New accounting disclosure requirements focus on risk assessment

Many Canadian companies will soon start preparing disclosures for their fiscal year-end corporate financial statements. For most organizations that account for their pension and other post-employment benefits plans in accordance with International Accounting Standard 19 (IAS 19), significant changes to the disclosure requirements for these plans will come into effect at this year-end.

Recap of IAS 19
Beginning in 2011, Canadian accounting standards adopted international accounting rules for most publicly traded Canadian companies. These companies began reporting under IAS 19 for purposes of reflecting their pension and other post-employment benefits plans (such as post-retirement health and life insurance coverage) in their corporate financial statements. In 2011, changes were made to IAS 19, with these changes coming into effect for a company’s first fiscal year beginning on or after Jan. 1, 2013.

The changes to IAS 19 require immediate recognition of all changes in the funded position of a company’s pension and other post-employment benefits plans in the company’s financial statements. In 2012 and early 2013, many plan sponsors focused on the effect of the changes to the accounting rules on their corporate earnings and balance sheet. Now that the end of 2013 is approaching, attention is turning to the effect that the changes will have on required disclosures in companies’ corporate financial statements.

A principle-based approach to financial disclosures
The previous version of IAS 19 took a detailed, prescriptive approach to financial statement disclosure. The revised version takes a principle-based approach in which the financial disclosures must do the following:

  • explain the characteristics of the company’s DB plans and the risks to the company as the plan sponsor;
  • identify and explain the amounts recognized in the company’s financial statements; and
  • describe the plans’ effect on the company’s future cash flows.

Reconciliations of changes in plan liabilities and assets—from the beginning to the end of the year—continue to be required. Enhanced information about asset risk, including a summary of plan assets by class based on the nature of the assets and risk profile, is also required.

As in the past, plan sponsors must disclose the significant actuarial assumptions used to calculate plan liabilities, but the specific assumptions are not specified. Instead, the company determines which key assumptions will best aid investors and analysts in understanding the amounts reported in the financial statements. The disclosure of key assumptions must be supplemented with a sensitivity analysis (i.e., the effect on plan liabilities of changes in key assumptions) to aid the financial statement users in understanding the degree of uncertainty of the reported amounts.

Disclosure of financial risks
IAS 19 seems to strongly encourage (though does not require) an analysis of plan liabilities that provides insight into their nature, characteristics and risks. For example, plan sponsors might disclose the liabilities separately for active employees, deferred vested former employees and pensioners.

Disclosures that provide insight about the uncertainty of the plans’ future cash flows are now required. These disclosures focus on the following:

  • a description of asset/liability-matching strategies being utilized by the plan sponsor, including any annuity purchases and other techniques used to manage risk;
  • the maturity profile of plan liabilities (i.e., the duration of the liabilities);
  • information about future plan cash flows, including expected contributions to the plans for the next year; and
  • identification of the expected timing of future benefit payments from the plans (which is encouraged but not required).

    • Decisions for plan sponsors
    Plan sponsors will need to establish what they must and should disclose in their financial statements regarding their pension and other post-employment benefits plans. This will include decisions regarding the information on the characteristics and risks of the plans that will be disclosed and what assumptions will be included in the sensitivity analysis. IAS 19 directs the sponsor to consider the level of detail to provide, how much emphasis to place on each required disclosure, and what additional information is needed for users of the financial statements to evaluate the information provided.

    The principle-based focus of the new disclosure requirements should result in disclosures that are less generic and more company-specific and, therefore, more useful to investors and analysts. Also, given the nature of the disclosures, sponsors may find an increased focus by users of the financial statements on the risks associated with their pension and other post-employment benefits plans.

    Preparing disclosures for the first time under the revised accounting standard will likely require considerable time and effort. Decisions need to be made about what information to disclose, new financial statement wording needs to be drafted, and not all needed information will be readily available. Also, sponsors will want to take the time needed to strike an appropriate balance between providing enough information to be useful to financial statement users, while avoiding reducing the effectiveness of the financial statements by providing unnecessary information. Plan sponsors reporting under IAS 19 that have yet to start focusing on their year-end disclosures would be wise to turn their attention to these new requirements.