamortized after the settlement. Past service costs are amortized over theaverage remaining service period to employees ' full eligibility dates becausethe entity expects to receive economic benefits in future periods as theemployees continue working and earning future benefits.

117 Any unamortized transitional obligation or transitional asset may includeprior years ' service costs and interest costs on the accrued benefitobligation , past service costs and actuarial gains and losses. For purposesof calculating a settlement gain or loss , an unamortized transitional asset atthe date of settlement is assumed to be an actuarial gain and is combinedwith any unamortized actuarial gain or loss. An unamortized transitionalobligation at the date of settlement is assumed to be past service costs.

118 Any unamortized transitional obligation for a defined benefit plan otherthan a pension plan is likely to include a significant amount of prior yearscurrent service cost and interest cost on the accrued benefit obligation notpreviously recognized, since such a plan is not usually funded. For anongoing benefit plan other than a pension plan , any gain arising from asettlement is reduced by any unamortized transitional obligation , with onlythe excess recognized in income in the period in which the settlementoccurs. This treatment ensures that the entity does not accelerate therecognition of any gains arising from remeasuring an accrued benefiobligation before that obligation has been fully recognized. A settementgain that results from settling a pension obligation is measured withoutregard to any unamortized transitional obligation.

119 For a benefit plan other than a pension plan , when all, or part, of theaccrued benefit obligation has been settled, a settlement may acceleraterecognition of the transitional obligation under paragraph 3461.167 sincesettlement payments are included in cumulative benefit payments.

120 When the cost of all settlements for a plan in a year is less than , or equalto, the sum of the currentservice cost and interest cost on the accruedbenefit obligation for that plan for the year, gain or loss recognition ispermitted but not required for those settlements. These circumstances mayarise , for example, when a plan purchases annuities each year for benefitsearned by employees retiring in that year. When the gain or loss is notrecognized , the settlement transaction is treated as a funding transactionand any gain or loss will be reflected in subsequent actuarial gains or lossesof the plan. The accounting policy adopted for recognition of settlementgains and losses in such circumstances is applied consistently from year toyear.

121 The cost of settlement is:

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Knotia - CI CA Standards & Guidance Collection

122

(a) the amount of cash paid to employees, for a direct cash settlement;(b) the cost of non-participating insurance contracts, for a settement

using such contracts; and(c) the cost of participating insurance contracts less the amount

attributed to participation rights (see paragraphs 3461.125- 126), fora settement using such contracts.

Insurance contracts and arrangementsEmployee future benefits may be provided or funded by an entity through

insurance contracts. An insurance contract involves the transfer ofsignificant risk from the entity (or the plan) to the insurance enterpriseeven though the entity retains credit risk associated with the possibility of adefault by the insurance enterprise. Examples of significant risks associatedwith an accrued benefit obligation are mortality risk and the risk that theinflation rate may change significantly.When an entity has settled an accrued benefit obligation through the

purchase of an insurance contract, the benefits provided or funded by theinsurance contract are excluded from the accrued benefit obligation and theinsurance contract is excluded from plan assets, except for anyparticipation right (see paragraph 3461.126).Other arrangements with an insurance enterprise do not meet the

definition of an insurance contract because the insurance enterprise doesnot assume an unconditional legal obligation to provide specified benefits tospecified individuals. For example, a yearly renewable term contract withan insurance enterprise may provide sufficient cash only to pay for benefitsprovided in the current year. In such cases, there is no transfer of most ofthe risk inherent in the accrued benefit obligation and the entity accountsfor its obligations to employees under its benefit plans without regard tothe insurance arrangement, i.e. , the entity applies this Section for definedbenefit plans or defined contribution plans.Participating insurance policies provide that a purchaser (either a plan or

an entity) may participate in the experience of an insurance enterprise. Theinsurance enterprise ordinarily pays dividends to the purchaser, the effectof which is to reduce the cost of the policy. The participation dividend is apartial return of the premium paid by the purchaser and therefore, by theterms of the definition , the participating insurance policy is not aninsurance contract. Since, in substance, the participation dividend is areturn on investment of the participation right, it is accounted forseparately as an investment. However, the component of the participatinginsurance policy that involves a payment of a fixed consideration orpremium may satisfy the definition of an insurance contract. When anentity has transferred significant risk associated with an accrued benefitobligation to an insurance enterprise through a participating insurancepolicy, a portion of this policy that represents the payment of the fixedconsideration or premium may meet the definition of an insurance contract.In such cases, this portion does constitute a settlement and is accountedfor as such (see paragraphs 3461.113- 121). When an entity remainssubject to significant risks and rewards associated with the accrued benefitobligation covered or the assets transferred to an insurance enterprise , thepurchase of the policy from the insurance enterprise does not constitute asettlement. The entity continues to account for the benefits covered by thepolicy as described in paragraph 3461.124.

The purchase price of a participating insurance policy ordinarily is higherthan the price of an equivalent policy without a participating right. Thedifference represents the cost of the participating right, which is recognized

123

124

125

126

Page 34 of75


separately at the date of purchase as an investment.Examples(a) Calculation of a settlement gain or loss when an unamortized

transitional obligation exists:A company sponsors a funded retirement life insurance plan. On

December 31 , 20X1 , the company settles the accrued benefitobligation of $70 000 for its current retirees through the purchase ofnon-participating life insurance contracts. The results of the partialsettlement of the accrued benefit obligation are as follows:Before After

s.e1.tleme n!WJ settlement

Accrued benefit obligation $(257 000) $70 000 $(187 000)Plan assets at fair value n,OQ (70,000). 000Plan deficit (184 000) (184 000)Unamortized actuarial net gain (44 575) 124 (32 451)Unamortized past service costs 000 000Unamortized transitional 195 000 124 182 876obligationAccrued benefit liability (575) (575)

------ ------ ------------ ------ ------

The before settlement amounts of accrued benefit obligation andplan assets incorporate the effects of remeasurement in accordancewith paragraph 3461.113(a), and those effects are included in theunamortized actuarial net gain.

The settlement gain is calculated as follows:Since only a portion of the accrued benefit obligation is settled , the

company determines the settlement gain based on the percentagereduction in the accrued benefit obligation , i. , $70 000 -: $257 000or 27.2%.

Unamortized transitional assetUnamortized actuarial net gainAmount subject to pro rata calculationPro rata portion settled

Offset to unamortized transitional obligationSettlement gain

575575

x 27.

12, 124(12 124

--------------

(b)

In this case, the settlement gain is entirely offset against theunamortized transitional obligation and , thus, no journal entries arerequired as a result of the partial settlement.Calculation of a settlement gain when an unamortized transitionalasset exists:

A company sponsors a defined benefit pension plan. On January 220X5 , the company settles the accrued benefit obligation of $200 000for its current retirees through the purchase of annuity insurancecontracts. The results of the partial settlement of the accrued benefiobligation are as follows:

BeforeSe.tt!emenj: After

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Knotia - CI CA Standards & Guidance Collection

Accrued benefit obligationPlan assets at fair valuePlan surplusUnamortized actuarial net gainUnamortized past service costUnamortized transitional assetAccrued benefit asset

settl IlJmt$(257 000)

J51L2QQ

900(44 575)

000

Q,-:UJ)$ 25 992

$200 000

(20P, OOQ)

settl$57 000

l,5.Q,QOO

900896)000

02,_$ 104,498

679

1JI$ 78 506

-------------- -------------- --------------

The before settlement amounts of accrued benefit obligation andplan assets incorporate the effects of remeasurement in accordancewith paragraph 3461.113(a), and those effects are included in theunamortized actuarial net gain.

The settlement gain is calculated as follows:Since only a portion of the accrued benefit obligation is settled , the

company determines the settlement gain based on the percentagereduction in the accrued benefit obligation , i.e. , $200 000 ..$257 000, or 77.8%.

Unamortized actuarial net gainPro rata portion settled

Unamortized transitional assetPro rata portion settled

Settement gain

$44 575x 77.

679333

x 77.

43,827$78 506

------------

Journal entry related to the settement:Dr. Accrued benefit asset 78 506

Cr. Settlement gainCurtailments

127

78, 506

. .

For defined benefit plan, an entity should recognize curtailment lossin income when it is probable that curtailment wil occur and the net

effects are reasonably estimable. An entity should recognize curtailmentgain in income when an event giving rise to curtailment has occurred. A

curtailment gain or loss should comprise:(a) any unamortized past service costs and any unamortized transitional

obligation associated with future years of service no longer expectedto be rendered as a result of the curtailment or attributable to futureyears of service for which benefits have been curtailed; and

(b) the increase or decrease in the accrued benefit obligation resultingdirectly from the curtailment event, adjusted in accordance withparagraph 3461.128. (OCT. 2000

. For defined benefit plan, an increase or decrease in an entity's accruedbenefit obligation resulting directly from curtailment event should beadjusted as follows in determining curtailment gain or loss:(a) When there is decrease in the accrued benefit obligation and an

unamortized actuarial loss exists, the decrease in the accrued benefitobligation should be reduced by that loss with any excess included

128

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129

the curtailment gain.

(b) When there is a decrease in the accrued benefit obligation and anunamortized actuarial gain exists, the entire decrease in the accruedbenefit obligation should be included in the curtailment gain.When there is an increase in the accrued benefit obligation and anunamortized actuarial loss exists, the entire increase in the accruedbenefit obligation should be included in the curtailment loss.When there is an increase in the accrued benefit obligation and anunamortized actuarial gain exists, the increase in the accrued benefitobligation should be reduced by that gain with any excess included inthe curtailment loss.

For purposes of determining the increase or decrease in the entity' s accruedbenefit obligation, any unamortized transitional asset should be treated asan unamortized actuarial gain and should be combined with theunamortized actuarial gain or loss arising subsequent to the date as ofwhich the transitional asset was determined. (JAN. 2000)A curtailment may result from an event that, under a defined benefit plan

results in a significant reduction of the expected years of future service ofactive employees. For example , the event may be the termination ofemployment for those employees who participated in the plan at the date ofa prior plan amendment. A curtailment may also result from an event thatunder a defined benefit plan , results in an elimination of the right to earndefined benefits for some , or all , of the future services of a significantnumber of active employees. Included in the calculation of a curtailmentgain or loss are part of any unamortized past service costs and part of anyunamortized transitional obligation. In these circumstances, the part of anyunamortized past service costs and unamortized transitional obligationassociated with the curtailment is measured as:(a) a pro rata portion of the unamortized past service costs, based on the

remaining years of expected service prior to full eligibility for thoseemployees active at the date of the plan amendment whoseemployment has been terminated or whose right to earn definedbenefits has been eliminated relative to the remaining years ofexpected service prior to full eligibility of all employees active at thedate of the plan amendment; and

(b) a pro rata portion of the unamortized transitional obligation , based onthe remaining years of expected service prior to full eligibility forthose employees active at the date of transition whose employmenthas been terminated or whose right to earn defined benefits has beeneliminated relative to the remaining years of expected service prior tofull eligibilty of all employees active at the date of transition.

An entity may use the percentage reduction in the accrued benefitobligation in the calculation of the pro rata portion of the curtailment loss tosimplify the calculation of the curtailment loss described in paragraphs3461.127- 128 or when suffcient data is not available to determine theamortization period at the date as of which the transitional obligation ortransitional asset was determined.A reduction or elimination of future services associated with a curtailment

event raises doubt about the continued existence of the future economicbenefits of prior plan amendments. Therefore, an entity includes in anycurtailment gain or loss an appropriate portion of any unamortized pastservice costs.

(c)

(d)

130

131

132 A curtailment can decrease or increase a defined benefit plan s accrued

Page 37 of75


benefit obligation. This decrease or increase may be partly a reversal of previouslyunamortized actuarial gains and losses and partly a reversal of prior yearsservice costs and interest costs on the accrued benefit obligation.Therefore , a decrease in the accrued benefit obligation resulting from acurtailment is reduced by any unamortized actuarial loss and the netamount is recognized in income. When a curtailment results in a decreasein the accrued benefit obligation and an unamortized actuarial gain existsthe entire decrease in the accrued benefit obligation is recognized in incomeas part of the curtailment gain or loss. An increase in the accrued benefitobligation resulting from a curtailment is reduced by any unamortizedactuarial gain and the net amount is recognized in income. When thecurtailment results in an increase in the accrued benefit obligation and anunamortized actuarial loss exists, the entire increase in the accrued benefitobligation is recognized in income as part of the curtailment loss. Thusonly those amounts that do not represent a reversal of unamortizedamounts arising previously are recognized in income.Recognition of the effects of a curtailment

Page 38 of75


(a)D ecreas e in yeas 0 ffuture s erc e eltion of the rightto ea future benefits?

"''" ..,.

Yes

recogntionRecogne loss associated withunorted past serce costsand any unorted trsitionaobligation

(b) Chage in accruedbenefit obligation

Decrease Increase

.. ,.

I C

10SS

Unrecogned netloss? (see pargrph3461. 128(a)-(b)J

Unrec ogned netga? (s ee pargrph3461. 128(c)-(d))

Recognecurent ga

Yes

Net agastcurent ga Net agast

curent lossRecogne

curent 10 s s

Any remgcurent ga?

Any remgcurent loss?

Yes

Recogne ascurent gain

Yes

Recogne ascurent lossNo recogntion No recogntion

The total amount of curtailment gain or loss recognized is the sum of theamount from part (a) and the amount from part (b).

133 Any unamortized transitional obligation or transitional asset may includeprior years ' service costs and interest costs on the accrued benefitobligation , past service costs and actuarial gains and losses. For purposesof calculating a curtailment gain or loss, an unamortized transitional assetat the date of curtailment is assumed to be an actuarial gain and iscombined with any unamortized actuarial gain or loss. An unamortizedtransitional obligation at the date of curtailment is assumed to be past

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service costs and is combined with any unamortized past service costs.Examples(a) Calculation of a curtailment gain when an unamortized actuarial gain

and unamortized transitional obligation exist:A company sponsors an unfunded retirement benefit plan. On

October 28 , 20X4 , the company decides to reduce its operations byterminating the employment of a significant number of employeeseffective December 31 , 20X4. On October 28 , 20X4 , it is expectedthat a curtailment gain will result from the termination. The eventthat gives rise to the curtailment results in a significant reduction inthe expected years of future service of active employees. Theremaining years of expected service associated with those employeeswhose employment has been terminated , and who were activeemployees at the date of transition is 22 percent of the remainingyears of service of all employees at the date as of which thetransitional obligation was determined. The remaining years ofservice prior to full eligibility associated with those employees whoseemployment has been terminated , and who were employees at thedate of a prior plan amendment is 18 percent of the remaining yearsof service of all employees at the date of that plan amendment.Before After

curtailment Curtailment curtailment

Accrued benefit obligation $(257 000) $54 000 $(203,000)Plan assets at fair valuePlan deficit (257 000) 000 (203, 000)Unamortized actuarial net gain (44 575) (44 575)Unamortized past service costs 33,000 940) 060Unamortized transitional 195 000 900 152 100obligationAccrued benefit liability $ (73 575) 160 $ (68 415)

------- ------ -------------- ------ -------

The curtailment gain is calculated as follows:Unamortized past service costs: 18% x $33,000 =Unamortized transitional obligation: 22% x $195,000 =Pro rata portion of past service costs andunamortized transitional obligation relatedto the curtailmentDecrease in accrued benefit obligationCurtailment gain

$(5 940)(42.900( 48, 840)

000$ 5, 160

----------

Subsequent to the curtailment, the unamortized actuarial gainunamortized past service costs and unamortized transitionalobligation continue to be amortized using the remainder of theamortization period determined at the date each balance arose.

Journal entry related to the curtailment:Dr. Accrued benefit liability . 5 160Cr. Curtailment gain 5, 160

(b) Calculation of a curtailment loss related to a disposal of a portion of abusiness segment when an unamortized actuarial loss and

Page 40 of 75


unamortized transitional asset exist:A company sponsors a defined benefit pension plan. On December, 20X4 , the company decided to reduce the operations of a

business segment significantly, with the result that the employmentof a significant number of employees was terminated. The right ofthese employees to earn further benefits under the pension plan waseliminated. The portion of the accrued benefit obligation related tothese employees was $110 000.Before After

(:lJr.ti:J!mgJ tqJJ:Jgjlmem rta ilmenj;

Accrued benefit obligationPlan assets at fair valuePlan surplusUnamortized actuarial net lossUnamortized transitional assetAccrued benefit asset

$(2 000 000)

(l, QQ,.QQ!U

100 000100 000

(200 000

$110 000 $(1 890 000)

lOO .9j)

210 000100 000

.P00$ 110 000

----_._-

110 000

$110,000

-------------- -------------- --------------

The curtailment gain is calculated as follows:

Decrease in accrued benefit obligationUnamortized transitional asset of $200 000 treated as anunamortized actuarial gain and combined with theunamortized actuarial net loss of $100 000 , resulting in anactuarial net gain of $100 000 and an adjustment pursuant

to paragraph 3461.128(b) of:Curtailment gain

$110 000

$110 000

------------

Subsequent to the curtailment, the unamortized actuarial loss andunamortized transitional asset continue to be amortized using theremainder of the amortization period determined at the date eachbalance arose.

Journal entry related to the curtailment:

Dr. Accrued benefit asset 110 000

Cr. Curtailment gainRelationship between settlements and curtailments

134 A settlement and a curtailment may occur separately or together. Whenbenefits expected to be paid in future periods are eliminated for someemployees (for example, because a significant portion of the work force isdismissed or a plant is closed), but the plan remains in existence andcontinues to pay benefits, to invest assets, and to receive contributions, acurtailment has occurred, but not a settlement. When an entity purchasesnon-participating insurance contracts for the accrued benefit obligation andcontinues to provide benefits for future service, either in the same plan orin a successor plan, a settlement has occurred but not a curtailment. Whena plan termination occurs (that is, the accrued benefit obligation is settledand the plan ceases to exist) and the plan is not replaced by a successordefined benefit plan , both a settlement and a curtailment have occurred(whether or not the employees continue to work for the entity). When botha settlement and a curtailment occur, the entity decides which of theseevents to account for first and applies the same sequence in the futurewhenever a settlement and a curtailment occur at the same time.

110 000

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13.5

TERMINATION BENEFITSThe following definitions are associated primarily with paragraphs

3461.136- 142:(a) Contractual termination benefits are benefits required to be

provided to employees under the existing terms of a benefit planwhen a specified event, such as a plant closing, occurs.

(b) Special termination benefits are benefits that are not contractualtermination benefits and that are offered to employees for a shortperiod of time , normally not exceeding twelve months , in exchangefor employees ' voluntary or involuntary termination of employment.

. An entity that offers special termination benefits to employees forvoluntary terminations should recognize a liability and an expense whenemployees accept the offer and the amount of the special terminationbenefits can be reasonably estimated. (OCT. 2000 . An entity that offers special termination benefits to employees for

involuntary terminations should recognize a liabilty and an expense in theperiod in which:(a) management having the appropriate level of authority approves and

commits the entity to a plan of termination and establishes thebenefits that employees wil receive upon their termination ofemployment;

(b) the benefit arrangement is communicated to employees in suffcientdetail to enable them to determine the type and amount of benefitsthey wil receive when their employment is terminated;

(c) the plan of termination specifically identifies the target level ofreduction in the number of employees, the job classifications orfunctions and their locations; and

(d) the period of time to complete the plan of termination indicates thatsignificant changes to the plan of termination are not likely. (OCT.

2000 . An entity that is required by the existing terms of a benefit plan to

provide contractual termination benefits to employees should recognize aliabilty and an expense when it is probable that employees wil be entitledto benefits and the amount can be reasonably estimated. (OCT. 2000

An entity may provide benefits to employees when their employment isterminated. These benefits may be either contractual termination benefitsrequired by the existing terms of a benefit plan when a specified event,such as a plant closing, occurs or special termination benefits offered for ashort period of time. A plan of termination for special termination benefitsnormally does not cover a period exceeding twelve months. Specialtermination benefits may be provided for involuntary or voluntarytermination of service.Termination benefits may take various forms including lump-sum

payments, periodic future payments, or both. They may be paid directlyfrom an entity's assets, from an existing benefit plan or a new benefit planor from a combination thereof. The cost of termination benefits recognizedas a liability and an expense includes the amount of any lump-sumpayments and the present value of any expected future payments. Asituation involving termination benefits may also involve a curtailment to beaccounted for in accordance with paragraphs 3461.127- 128.

136

137

138

139

140

141 The liability and expense recognized in respect of employees who accept

Page 42 of 75


an offer of special termination benefits:(a) for a defined benefit pension plan , is the difference between:

(i) the accrued benefit obligation in respect of those employeesunder existing benefit plans , assuming that those employeeswould retire or terminate their employment immediately,without taking into account any special termination benefits;and

(ii) the accrued benefit obligation in paragraph 3461.141(a)(i)adjusted to reflect the special termination benefits; and

(b) for a defined benefit plan other than a pension plan , is the differencebetween:(i) the accrued benefit obligation in respect of those employees

under existing benefit plans , assuming that those employeesnot yet fully eligible for benefits would terminate theiremployment at their full eligibility date and that fully eligibleemployees would retire immediately, without taking intoaccount any special termination benefits; and

(ii) the accrued benefit obligation in paragraph 3461.141(b)(i)adjusted to reflect the special termination benefits.

The liability and expense for special termination benefits includes only thevalue of the additional benefits that arises from the offer of specialtermination benefits. Other changes in the accrued benefit obligationresulting from employees now terminating employment at a date earlierthan originally assumed would be recognized either in the determination ofactuarial gains or losses (see paragraphs 3461.087- 093) or as acurtailment gain or loss (see paragraphs 3461.127- 133).

142 An entity may offer special termination benefits to employees who leavevoluntarily but terminate the employment of additional employeesinvoluntarily if target reduction levels are not achieved. In thosecircumstances , the liability for termination benefits is recognized for alltargeted terminations when the criteria in paragraph 3461.137 are met.The excess of the cost of voluntary termination benefis over the cost of theinvoluntary termination benefits is recognized when employees accept theoffer and the amount can be reasonably estimated.Example

An entity' s plan of termination offers $15,000 to each employeewho leaves voluntarily. The target reduction level is 300. Employeeswhose employment is terminated involuntarily wil each receive abenefit of $9 000. The liabilty to be recognized when the plan oftermination is approved (and the conditions in paragraph 3461.137are met) is 300 x $9 000 = $2 700,000. When employees accept thevoluntary offer of the $15,000 benefit, an additional liabilty for$6,000 per employee is accrued (see paragraph 3461.136).

DISCONTINUED OPERATIONS AND DISPOSAL OF A PORTION OF ABUSINESS SEGMENT(paragraph 3461.143 deleted)

144 When a settlement or curtailment gain or loss or the cost of special orcontractual termination benefits, including post-employment benefits, isdirectly related to a discontinued operation (see DISPOSAL OF LONG-LIVEDASSETS AND DISCONTINUED OPERATIONS, Section 3475), it is:(a) recognized in accordance with Section 3461; and(b) presented in accordance with Section 3475.

Page 43 of75


145MULTIEMPLOYER AND MULTIPLE-EMPLOYER BENEFIT PLANSThe following definitions are associated primarily with paragraphs

3461.146- 149:(a) A multiemployer plan is a defined benefit plan to which two or

more unrelated entities contribute , usually pursuant to one or morecollective bargaining agreements. Unrelated entities are entities thatdo not meet the definition of related parties in RELATED PARTYTRANSACTIONS, Section 3840. Multiemployer plans may be referredto as "joint trust" or "union " plans. Characteristics of a multiemployerplan include the following:(i) Assets contributed by one participating entity are not

segregated in a separate account or restricted to providebenefits only to employees of the entity and , thus , may beused to provide benefits to employees of other participatingentities.

(ii) Participating entities usually have a common industry bond orat least have the same labour union.

(iii) A multiemployer plan is usually administered by a board oftrustees composed of management and labour representatives.

(b) A multiple-employer plan is a defined benefit plan maintained bymore than one entity that is not a multiemployer plan. In contrast tomultiemployer plans, a multiple-employer plan maintains separateaccounts for each entity so that contributions provide benefits onlyfor employees of the contributing entity. In addition , multiple-employer plans are generally not collectively bargained and areintended to allow participating entities, commonly in the sameindustry, to pool their plan assets for investment purposes and toreduce the cost of plan administration. Multiple-employer plans mayhave features that allow participating entities to have different benefitformulae, with the entity's contributions to the plan based on thebenefit formula selected by the entity.

When benefits are provided to employees through a multiemployer planthe amount for which an individual entity is obligated under the plan maynot be quantified. Generally, a contribution rate is established for eachperiod to ensure that the plan assets are adequate to cover the planfuture benefit payments.

Although a multiemployer plan may have the characteristics of a definedbenefit plan, sufficient information to follow the standards on definedbenefit plans in paragraphs 3461.024- 134 is normally not available. Insuch circumstances a multiemployer plan is accounted for following thestandards on defined contribution plans in paragraphs 3461.014- 023.

When benefits are provided to employees through a defined benefitmultiple-employer plan, each entity in the plan follows the standards ondefined benefit plans in paragraphs 3461.024- 134 and bases its accountingfor plan assets on its proportionate interest in the assets of the multiple-employer plan.

The definition of a multiemployer plan refers to entities that are unrelated.Entities within a related group, such as a parent company and itssubsidiaries, may share a benefit plan that satisfies the definition of amultiemployer benefit plan other than the requirement that the entities beunrelated. The costs of the benefit plan are not always allocated to, orfunded separately by, the individual entities within the related group. As result, individual entities within the related group are not able to identify

146

147

148

149

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their share of the underlying assets and liabilities. In such circumstances , abenefit plan is accounted for by the parent company and its subsidiaries intheir individual financial statements following the standards on definedcontribution plans in paragraphs 3461.014- 023. In its consolidatedfinancial statements, the company accounts for the plan following thestandards on defined benefit plans in paragraphs 3461.024- 134. Additionaldisclosures are required in the non-consolidated financial statements of theparent company and in the financial statements of its subsidiaries toindicate that defined contribution plan accounting has been used (seeparagraph 3461.152(h)).DISCLOSUREGeneral

150 . The objective of the disclosure requirements is to provide users offinancial statements with information about:(a) the effect of employee future benefits on the entity s financial

statements, and(b) plan obligations and assets for defined benefit plans;that is useful in understanding the entity s obligation to provide employeefuture benefits, and the costs, risks and uncertainties associated with thoseobligations, for purposes of making resource allocation decisions as well

assessing management stewardship. To meet this objective, an entityshould provide, at minimum, the disclosures in paragraphs 3461.151-163. (JUNE 30 , 2004)

151 An entity provides the disclosures required by paragraphs 3461.153- 157and 3461.161 , separately for:(a) plans that provide pension benefits; and(b) plans that provide primarily other employee future benefits.

152 An entity discloses the significant accounting policies it has adopted inapplying this Section , including where applicable:(a) whether future salary levels or cost escalation affect the amount of

employee future benefits, and that therefore , the projected benefitmethod prorated on services has been used to determine the accruedbenefit obligation , or whether future salary levels or cost escalationdo not affect the amount of employee future benefits, and thattherefore, the accumulated benefit method has been used todetermine the accrued benefit obligation (see paragraph 3461.034);

(b) whether the expected return on plan assets is based on the fair valueof plan assets or on a market-related value, and in the latter case,the method used in calculating the market-related value for eachclass of asset (see paragraphs 3461.076- 077);

(c) the method used to amortize past service costs and the amortizationperiod (see paragraphs 3461.079- 083 and paragraph 3461.086);

(d) whether all actuarial gains and losses are amortized or only those inexcess of 10 percent of the greater of the accrued benefit obligationand the fair value (or market-related value) of plan assets at thebeginning of the year, the method used to amortize actuarial gainsand losses , and the amortization period (see paragraphs 3461.087-088 and paragraph 3461.092);

(e) when the entity applies this Section prospectively, the method usedto amortize a transitional obligation or transitional asset and theamortization period (see paragraph 3461.167);

(f) the sequence in which a settlement and a curtailment are accounted

Page 45 of75


153

for when a transaction or event gives rise to both (see paragraph3461.134);

(g)

the use of defined contribution plan accounting by an entity that ispart of a multiemployer plan for which the entity has insufficientinformation to apply defined benefit plan accounting (see paragraph3461.147); and

(h) the use of defined contribution plan accounting by an entity that ispart of a multiemployer plan of a related group of companies (seeparagraph 3461.149).

Defined contribution plans

For defined contribution plans , an entity discloses:(a) the cost recognized for the period; and(b) a description of the nature and effect of each significant change

during the period affecting the comparability of the costs for thecurrent and prior periods , such as a change in the rate of employercontributions, a business combination or a divestiture.

The entity also discloses the total cash amount initially recognized in theperiod as paid or payable for that period for employee future benefits. Thisamount includes contributions to funded defined benefit plans and todefined contribution plans; payments directly to employees, theirbeneficiaries or estates; and payments to a third-party service provider onbehalf of the employees. When the entity discloses any component of thetotal cash amount separately, it provides a reconciliation of this componentto that total.Defined benefit plansAn entity discloses the following information about the effect of defined

benefit plans on its financial statements for the period:(a) Description of the type(s) of plans

a description of the type(s) of pension plans, distinguishing flat-benefit plans from final-pay plans and identifying indexation features;and a description of the type(s) of plans other than pension plans,identifying the benefits included such as health care and lifeinsurance;

(b) Measurement date and dates of actuarial valuationsthe date used to measure the plan assets and the accrued benefitobligation (see paragraph 3461.044), the effective date of the mostrecent actuarial valuation for funding purposes and the effective dateof the next required actuarial valuation for funding purposes;

(c) Costs recognizedthe total amount of benefit cost recognized for the period (seeparagraph 3461.070) and an analysis of the components of that costshowing separately:(i) each amount arising from events in the period , including the

current service cost, any past service cost arising from a planinitiation or amendment in the period, the interest cost on theaccrued benefit obligation , the actual return on plan assetsand actuarial gains and losses arising during the period on anaccrued benefit obligation;

(ii) the difference between the actual return on plan assets and theexpected return on plan assets;

154

(iii) other adjustments (such as the deferral of amounts arising fromevents in the period and the amortization of amounts

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155

previously deferred) made to provide an appropriate allocation of coststo the periods in which employee services are renderedshowing separately each component including actuarial gainsand losses , past service costs and transitional amounts; and

(iv) the increase or decrease in a valuation allowance against thecarrying amount of an accrued benefit asset;

(d) Assets and liabilitiesthe amount(s) recognized in the balance sheet at the end of theperiod as an accrued benefit liability or accrued benefit assettogether with the balance sheet classification(s), indicating separatelythe amount of any valuation allowance determined in accordance withparagraph 3461.102;

(e) Reconciliationa reconciliation of the accrued benefit obligation to the accruedbenefit liability or accrued benefit asset (net of any valuationallowance) at the end of the period (see paragraph 3461.044),showing separately:(i) the fair value of plan assets at the end of the period;(H) the resulting plan surplus or deficit at the end of the period;

(Hi) the balance of unamortized amounts at the end of the periodshowing separately the amounts of:

unamortized past service costs;unamortized net gain or loss , which comprises unamortized

actuarial gains and losses and the asset gains and losses not yetreflected in a market-related value of plan assets; and

the aggregate of the unamortized transitional obligation ortransitional asset and the unamortized amount carried forwardarising on the initial application of this Section related to the limiton the carrying amount of an accrued benefit asset;

and(iv) the amount of any valuation allowance determined in

accordance with paragraph 3461.102.The entity also discloses the total cash amount initially recognized in theperiod as paid or payable for that period for employee future benefits. Thisamount includes contributions to funded defined benefit plans and todefined contribution plans; payments directly to employees, theirbeneficiaries or estates; and payments to a third-part service provider onbehalf of the employees for employee future benefits. When the entitydiscloses any component of the total cash amount separately, it provides areconcilation of this component to that total.An entity discloses the following information about defined benefit plans

for which it is the sponsor:(a) The benefits obligation

a reconciliation of the beginning and ending balances of the accruedbenefit obligation for the period, showing separately:(i) the amount of contributions by employees during the period;(H) the amount of benefis paid during the period;(iii) the current service cost for the period;

(iv) the interest cost for the period on the accrued benefitobligation;

(v) the effect of each significant non-routine event, including

Page 47 of75


156

amendment, settement or curtailment of a plan , an event giving riseto contractual termination benefits, or a business combinationor divestiture;

(vi) the actuarial gains and losses arising during the period; and(vii) the effect of foreign currency exchange rate changes;

(b) Plan assetsthe following information about plan assets:

(i) a reconciliation of the beginning and ending balances of the fairvalue of plan assets for the period , showing separately:

the amount of contributions by the entity during the period;the amount of contributions by employees during the

period;the amount of benefits paid during the period;the effect of each significant non- routine event, including a

settlement of a plan , an event giving rise to contractualtermination benefits, or a business combination or divestiture;

the actual return on plan assets during the period; andthe effect of foreign currency exchange rate changes;

(ii) the percentage of the fair value of total plan assets held at themeasurement date (see paragraph 3461.044) represented byeach major category of plan assets, which include but are notlimited to equity securities, debt securities and real estate; andadditional asset categories when that information is expectedto be useful in understanding the risks and expected long-termrate of return for plan assets; and

(iii) the amounts and types of securities of the entity and relatedparties included in plan assets, the approximate amount offuture annual benefits covered by insurance contracts issuedby the entity or related parties, and transactions between theentity and the plan during the period; and

(c) Non-routine eventsthe nature and effect of each significant non-routine event occurringduring the period, including an amendment, curtailment or settlementof a plan , an event giving rise to contractual termination benefits, ora business combination or divestiture.

An entity that has aggregated disclosures for its single-employer definedbenefit pension plans, or for its other defined benefit plans, discloses theaccrued benefit obligation at the end of the period as determined by theactuarial valuation, and the fair value of plan assets at the end of theperiod, separately for the aggregate of plans with accrued benefitobligations in excess of plan assets.

An entity discloses the significant assumptions used in accounting foremployee future benefits, including:(a) the weighted average of the amounts assumed in accounting for the

plan for:(i) the discount rate at the end of the period used to determine the

accrued benefit obligation;(ii) the discount rate at the preceding year end (see paragraph

3461.045) used to determine the benefit cost;(iii) the expected long-term rate of return on plan assets; and(iv) the rate of compensation increase (for pay-related plans);

157

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Knotia - CICA Standards & Guidance Collection Page 49 of 75

158

159

160

161

162

specifying, in a tabular form , the assumptions used to determinethe accrued benefit obligation and the assumptions used to determinebenefit cost; and

(b) the assumed health care cost trend rate(s) for the next year used tomeasure the expected cost of benefits covered by the plan (grosseligible charges), and a general description of the direction andpattern of change in the assumed trend rate(s) thereafter, togetherwith the ultimate trend rate(s) and when each such rate is expectedto be achieved.

An entity with a plan providing health care benefits to retirees disclosesthe effects of a one-percentage-point increase and a one-percentage-pointdecrease in the assumed health care cost trend rates on the aggregate ofthe service and interest cost components of the benefit cost for the periodand on the accrued benefit obligation at the end of the period. Comparativeinformation is not required.The following disclosures, included in paragraphs 3461.154- 155 and

3461.157- 158 , are not required of entities other than public enterprisesco-operative organizations, deposit-taking institutions and life insuranceenterprises:(a) the components of the benefit cost, otherwise disclosed in accordance

with paragraph 3461.154(c);(b) the separate unamortized amounts, otherwise disclosed in accordance

with paragraph 3461.154(e)(iii);(c) the reconciliation of the beginning and ending balances of the accrued

benefit obligation for the period, otherwise disclosed in accordancewith paragraph 3461.155(a);

(d) the reconciliation of the beginning and ending balances of the fairvalue of plan assets for the period , otherwise disclosed in accordancewith paragraph 3461.155(b)(i); however, all entities disclose thebenefits paid; and

(e) the effects of a one-percentage-point increase and a one-percentagepoint decrease in the assumed health care cost trend rates, otherwisedisclosed in accordance with paragraph 3461.158.

Public enterprises are those enterprises that have issued debt or equitysecurities that are traded in a public market (a domestic or foreign stockexchange or an over-the-counter market, including local or regionalmarkets), that are required to file financial statements with a securitiescommission , or that provide financial statements for the purpose of issuingany class of securities in a public market.Multiemployer plans

For multiemployer plans, an entity discloses:(a) the cost recognized for the period; and(b) a description of the nature and effect of each significant change

during the period affecting comparabilty, such as a change in therate of employer contributions, a business combination or adivestiture.

In some circumstances, an entity may be unable to obtain sufficientinformation about its multiemployer plans to disaggregate amounts it hascontributed to provide pension benefits from amounts it has contributedprimarily to provide other employee benefits. When such disaggregation isimpracticable , an entity discloses total contributions to multiemployerplans.


163Special termination benefits

For special termination benefits , a public enterprise , co-operativeorganization , deposit-taking institution or life insurance enterprisediscloses:(a) the amount of the expense recognized for the period; and(b) a description of the nature of the related event or events that

resulted in these benefits being provided.TRANSITIONAL PROVISIONSThe disclosure paragraphs 3461.150- 163 of this Section apply to fiscal

years ending on or after June 30 , 2004. Earlier adoption is encouraged. Allother paragraphs of this Section apply to fiscal years beginning on or afterJanuary 1 , 2000.

An entity may apply this Section either prospectively or retroactively, andit discloses the method of application it has chosen. This Section is appliedon the same basis to all of an entity s benefit plans for which a change inaccounting is required.

When a change in accounting is required , an entity determines theaccrued benefit obligation , the fair value of plan assets and the transitionalobligation or transitional asset in accordance with this Section as of thebeginning of the fiscal year to which it is first applied.When this Section is applied prospectively to a benefit plan , an entity

amortizes a transitional obligation or transitional asset in a rational andsystematic manner over an appropriate period of time, which is normallythe average remaining service period of active employees expected toreceive benefits under the benefit plan. However, when all , or almost all , ofthe employees are no longer active at the date as of which the plantransitional obligation or transitional asset is determined , the entityamortizes the transitional obligation or transitional asset on a straight- linebasis over the average remaining life expectancy of the former employees.When the limit on the carrying amount of an accrued benefit asset changesas a result of the initial application of this Section on a prospective basis,the amount of the change in the valuation allowance is carried forward andamortized on the same basis as a transitional asset or transitionalobligation. For a defined benefit plan other than a pension plan , theamortization of a transitional obligation for each period should be sufficientto ensure that the cumulative benefit cost recognized subsequent to thedate as of which the transitional obligation is determined is no less than thecumulative benefit payments subsequent to that date.An entity may have various unamortized balances arising from the

application of methods of accounting for employee future benefits otherthan the methods specified by this Section. Such balances may includepreviously unamortized amounts for past service costs, actuarial gains andlosses, transitional balances and the difference between the fair value ofplan assets and their market-related value. When a change in accounting isrequired, all of these balances are included in the transitional obligation ortransitional asset determined in accordance with this Section , except whenthe entity chooses to apply the guidance in paragraph 3461.169. Theprevious amortization schedules no longer apply. All past service costs andactuarial gains or losses arising after the date as of which the transitionalobligation or transitional asset is determined are amortized from that dateforward in accordance with this Section.

164

165

166

167

168

169 At the date as of which an entity first applies this Section , the entity mayapply it in a manner that produces recognized and unrecognized amounts

Page 50 of75


for all of the entity s benefit plans the same as those determined by theapplication of accounting principles generally accepted in the United States.

170 When an entity has chosen prospective application of this Section and hasa separately measured benefit plan providing post-employment benefits orcompensated absences that do not vest or accumulate , the transitionalobligation or transitional asset is amortized to income on a basisappropriate for the type of benefit. For example, a long-term disabilitybenefit may be amortized based on the average period over which benefitsare expected to be paid.

171 When this Section is applied prospectively to a defined benefit plan otherthan a pension plan that was previously accounted for on a cash basis , anytransitional obligation is amortized on a basis that ensures recognition ofthe accrued benefit obligation in accordance with this Section , in an amountat least equal to the amount that would have been recognized under theprevious method of accounting. An accelerated amortization is most likelyto occur for such a plan when former employees comprise a significantproportion of all active, inactive and former employees.

172 For an entity applying this Section on a retroactive basis, restatement offinancial statements for prior periods is encouraged but not required.GLOSSARY OF DEFINED TERMSThis glossary contains all of the terms defined in this Section (seeparagraphs 3461.009 , 3461.024 , 3461.101 , 3461.111 , 3461.135 and3461.145), set out in alphabetical order.

An accrued benefit asset is the amount of any asset recognized on anentity' s balance sheet in respect of employee future benefits beforededucting any valuation allowance that may be required. It is the sum ofthe entity s accumulated cash contributions less the sum of the current andprior years ' benefit costs (before any change in valuation allowance).

An accrued benefit liabilty is the amount of any liability recognized on anentity' s balance sheet in respect of employee future benefits. It is the sumof the current and prior years ' benefit costs less the entity s accumulatedcash contributions.

Accrued benefit methods are a family of actuarial valuation methods inwhich a distinct unit of future benefit is attributed to each year of creditedservice and the actuarial present value of that unit of benefit is computedseparately for the period during which it is presumed to have accrued. Twoaccrued benefit methods are:(i) Accumulated benefit method - Benefis earned to date are based

on the plan formula, the employee s history of pay, service and otherfactors, as of the date of determination.

(ii) Projected benefit method prorated on services Generally, anequal portion of the total estimated future benefit (i.e., with salaryprojection or cost escalation, when appropriate) is attributed to eachyear of service in the attribution period. Some plans define differentamounts of benefits for different years of service. For such plans, thismethod wil not necessarily attribute an equal portion of the totalestimated future benefit to each year of service in the attributionperiod (see paragraph 3461.042).

An accrued benefit obligation is the actuarial present value of benefitsattributed to employee services rendered to a particular date. As of aparticular date prior to an employee s full eligibility date, an entityaccrued benefit obligation in respect of the employee is the portion of theobligation for employee future benefits attributed to that employee

Page 51 of75


service rendered to that date. On and after the full eligibility date , the accruedbenefit obligation and obligation for employee future benefits for anemployee are the same.

Actuarial assumptions are estimates of future events that will affect anentity s costs , and obligation , for employee future benefits. Examples ofthese estimates are rates of return on plan assets, administration expensesand taxes (other than income taxes), termination rates , disability claimrates , rates of employee turnover, retirement age , mortality, dependencystatus , per capita claims costs by age and by type of benefit, health carecost trend rates, discount rates to reflect the time v.alue of money, andfuture salary and benefit levels.

Actuarial gains and losses are changes in the value of the accrued benefitobligation and the plan assets resulting from:(i) experience different from that assumed; or(ii) changes in an actuarial assumption.

Actuarial present value is the discounted value of an amount or series ofamounts payable or receivable at various times , determined as of a givendate by the application of a particular set of actuarial assumptions.

An actuarial valuation is an assessment of the financial status of a benefitplan. It includes the valuation of plan assets , if any, and the accruedbenefit obligation.

An adjusted benefit asset is an accrued benefit asset less the amount, ifany, by which the aggregate of any unamortized past service costsunamortized actuarial losses and unamortized transitional obligationexceeds the aggregate of any unamortized actuarial gains and unamortizedtransitional asset.

An attribution period is the period of an employee s service to which anobligation for employee future benefits is assigned.

A benefit plan is any arrangement that is mutually understood by an entityand its employees whereby the entity undertakes to provide its employeeswith benefits after active service in exchange for their services. Benefitsmay commence immediately upon termination or suspension of activeservice or may be deferred until an employee attains a specified age.Generally, a written plan provides the best evidence of the terms of thebenefit plan. However, the terms of a benefit plan may also be discerniblefrom a well-defined, although unwritten practice of paying benefits or fromoral representations made to employees. For example, an indication thatthe terms of a benefit plan differ from the written plan may be discernedfrom an entity's past practice of providing regular increases in certainmonetary benefits. An entity could have a present commitment to amendthe benefit plan , either in writing or through practice or oralrepresentations. Evidence of an entity's commitment to amend the benefitplan includes its past practices of amending the plan, identification ofstrategres to effect future changes, and the assessment of the feasibiltyand likelihood of making those changes in light of the expected economicand social costs. Anticipated amendments that are subject to negotiationsdo not constitute terms of a benefit plan until such amendments have beennegotiated and agreed to by the entity and its employees.

Benefits that accumulate are those for which the right to the benefit isearned but unused and may be carried forward to one or more periodssubsequent to that in which they are earned , even though there may be alimit to the amount that can be carried forward.

Contractual termination benefits are benefits required to be provided to

Page 52 of75


employees under the existing terms of a benefit plan when a specified event, suchas a plant closing, occurs.

A credited service period is the employee service period for which benefitsare earned pursuant to the terms of a benefit plan. The beginning of acredited service period may be the date of hire or a later date. Forexample , a plan may provide benefits only for service rendered after aspecified age or period of employment.

A curtailment is an event that, under a defined benefit plan , results in:(i) a significant reduction of the expected years of future service of active

employees; or(ii) the elimination , for a significant number of active employees, of the

right to earn defined benefits for some , or all , of their future services.A defined benefit plan is a benefit plan that specifies either the benefits to

be received by an employee , or the method of determining those benefitssuch as a benefit of $10 000 of life insurance or a pension benefit equal toone and a half percent of the average of the final five years ' salary timesthe total years of service. Any benefit plan that is not a defined contributionplan is a defined benefit plan.

A defined contribution plan is a benefit plan that specifies how an entitycontributions to the plan are determined rather than the benefits to bereceived by an employee or the method of determining those benefits. Theplan also allocates the entity s contributions to specific individuals. Thefuture benefit for each employee is the accumulated amount of thecontributions made by the entity on that employee s behalf together withthe accumulated amount of any contributions made by the employee andthe investment earnings on the contributions.

An expected future benefit is a calculated amount representing the benefitthe entity expects to realize from a plan surplus. An expected future benefitincludes any withdrawable surplus or reduction in future contributions. Anentity determines its expected future benefit as the sum of:(i) the present value of its expected future annual accruals for service for

the current number of active employees, less the present value ofrequired employee contributions and minimum contributions theentity is required to make regardless of any surplus; and

(ii) the amount of the plan surplus that can be withdrawn in accordancewith the existing plan and any applicable laws and regulations.

Fair value is the amount of the consideration that would be agreed upon in anarm s length transaction between knowledgeable, willing parties who areunder no compulsion to act (see additional guidance in FINANCIALINSTRUMENTS - DISCLOSURE AND PRESENTATION , Disclosure, Fair valueSection 3860).

The full eligibilty date is the date at which an employee has rendered all ofthe service necessary to earn the right to receive all of the benefitsexpected to be received by that employee (including any beneficiaries anddependants expected to receive benefits). Determination of the fulleligibility date is affected by plan terms that provide incremental benefitsexpected to be received by or on behalf of an employee for additional yearsof service , unless those incremental benefits are insignificant.

A funded benefit plan is a benefi plan in which the reporting entity is settingaside assets to pay the costs of benefits as they become due. The assetsare set aside by the reporting entity in a separate legal entity, generally atrust, and the reporting entity cannot use the assets so set aside for its ownpurposes. When benefits become payable, they are paid out of the trust

Page 53 of 75


directly to the employees. Pension plans are generally funded because of legalrequirements to set assets aside.

An insurance contract is a policy in which an insurance enterprise assumesan unconditional legal obligation to provide specified benefits to specificindividuals in return for a fixed consideration or premium. An insurancecontract is irrevocable and involves the transfer of significant risk from theentity (or the plan) to the insurance enterprise. When the insuranceenterprise providing the policy is a captive insurer (an insurance enterprisethat does business primarily with the entity and related parties), or whenthere is any reasonable doubt that the insurance enterprise will meet itsobligations under the policy, the policy is not considered an insurancecontract. Insurance contracts include annuity contracts.

A multiemployer plan is a defined benefit plan to which two or moreunrelated entities contribute, usually pursuant to one or more collectivebargaining agreements. Unrelated entities are entities that do not meet thedefinition of related parties in RELATED PAR1Y TRANSACTIONS , Section3840. Multiemployer plans may be referred to as "joint trust" or "unionplans. Characteristics of a multiemployer plan include the following:(i) Assets contributed by one participating entity are not segregated in a

separate account or restricted to provide benefits only to employeesof the entity and , thus, may be used to provide benefits to employeesof other participating entities.

(ii) Participating entities usually have a common industry bond or at leasthave the same labour union.

(iii) A multiemployer plan is usually administered by a board of trusteescomposed of management and labour representatives.

A multiple-employer plan is a defined benefit plan maintained by more thanone entity that is not a multiemployer plan. In contrast to multiemployerplans, a multiple-employer plan maintains separate accounts for each entityso that contributions provide benefits only for employees of the contributingentity. In addition , multiple-employer plans are generally not collectivelybargained and are intended to allow participating entities , commonly in thesame industry, to pool their plan assets for investment purposes and toreduce the cost of plan administration. Multiple-employer plans may havefeatures that allow participating entities to have different benefit formulae,with the entity's contributions to the plan based on the benefit formulaselected by the entity.

An obligation for employee future benefits is the actuarial present valueas of a particular date of benefits expected to be paid under a definedbenefit plan. The obligation is measured on the basis of the expectedamount and timing of future benefits, taking into consideration theexpected future cost of providing the benefits and the extent to which thecosts are shared by employees or others.

Plan assets are assets that have been segregated and restricted in a trust orother legal entity separate from a reporting entity to provide for employeefuture benefits under the following conditions:

(i) The assets of the separate entity are to be used only to settle therelated accrued benefit obligation , are not available to the reportingentity' s own creditors, and either cannot be returned to the reportingentity or can be returned to the reporting entity only if the remainingassets of the trust are sufficient to meet the plan s obligations.

(ii) To the extent that sufficient assets are in the separate entity, thereporting entity will have no obligation to pay the related employee

Page 54 of75

Knotia - CICA Standards & Guidance Collection Page 55 of 75

future benefits directly.Plan assets include any financial instruments issued by the reporting entityand held by the trust or other legal entity. For the purposes of this Sectionplan assets do not include amounts held by the reporting entity and not yetpaid into the trust or other legal entity. Plan assets may include certainarrangements with insurance enterprises (see paragraphs 3461.122- 126).

A settlement is a transaction in which an entity substantially discharges orsettles all , or part , of an accrued benefit obligation. A settlement is atransaction that is irrevocable , relieves the entity of primary responsibilityfor the accrued benefit obligation and eliminates the significant risksassociated with the accrued benefit obligation and the assets used to effectthe settlement. Examples of transactions that constitute a settlementinclude:(i) making lump-sum cash payments to employees in exchange for their

rights to receive specified benefits; and(ii) purchasing non-participating insurance contracts.

Special termination benefits are benefits that are not contractualtermination benefits and that are offered to employees for a short period oftime , normally not exceeding twelve months, in exchange for employeesvoluntary or involuntary termination of employment.

A transitional asset is the unrecognized amount, if any, as of the beginningof the fiscal year to which this Section is first applied , determined as:(i) the fair value of plan assets less the accrued benefit obligation;(ii) less any accrued benefit asset or plus any accrued benefit liability.An entity may have adopted a method of accounting in accordance with thisSection prior to its issuance. In that case, a transitional asset is not re-determined.

The transitional obligation is the unrecognized amount, as of the beginningof the fiscal year in which this Section is first applied , determined as:(i) the accrued benefit obligation less the fair value of plan assets;(ii) plus any accrued benefit asset or less any accrued benefit liability.An entity may haveadopted a method of accounting in accordance with thisSection prior to its issuance. In that case, a transitional obligation is not re-determined.

An unamortized transitional asset or unamortized transitionalobligation is the portion of a transitional asset or transitional obligationthat has not been recognized in the financial statements.An unfunded benefit plan is a benefit plan in which an entity pays all ofthe costs of benefits directly to its employees, their beneficiaries or estatesor to a third-part service provider on behalf of the employees, as theamounts become due.

Employee future benefits that vest are those for which , after a specific ordeterminable date , the entitlement ceases to be conditional on an employeeremaining in the service of an entity.ILLUSTRATIVE EXAMPLESThis material is illustrative only.These examples indicate how the accounting treatment specified in thisSection might be applied in particular situations. Matters of principlerelating to particular situations should be decided in the context of thisSection.None of the examples realtes to any other example.


Example 1 - ComputationsExample 2 DisclosuresExample 3 TransitionExample 1 - Computations

These examples illustrate computations of the accrued benefit liability,benefit cost and related amounts for a pension plan and a plan providingother retirement benefits.

SITUATION IPension Plan Using Fair Value of Plan Assets for Calculating Expected

ReturnSituation I assumes that the Company uses fair value for the calculation ofthe expected return on plan assets. Situation II assumes that the Companyuses market- related value for that calculation.XYZ Company sponsors a defined benefit pension plan. The Company usesthe balance sheet date of December 31 as the measurement date. Thecurrent service cost and past service costs are determined as of thebeginning of the year. All contributions and benefit payments are assumedto occur in the middle of the year. An employee s contributions arerefundable upon withdrawal from the plan to the extent benefits have notbecome vested. XYZ Company recognizes in pension cost the minimumrequired annual amortization of actuarial gains and losses. The Companyexpenses all costs recognized for the period relating to employee futurebenefits. An unamortized transitional obligation of $500 000 is beingamortized over 12 years. The following amounts relate to XYZ Companypension experience as determined by annual valuations.

20XO

Assumptions1 Expected long-term rate of return on planassets2 Discount rate - Jan. 3 Assumed rate of salary escalation4 Average remaining service period of activeemployees expected to receive benefits underthe pension plan (years)Annual amounts5 Current service cost, net of employeecontributions6 Contributions by the Company7 Contributions by the employees8 Benefit payments9 Accrued benefit obligation - Jan. 10 Accrued benefit obligation - Dec. 11 Fair value of plan assets - Jan. 112 Fair value of plan assets Dec. 31

13 Past service costs14 Period over which past service costs are tobe amortized - Jan. 1 (years)

Exhibit I - Actual return on plan assets

20X1

$100,000

115,00035,00030,000

000,000080,000500,000856 000

$118,200

165,00040,00039,000

080,0002,474,000

856,000988 000125,000

Page 56 of75


15 Fair value of plan assets - Jan. 1 (Line 11)16 Contributions (Line 6 + Line 7)

17 Benefit payments (Line 8)18 Sub-total19 Fair value of plan assets Dec. 31 (Line12)

20 Actual return on plan assets

2QX

500 000150 000

.Q,

620 000

lt5_6 J.QQ.Q

$236 000

--------------

20X1

856 000205 000

9-1-Q.Q.Q

022 000

8J3,JtQ.Q

$(34 000)

--------------

Exhibit II - Expected return on plan assets (paragraphs 3461.076-078)

21 Fair value of plan assets - Jan. 1 (Line 11)22 Contributions (mid-year) ((Line 6 + Line 7)x 0.23 Benefit payments (mid-year) (Line 8 x 0.24 Sub-total

25 Expected return on plan assets (Line 1 xLine 24)

20XQ

500 000000

(15,000)560 000

----------------

$117 000

--------------

20X1

856 000102 500

(19, 500939 000

----------------

$145 425

--------------

Exhibit III - Actuarial gain (loss) on plan assets (paragraphs3461.087- 093)

26 Actual return on plan assets (Line 20)

27 Expected return on plan assets (Line 25)28 Actuarial gain (loss) on plan assets

20XO

$236 000117,000

$119 000

--------------

20X1

$(34 000)145,425

$( 179,425)

--------------

Exhibit IV - Interest cost on accrued benefit obligation (paragraph3461.075)

29 Accrued benefit obligation - Jan. 1 (Line 9)30 Current service cost (Line 5 + Line 7)31 Past service costs (Line 13)32 Benefit payments (mid-year) (Line 8 x 0.33 Accrued benefit obligation - averagebalance for the year

34 Interest cost on accrued benefit obligation(Line 2 x Line 33)

20XO

$(2,000 000)(135 000)

15,000$(2 120 000)

20X1

$(2 080,000)(158,200)(125 000)

500$(2 343,700)

$( 137 800)

--------- ------------------ ---------

$(140 622)

---------------- ----------------

Exhibit V - Actuarial gain (loss) on accrued benefit obligation(paragraphs 3461.087- 093)

35 Accrued benefit obligation - Jan. 1 (Line 9)20XO

$(2 000 000) $(2 080 000)

Page 57 of75


36 Current service cost, net of employeecontributions (Line 5)37 Past service costs (Line 13)38 Contributions by the employees (Line 7)39 Interest cost on accrued benefit obligation(Line 34)40 Benefit payments (Line 8)41 Expected accrued benefit obligation42 Accrued benefit obligation - Dee. 31 (Line10)43 Actuarial gain (loss) on accrued benefitobligation

(100 000)

(35 000)(137 800)

OOO

242 800)

(2,Q8_ QQ)

$162 800

--------------

(118 200)

(125 000)(40 000)

(140 622)

J2,QQQ

(2,464 822)

(2, LQQQ)

$(9 178)

--------------

Exhibit VI - Required amortization of unamortized net actuarialgain (paragraphs 3461.087- 093)

44 Accrued benefit obligation - Jan. 1 (Line 9)

45 Fair value of plan assets - Jan. 1 (Line 11)

46 10% of the greater of Line 44 and Line 45

47 Unamortized net actuarial gain Jan. 1

(Line 50)

48 Amount subject to amortization (excess ofLine 47 over Line 46, if any)

49 Minimum required amortization (Line 48 ..Line 4)

20XO 20X1

000 000 080 000

------- -------------- -------

500 000 856 000

------- -------------- -------

$200 000 $208,000

------- -------------- -------

$281 800

------------------------------------------ --------------

$73 800

--------------

$6, 150

--------------

Exhibit VII - Schedule of unamortized net actuarial gain(paragraphs 3461.087- 093)

50 Unamortized net actuarial gain - Jan. 51 Amortization for current year (Line 49)52 Actuarial gain (loss) on accrued benefitobligation (Line 43)53 Actuarial gain (loss) on plan assets (Line 28)54 Unamortized net actuarial gain - Dec.

20XO

162 800

119.000$ 281 800

------------

20X1

$281,800(6, 150)

178)

(179.425)$ 87 047

--------------

Exhibit VIII - Amortization of past service costs (paragraphs3461.079- 086 )

55 Unamortized past service costs - Jan. 1(Line 13)

OXO 20X1

$125 000

Page 58 of75


56 Amortization for current year (Line 55 -;Line 14)

57 Unamortized past service costs - Dec. 31

417

$114 583

------------

Exhibit IX - Amortization of transitional obligation (paragraphs3461.164- 172)

58 Unamortized transitional obligation - Jan. (the amount for 20XO is Line 9 - Line 11 forthat year)

59 Amortization for current year ($500 000 -;12)60 Unamortized transitional obligation - Dec.

20XQ

$500 000

4l667

$458 333

------------

lQKl$458 333

41,667

$416 666

------------

Exhibit X - Determination of pension cost (paragraphs 3461.069-095)

61 Current service cost, net of employeecontributions (Line 5)62 Interest cost on accrued benefit obligation(Line 34)63 Expected return on plan assets (Line 25)64 Amortization of transitional obligation (Line59)65 Amortization of past service costs (Line 56)66 Amortization of net actuarial gain (Line 49)67 Pension cost

20XO

$100 000

137 800

(117 000)667

$162,467

--------------

20X1

$118 200

140 622

(145 425)667

417(6. 150)

$159 331

--------------

Exhibit XI - Accrued benefit liabilty (paragraphs 3461.029- 065)20XO 20X1

$ (47 467)(162,467) (159,331)

115,000 165 000$ (47,467) $ (41 798)

68 Accrued benefit liability - Jan. 169 Pension cost for the year (Line 67)70 Contributions by the Company (Line 6)71 Accrued benefit liabilty - Dec. 31

-------------- --------------

Exhibit XII Reconciliation of accrued benefit obligation to accruedbenefit liabilty

72 Accrued benefit obligation - Dec. 31 (Line10)

73 Plan assets at fair value - Dec. 31 (Line 12)74 Funded status plan deficit75 Unamortized transitional obligation (Line 60)76 Unamortized past service costs (Line 57)77 Unamortized net actuarial gain (Line 54)

20XO 20X1

$(2 080 000) $(2,474 000)

856,000(224 000)

458 333

a.8.1, QQ)

1,988.000(486 000)

416 666114 583

t67 , Q4?J

Page 59 of75


78 Accrued benefit liability - Dee. 31 (Line 71) $ (47 467) $ (41 798)

-------------- --------------

Journal entries2.Q2(O

162,4672QXl

159 331Dr. Pension expenseCr. Accrued benefitliability

To record the current year s pension cost (Line 67)

Dr. Accrued benefit liability 115 000Cr. Cash 115 000To record the payment of funding contributions by the Company (Line 6)

Note:In practice , actuarial valuations are commonly performed at the beginningof the year using assumptions as of that date. The expense amountsdetermined from these actuarial valuations are then used for the interimand year-end financial statements for that year. However, the year-endaccrued benefit obligation disclosed in the financial statements is requiredto reflect the year-end discount rate. This result is generally achieved byupdating the beginning-of-year valuation using the year-end discount ratewhile keeping all other assumptions constant. The difference between thetwo accrued benefit obligation amounts is an actuarial gain or loss on theaccrued benefit obligation , which is added to the net unamortized actuarialgain or loss and not amortized until the next year. At the start of the nextyear, the actuarial valuation is recomputed , this time with the updateddiscount rate that was used to calculate the accrued benefit obligation fordisclosure purposes at the end of the prior year and with all otherassumptions updated. This recomputation could result in another actuarialgain or loss which is then also added to the net unamortized actuarial gainor loss amount as of the beginning of the year. The distinction betweenthese two sources of actuarial gains or losses on the accrued benefitobligation has not been reflected in the above example.

162,467 159 331

165 000165 000

SITUATION IIPension Plan Using Market-Related Value of Plan Assets for Calculating

Expected Retu rnSituation II assumes that XYZ Company uses a market-related value forplan assets in determining the expected return on plan assets, whichaffects the computation of pension cost and accrued benefit liabilty. Theelements of this situation are the same as the elements of Situation Iexcept as follows (line number references are to Situation I when there isno corresponding line number in this situation; line number referencesspecify Situation II when the amount for a line may differ from the amountfor the corresponding line in Situation I):

Annual amounts11a Market-related value of plan assets Jan. 1

20XO

11b Number of years over which changes in thefair value of plan assets are reflected in themarket- related value

20XO 20X1

500,000

Exhibit II - Expected return on plan assets and market-related

Page 60 of 75


value of plan assets (paragraphs 3461.076- 078)QXJJ

500 00021 Market-related value of plan assets - Jan. 1

2000 (Line 11a)22 Contributions (mid-year) ((Line 6 + Line 7) x

23 Benefit payments (mid-year) (Line 8 x 0.24 Sub-total

25 Expected return on plan assets (Line 1 x Line, Situation II)

25a Market-related value of plan assets - Jan. 1(Line 21 , Situation II)25b Contributions (Line 6 + Line 7)25c Benefit payments (Line 8)25d Adjustment for prior years ' actuarial gain onplan assets (Line 28a)25e Market-related value of plan assets - Dee.

25f Fair value of plan assets - Dec. 31 (Line 12)

25g Actuarial gain (loss) on plan assets notincluded in ending balance of market- relatedvalue - Dec.

000

OQ.

560 000

----------------

$117 000

500 000

150 000(30 000)

737 000

1,856 000$ 119,000

20X1737 000

102 500

5.oJ2 )

820 000

----------------

$136 500

737 000

205 000(39 000)

23,800

063 300

L988.000$ (75 300)

------- --------------- --------

Exhibit III - Actuarial gain (loss) on plan assets (paragraphs3461.087- 093)

26 Actual return on plan assets (Line 20)

27 Expected return on plan assets (Line 25Situation II)28 Actuarial gain (loss) on plan assets

28a Annual adjustment on a straight- line basisover the following 5 years (Line 28, Situation II +Line 11b)

20XO 20X1

$236,000 $(34 000)117 000 136 500

$119,000 $(170,500)

------- -------------- -------

800 (34 100)

------- --------------- --------

Exhibit VI - Required amortization of unamortized net actuarialgain (paragraphs 3461.087- 093)

44 Accrued benefit obligation - Jan. 1 (Line 9)

45 Market- related value of plan assets - Jan. (Line 21 , Situation II)

46 10% of the greater of Line 44 , Situation IIand Line 45, Situation II

20XO

000,000

----------------

$1, 500,000

----------------

$200 000

20X1

080 000

----------------

737 000

----------------

$208 000

Page 61 of75


47 Unamortized net actuarial gain - Jan. 1 (Line, Situation II)

47a Less: actuarial gain not yet included inmarket- related value of plan assets - Jan. 1(Line 25g)47b Sub-total

48 Amount subject to amortization (excess ofLine 47b over Line 46 , Situation II , if any)

49 Minimum required amortization (Line 48Situation II 7 Line 4)

---------------------------------------------------------------- ----------------

$281 800

(tQQ

$162 800

------------------------------------------------

Exhibit VII - Schedule of unamortized net actuarial gain(paragraphs 3461.087- 093)

50 Unamortized net actuarial gain - Jan. 151 Amortization for current year (Line 49Situation II)52 Actuarial gain (loss) on accrued benefitobligation (Line 43)53 Actuarial gain (loss) on plan assets (Line 28Situation II)54 Unamortized net actuarial gain Dec. 31

20XO

162 800

OOO

$281 800

--------------

20X1

$281 800

178)

(170 500)

$102 122

--------------

Exhibit X - Determination of pension cost (paragraphs 3461.069-095)

61 Current service cost, net of employeecontributions (Line 5)62 Interest cost on accrued benefit obligation(Line 34)63 Expected return on plan assets (Line 25Situation II)64 Amortization of transitional obligation (Line59) 65 Amortization of past service costs (Line 56)66 Amortization of net actuarial gain (Line 49Situation II)67 Pension cost

20XO 20X1

$100 000 $118 200

137 800 140,622

(117 000) (136 500)

667 667

10,417

$162 467

--------------

$174 406

--------------

Exhibit XI - Accrued benefit liabilty (paragraphs 3461.029- 065)20XO 20X1

(47,467)(162,467) (174,406)

68 Accrued benefit liability - Jan. 69 Pension cost for the year (Line 67 , Situation

Page 62 of75


II)70 Contributions by the Company (Line 6)71 Accrued benefit liability - Dec. 31

lJ.5, QQO

$(47 467)16!),QOO

$(56 873)

-------------- --------------

Exhibit XII - Reconcilation of accrued benefit obligation to accruedbenefit liabilty

72 Accrued benefit obligation - Dee. 31 (Line10)

73 Plan assets at fair value - Dec. 31 (Line 12)74 Funded status plan deficit75 Unamortized transitional obligation (Line 60)76 Unamortized past service costs (Line 57)77 Unamortized net actuarial gain (Line 54Situation II)78 Accrued benefit liability - Dec. 31 (Line 71Situation II)

QXQ 2QXl$(2 080 000) $(2,474 000)

--,

.5Q,-Q.Q.Q

(224 000)458 333

988&( 486 000)

416 666114 583

(102, 122(281,800)

$ (47,467) $ (56 873)

-------------- --------------

Journal entries20XO

Dr. Pension expense 162 467Cr. Accrued benefit liability 162,467

To record the current year s pension cost (Line 67)Dr. Accrued benefit liability 115 000Cr. Cash 115,000To record the payment of funding contributions by the Company (Line 6)

SITUATION IIIOther Retirement Benefits Plan

XYZ Company provides certain retiree health and nominal life insurancebenefits to its employees. The plan is unfunded and requires nocontributions from employees.In 20XO, XYZ Company adopted accrual accounting for the benefit plan.Prior to that date , XYZ Company recognized a benefit cost equal to itspayments for the actual costs incurred by the retirees. At the beginning of20XO, XYZ Company s management had an actuarial valuation done foraccounting purposes, using the projected benefit method prorated onservices.The results of the valuation were:

Accrued benefit obligation , January 1 , 20XO $1 000,000The average remaining service period of employees at the time of adoptionof accrual accounting for the benefit plan was 12 years. XYZ Company hasdecided to amortize this transitional obligation , using a straight- linemethod , over 12 years.

20X1

174,406174,406

165 000165 000

The following amounts relate to the retiree health and life insurance plan asdetermined by annual valuations performed in subsequent years. Benefitpayments are considered to take place in the middle of each year. Accrualfor service is at the beginning of each year. The measurement date selected

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by XYZ Company is December 31. The Company expenses all costs recognizedfor the period relating to employee future benefits. This Situation isunrelated to Situations I and II (the line number references do notcorrespond to the lines in those situations).

Assumptions1 Discount rate - Jan. 2 Average remaining service period of activeemployees expected to receive benefits underthe benefit plan (years)

2QXO

2j)_ 2Q2U

Annual amounts3 Current service cost $65 000 $78 0004 Benefit payments 15 000 17 0005 Accrued benefit obligation - Jan. 1 1 000 000 1 200 0006 Accrued benefit obligation Dee. 31 1 200 000 1 242 000

Exhibit I - Interest cost on accrued benefit obligation (paragraph3461.075)

7 Accrued benefit obligation - Jan. 1 (Line 5)8 Current service cost (Line 3)9 Benefit payments (mid-year) (Line 4 x 0.10 Average balance for year

11 Interest cost on accrued benefit obligation(Line 1 x Line 10)

20XO 20X1

$(1 000 000) $(1 200 000)(65 000) (78,000)

___

2,500 500$(1 057 500) $(1 269, 500)

(68 737) $

--------- ------------------ ---------

(76, 170)

--------- ------------------ ---------

Exhibit II - Actuarial gain (loss) on accrued benefit obligation(paragraphs 3461.087- 093)

12 Accrued benefit obligation - Jan. 1 (Line 5)13 Current service cost (Line 3)14 Interest cost on accrued benefit obligation(Line 11)15 Benefit payments (Line 4)16 Expected accrued benefit obligation17 Accrued benefit obligation - Dec. 31 (Line 6)18 Actuarial gain (loss) on accrued benefitobligation

20XO

$(1 000 000)(65 000)(68 737)

15.000118,737)200.000)

$ (81 263)

----------------

20X1

$(1 200,000)(78,000)(76 170)

17,000337 170)242,000)

$ 95 170

----------------

Exhibit III - Required amortization of unamortized net actuarialloss (paragraphs 3461.087- 093)

19 10% of accrued benefit obligation - Jan. (Line 5 x 0.

20XQ

$100 000

--------------

20X!.

$120 000

--------------

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20 Unamortized net actuarial loss - Jan. 1 (Line23)

21 Amount subject to amortization (excess ofLine 20 over Line 19, if any)

22 Minimum required amortization (Line 21 -;Line 2)

------------------------------------------

$(81 263)

------------------------------------------

Exhibit IV - Schedule of unamortized net actuarial gain (loss)(paragraphs 3461.087- 093)

23 Unamortized net actuarial gain (loss) - Jan. 24 Amortization for current year (Line 22)25 Actuarial gain (loss) on accrued benefitobligation (Line 18)

26 Unamortized net actuarial gain (loss) - Dec.

20XO

81.263).

$(81 263)

------------

ZOX1

$(81 263)

95. 170

$ 13 907

------------

Exhibit V - Determination of benefit cost (paragraphs 3461.069-095)

27 Current service cost (Line 3)28 Interest cost on accrued benefit obligation(Line 11)

29 Amortization of transitional obligation000,000 -; 12)

30 Amortization of net actuarial loss (gain) (Line22)31 Benefit cost

20XO

$65 000737

83, 333

$217 070

------------

20X1

$78 000170

333

$237 503

------------

Exhibit VI - Accrued benefit liabilty (paragraphs 3461.029- 065)20XO 20X1

$ $(202 070)(217 070) (237 503)

15.000 17.000$(202 070) $( 422 573)

32 Accrued benefit liability - Jan. 133 Benefit cost for the year (Line 31)34 Benefit payments (Line 4)35 Accrued benefit liability - Dec. 31

-------------- --------------

Exhibit VII - Reconcilation of accrued benefit obligation to accruedbenefit liabilty

36 Accrued benefit obligation - Dec. 31 (Line 6)37 Unamortized transitional obligation38 Unamortized net actuarial loss (gain) (Line26)39 Accrued benefit liability (Line 35)

20XO

$(1,200 000)916 667

-_._.

J.-I 263

$ (202 070)

20X1

$(1 242 000)833 334

$ (422 573)

Page 65 of75


---------------- ----------------

Journal entries

2QXO

Dr. Benefit expense 217 070Cr. Accrued benefit liability 217 070

To record the current year s benefit cost (Line 31)Dr. Accrued benefit liability 15000 17 000Cr. Cash 15000 17 000To record the payment of benefits to , or on behalf of, retirees in the current year(Line 4)

Example 2 - Disclosures

237 503237 503

SITUATION IPublic Company Disclosure

Company A is a public company with a number of defined benefit anddefined contribution plans of different types. The illustration providesdisclosures for the fiscal year ended December 31 , 20X3 , with comparativefigures for the prior year. The Company has undertaken several non- routinetransactions affecting its benefit plans so that the illustration includes mostof the possible disclosures an entity might be required to make.Consequently, the illustration should not be considered typical of thedisclosure most entities would make routinely. All amounts are inthousands of dollars.Note 1: Significant accounting policies(e) Pension and Other Retirement Benefit Plans

The actuarial determination of the accrued benefit obligations forpensions and other retirement benefits uses the projectedbenefit method prorated on service (which incorporatesmanagement' s best estimate of future salary levels, other costescalation , retirement ages of employees and other actuarialfactors).

For the purpose of calculating the expected return on planassets, those assets are valued at fair value.

Actuarial gains (losses) arise from the difference between actuallong-term rate of return on plan assets for a period and theexpected long-term rate of return on plan assets for thatperiod or from changes in actuarial assumptions used todetermine the accrued benefit obligation. The excess of the netaccumulated actuarial gain (loss) over 10 percent of thegreater of the benefit obligation and the fair value of planassets is amortized over the average remaining service periodof active employees. The average remaining service period ofthe active employees covered by the pension plan is 15 years(20X3) and 16 years (20X2). The average remaining serviceperiod of the active employees covered by the other retirementbenefits plan is 16 years (20X3) and 15 years (20X2).

Past service costs arising from plan amendments are deferredand amortized on a straight- line basis over the averageremaining service period of employees active at the date ofamendment.

On January 1 , 20XO , the Company adopted the new accounting

Page 66 of 75


standard on employee future benefits using the prospectiveapplication method. The Company is amortizing the transitionalobligation on a straight- line basis over 15 years , which was theaverage remaining service period of employees expected toreceive benefits under the benefit plan as of January 1 , 20XO.

When the restructuring of a benefit plan gives rise to both acurtailment and a settlement of obligations , the curtailment isaccounted for prior to the settlement.

Defined contribution plan accounting is applied to amultiemployer defined benefit plan for which the Company hasinsufficient information to apply defined benefit planaccounting.

Note X: Pension and other retirement benefit plansDescription of benefit plansThe Company has a number of funded and unfunded defined benefit plansas well as defined contribution plans , that provide pension , other retirementand post-employment benefits to most of its employees. Its defined benefitpension plans are based on years of service and final average salary.Pension benefits will increase annually by 50 percent of the rate of inflation.Other retirement benefit plans are contributory health care plans withemployee contributions adjusted annually, and non-contributory lifeinsurance plans. A plan also provides long- and short-term disability incomebenefits after employment, but before retirement.The Company acquired FV Industries in late 20X2 (see Note Y), including itspension and other retirement plans. Subsequent restructuring in 20X2included termination of employees due to plant closures. This resulted in acurtailment gain ($180), a settlement gain ($3) and contractual termination

costs ($59) that together improved earnings by $124. Plan amendmentsmade to be consistent with the FV Industries plans , resulted in past servicecosts of $195. Additional termination costs not provided for by the planswere $85 and are not included in the numbers in the remainder of thisnote.Total cash paymentsTotal cash payments for employee future benefits for 20X3, consisting ofcash contributed by the Company to its funded pension plans, cashpayments directly to beneficiaries for its unfunded other benefit plans, andcash contributed to its defined contribution plans, was $249 (20X2 $220).Defined benefit plansThe Company measures its accrued benefit obligations and the fair value ofplan assets for accounting purposes as at October 31 of each year. Themost recent actuarial valuation of the pension plans for funding purposeswas as of January 1 , 20X2, and the next required valuation will be as ofJanuary 1, 20X5.Defined benefit plan obligations

Pension benefit plans20X3 20X2

Other benefit Rlans

20X3 20X2Accrued benefit obligation

Balance at beginning of yearCurrent service costInterest cost

801

118

269 $ 1 210 $ 738

Page 67 of 75


Benefits paid

Actuarial (gains) losses

Foreign exchange ratechangesPlan amendments

AcquisitionsDivestituresCorporate restructuring givingrise to:

SettlementsCurtailments

Balance at end of year

Defined benefit plan assets

Fair value of plan assets Balance at beginning of yearActual return on plan assets

Employer contributionsEmployees ' contributionsBenefits paid

Foreign exchange ratechangesAcquisitionsDivestituresCorporate restructuring givingrise to:

SettlementsTermination payments

Balance at end of year

Plan assets consist of: *

Asset category

Equity securities

Debt securitiesReal estate

OtherTotal

Page 68 of 75

(140) (125)(25)(21)

(80) (70)(22)

120

907(246)

600(89)

(153)

78.1

801 279-Cw.

210902

----- ---------- ---------- ---------------

Pension benefit .glans20X3 20X2

Other benefit plans20X3 20X2

913 076

(140) (125)(33)

310(231)

(150)(59)

$1,913917

---------- ---------- ---------- ----------

percentage of plan assets20X3 20X2

57 %

100 %

54 %

100 %

--- ---

Equity securities include the Company s common shares in the amounts of$165 (8. 6 percent of total plan assets) and $163 (8. 5 percent of total planassets) at December 31 , * 20X3 and 20X2 respectively.


* Measured as of the measurement date of October 31 of each year.J;;onJ:jliatl 9f th JJJoQ.E:. lat fit-Plcm JQ Jb -9m.QJJnt

QIJt gjJ1 the- fi 09 n ClL Qte 1l (1t

osion ben t.la0X3 20K917 $1 913

-L 902 .8.Ql15 112

Fair value of plan assets

Accrued benefit obligationFunded status of plans - surplus(deficit)Unamortized net actuarial lossUnamortized past service costsUnamortized transitionalobligationAccrued benefit asset (liability)Valuation allowanceAccrued benefit asset(liabilty), net of valuationallowance

226325 352121

687 660

652 625

---------- ----------

Page 69 of 75

QtheLPenefi.LglalJ

2J2X3 20K

279279) 210)

505 550

(706 ) (622)

$ (706) $ (622)

---------- ----------

The accrued benefit asset (liability), net of valuation allowance, is includedin the Company s balance sheet as follows:

Pension benefit plans

Other assets

Accounts payable and accruedchargesOther long-term liabilitiesTotal

20X3

677(25)

20X2

655(30)


(18) (26)

688 596652 625 $ (706) $ (622)

----- ----- ----- ---------- ----- ----- -----

Pension benefit plans20X3 20X2680 $1,436

1.300 1.109$ (380) $ (327)

--------- ----------

Plans with accrued benefit obligations in excess of plan assetsIncluded in the above accrued benefit obligation and fair value of planassets at year end are the following amounts in respect of plans that arenot fully funded:

Accrued benefit obligationFair value of plan assetsFunded status - plan deficit

Other benefi plans

20X3 20X2

$ 1 279 $ 1 210

$(1,279) $(1 210)

------------ ------------

Elements of defined benefit costs recognized in the year

Pension benefit plans20X3 20X258 Current service cost, net ofemployee contributionsInterest cost 118

Other benefit glans20X3 20X2$ 40


Actual return on plan assets

Actuarial (gains) losses

Plan amendments

Curtailment gain

Settlement gain

Contractual termination benefitsElements of employee futurebenefits costs before adjustmentsto recognize the long-term natureof employee future benefit costsAdjustments to recognize thelong-term nature of employeefuture benefit costs:

Difference between expectedreturn and actual return on

plan assets for yearDifference between actuarial(gain) loss recognized foryear and actual actuarial(gain) loss on accrued benefitobligation for yearDifference betweenamortization of past servicecosts for year and actual planamendments for yearAmortization of thetransitional obligation

(20) (29)(25)120

(78)(3)

--2

J96 176 149

(123) (a) (51)

(40) (b) (30)

28 (c) (92)

(124) (107)Valuation allowance providedagainst the accrued benefit assetDefined benefit costsrecognized $ 72 $104 $164

---- ---- ----

(a) Expected return on plan assets of $(143) - the deferral of the actualreturn on plan assets of $(20) = $(123).

(b) Actuarial (gain) loss recognized for year of $nil - actual actuarial(gain) loss on accrued benefit obligation for year of $40 = $(40).

(c) Amortization of past service costs for year of $28 - actual planamendments for year of $nil = $28.

Significant assumptionsThe significant assumptions used are as follows (weighted-average):

Pension benefit plans Other benefit glans20X3 20X2 20X3 20X2Accrued benefit obligation as ofDecember 31:

Discount rateRate of compensationincrease

Page 70 of75

(22)

(102)

.J.

(30)

(8)

----


Benefit costs for years endedDecember 31:

Discount rateExpected long-term rate ofreturn on plan assetsRate of compensationincrease

Assumed heaJth care cost trend rates at December 31:

20X3

15%20X2

10%Initial health care cost trend rateCost trend rate declines toYear that the rate reaches the rate it is assumed toremain at

Sensitivity analysis

Assumed health care cost trend rates have a significant effect on theamounts reported for the health care plans. A one-percentage-point changein assumed health care cost trend rates would have the following effects for20X3:

2010 2009

Increase$ 22

$173

DecreaseTotal of service and interest costAccrued benefit obligation

Defined contribution and other plans

The total cost recognized for the Company s defined contribution plans is asfollows:

$ (20)

$(156)

20X3 20X2Plans providing pension benefits $70 $69Plans providing other benefits $17 $16

One of the Company s divisions participates in a multiemployer definedbenefit plan providing both pension and other retirement benefits. Thisplan , to which contributions totaled $50 in 20X3 and $49 in 20X2, is

accounted for as a defined contribution plan. These amounts are notincluded in the cost recognized for the defined contribution plan above. TheCompany s contribution per employee hour increased by 20 percent in 20X2to fund improved plan benefits.

SITUATION IINon-Public Company Disclosure

This illustration provides disclosures for Company B for 20X3 and 20X2based on the same facts and circumstances as in Situation I for Company Aexcept that Company B is non-public. Paragraph 3461.159 provides relieffrom certain disclosure requirements for entities other than publicenterprises, co-operative organizations, deposit-taking institutions and lifeinsurance enterprises. Situation II provides a reference to Situation I whenthe disclosure requirements between these Situations are the same.Situation II provides sample disclosures for requirements that differ fromSituation

This illustration involves relatively uncommon circumstances for a non-public entity, in order to indicate the disclosures that might be required forsuch entities under the requirements set out in this Section. In more usual

Page 71 of75


circumstances, the required disclosure would be considerably less.

Company B's significant accounting policy note is the same as Company A's in Situation

Note X: Pension and other retirement benefit plans

Company B's description of benefit plans is the same as Company A's inSituation I with the exception of the following additional details , whichCompany A provides as part of disclosures not required by Company B:

Pension benefit plans Other benefit RlaPlan assets Benefit obligation Benefit obligation310 $ 907 $ 600(231) (246) (89)(150) (153)

(78)

Company B's disclosures of total cash payments , information about measurement andaluation dates, and Ian asset mix are the same as Com an A's in Situation

Reconciliation of the funded status of the benefit plans to the amountsrecorded in the financial statements

Pension benefit plans20X3 20X2

902 $1 8011.917 1.91315 112

Acquisition of FV Industries

Sale of operationsSettlement gain

Curtailment gain

Contractual terminationbenefitsPlan amendments

Accrued benefit obligationFair value of plan assetsFunded status of plans - plansurplus (deficit)Balance of unamortized amountsAccrued benefit asset (liability)Valuation allowanceAccrued benefit asset(liabilty), net of valuationallowance

(102)(59)

120


279 $1 210

279) 210)

672 548 573 588687 660 (706) (622)

351

652 625 $ (706) $ (622)

----- ----- ----- ---------- ----- ----- -----

Company B's disclosures of the balance sheet classification of the accrued benefit asset(liability) and on plans with accrued benefit obligations in excess of plan assets are theIsame as Company A's in Situation

Employee future benefits costs recognized in the year

Pension benefit plans Other benefit R'ans20X3 20X2 20X3 20X2Defined benefit plans $72 $104 $164Defined contribution plans $70 $ 69 $ 17Company B's disclosure of significant assumptions is the same as Company A's inSituation 1.

Benefits R-gtd

$23$16

Benefits paid by pension benefit plans were $140 (20X2 - $125) and by


other benefit lans were $80 20X2 - $70 Company B's explanatory paragraph about the multiemployer defined benefit plan is thesame as Com an A's in Situation

Example 3 - TransitionCompany D sponsors a defined benefit pension plan. The Company uses thebalance sheet date of December 31 as the measurement date. UntilDecember 31 , 1999, the Company had been accounting for its pensionplans using a long-term rate of return to measure its accrued benefitobligation and a market-related value to measure its pension plan assets.Effective January 1 , 2000 , the Company began applying this Section andchanged to a market rate to measure its accrued benefit obligation and fairvalue to measure its pension plan assets. The following amounts relate tothe Company s pension experience as determined by annual valuations:

Assumptions Jan. L 20001 Expected long-term rate of return on plan assets 7.2 Discount rate - Jan. 1 6.3 Average remaining service period of active employees expected to receive benefits under the pension plan (years)Annual amounts4 Accrued benefit obligation using a long-term rate of return(old method)5 Accrued benefit obligation using a market rate (new method) 3 000 0006 Fair value of plan assets (new method) 3 600 0007 Market-related value of plan assets (old method) 2 950 0008 Accrued benefit asset 150 0009 Unamortized net actuarial gain (old method) 175 00010 Unamortized past service costs (old method) 75 00011 Unamortized transitional balance (old method) 50 000

Exhibit I - Transitional asset at January 1, 2000 (paragraphs3461. 164- 172)

Jan. L 2000750 000

12 Fair value of plan assets (new method) (Line 6)13 Accrued benefit obligation (new method) (Line 5)14 Funded status plan surplus15 Accrued benefit asset (Line 8)16 Transitional asset

Jan. L 2000600 000000 000600 000150,000

$450 000

--------------

Exhibit II - Components of the transitional asset (paragraphs3461.164- 172)

17 Change in the value of plan assets - Jan. 1 , 2000 (Line 6 -Line 7)

18 Change in the accrued benefit obligation - Jan. 1 (Line 4 -Line 5)19 Unamortized net actuarial gain under the old method (Line9) 20 Unamortized past service costs under the old method (Line

Jan. 2000$650 000

(250 000)

175 000

(75 000)


10)21 Unamortized transitional balance under the old method(Line 11)22 Transitional asset - Jan. 1 (Line 16)

000

$450 000

--------------

The unamortized balances arising up to December 31 , 1999 , i. , theunamortized net actuarial gain , the unamortized past service costs and theunamortized transitional balance, are included in the transitional assetdetermined in accordance with this Section. The previous amortizationschedules cease to apply.

SITUATION IProspective Method of Application

The Company selects the prospective method of adopting this Section andamortizes the transitional asset computed in Exhibit I on a straight- linebasis over the average remaining service period of active employeesexpected to receive benefits under the pension plan , i.e. , 12 years.Exhibit III - Amortization of transitional asset and unamortizedtransitional asset (paragraphs 3461.164- 172)

23 Transitional asset - Jan. 1 , 2000 (Line 16)24 Amortization for current year (Line 23 -; Line 3)25 Unamortized transitional asset - Dec. 31 , 2000

Jan. 1. 2000$450 000(37, 500

$412 500

--------------

The accrued benefit asset balance at January 1 , 2000 remains at $150 000(Line 8). The amortization on line 24 is included in the determination of netincome for the year ended December 31 , 2000 and , thus, will affect thebalance of the accrued benefit asset at that date.

SITUATION IIRetroactive Method of Application

The Company selects the retroactive method of adopting this Section andadjusts the opening balance of retained earnings on January 1 , 2000 for thecumulative effect of the change on prior periods.Exhibit IV - Unamortized transitional asset (paragraphs 3461.164-172)

26 Transitional asset - Jan. 1 , 2000 (Line 16)27 Retroactive restatement to opening retained earnings on

January 1 , 200028 Unamortized transitional asset - Dec. 31 , 2000

Jan. 1. 2000

$ 450 000(450 000

--------------

The accrued benefit asset on January 1 , 2000 is $600 000 , consisting of$450 000 (Line 16) + $150 000 (Line 8). Company D may have chosen torecognize the transitional asset retroactively by restating individual priorperiods.

Endnotes1. Costs recognized for the period include amounts expensed and costs that may havebeen capitalized as part of an asset such as inventory.

Page 74 of75


(1) * Editorial change - March 2004.




(5) * Requirements amended - October 1999. Editorial change - March 2004.(6) * Editorial change

- March 2004.(7) * Editorial change

- March 2004.(8) * Editorial change

- December 2002.(9) * Editorial change




- December 2002.

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