The new CICA standard presents the following opportunities:

	Reducing the Pension Cost for Future Years  The transitional rules allow an immediate adjustment to retained earnings for existing unrecognized losses or prior-service costs, an option that avoids reporting those amounts on the income statement. For companies that can withstand the balance-sheet hit, this provides an opportunity to eliminate existing pension-related amortizations, thereby increasing reported profits going forward. (For a company with unrecognized gains, there is no requirement to adjust retained earnings and, consequently, the amortizations will continue to reduce the pension cost going forward.)
	Boosting/Protecting the Balance Sheet  The other side of the option described above may be more important for benefit plan sponsors with significant borrowing needs or loan covenants. A company with unrecognized gains from DB plan has the option to use those gains to increase retained earnings. Meanwhile a sponsor with unrecognized losses and/or prior-service costs is not required to take a hit.
	Removing Compliance Worries for Smaller Plans  Many organizations have historically avoided reporting detailed costs for their DB plans on the grounds that they are immaterial. Where the DB plans have grown, or are expected to grow, relative to the size of the sponsor, the adoption of the new standard provides an opportunity to move to full compliance with the CICA requirements for employee future benefits. Auditors may approve the change this year with fewer disclosures and recalculations than at other times.
	Creating Consistency with the Funding Cost   The new rules allow plan sponsors the option to base accounting figures on going-concern funding liabilities, subject to certain additional conditions. The next section of this Spotlight discusses some of the factors that will determine whether this is attractive for a particular business.
	Aligning with Other Accounting Standards  For subsidiaries of companies required to report under alternative accounting standards, such as U.S. GAAP or IFRS, it may be possible and desirable to select options that better align the reported results with the consolidated figures presented by the parent. Similarly, for private enterprises considering an initial public offering, closer alignment with IFRS may also be possible and attractive.

Using a funding valuation to derive the accounting figures may lead to very different results from the existing approach. Often there may be a clear increase or decrease in the expected pension cost in the near term. However, near-term cost savings should not be the only factor to determine whether or not to base accounting figures on funding results. The following table lists some other business reasons for and against using the funding results rather than a stand-alone accounting valuation.

Possible Business Reasons for and against Using Funding Results Rather than a Stand-Alone Accounting Valuation
Arguments for using funding results include:			Arguments against using funding results include:
Improvement in Balance Sheet Position  The discount rates used for going-concern funding valuations tend to be higher than typical accounting discount rates. Reduced Exposure to Volatility in Corporate Bond Yields  The discount rates used for going-concern funding valuations tend to vary less over time than typical accounting discount rates that are tied directly to corporate bond yields. More Compatible with Certain Liability-driven Investing Techniques  Accounting and funding risks can be hedged together. Simpler Communication of the Cost of the Plan  There are fewer measures of cost. is the lesser of two evils. Lower Professional Fees  Separate accounting liability valuations are not needed.			Gains and Losses and Prior Service Costs Cannot be Deferred and Amortized   This is not permitted if funding results are used. Greater Exposure to Asset Volatility   Asset smoothing is not permitted if funding results are used; the market value of assets must be used. More Challenging Planning   The use of an early measurement date (e.g., September 30 for a December 31 year end) is not permitted under this option. More Detailed Calculations May Be Needed for Special Events  Examples include layoffs, large annuity purchases and plan changes.

While employers should rely on their accountants for authoritative advice on interpreting the CICA's new Accounting Standards for Private Enterprises, Sibson can be retained to work with employers and their accountants to help find approaches that best meet their needs. For assistance, contact either Rob Kay (416.969.3993, rkay@sibson.com) or Ron Olsen (416.969.3972, rolsen@sibson.com) in Sibson's Toronto office.

THE CICA'S NEW ACCOUNTING STANDARD FOR PRIVATE ENTERPRISES

The CICA's new Accounting Standards for Private Enterprises are set out in Part II of the CICA Handbook.* The key rules relating to the recognition of DB plan costs are Section 1500, First Time Adoption, and Section 3461, Employee Future Benefits. An amendment to Section 1500, made in January, permits three different approaches with respect to employee future benefits:

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* CICA members can access the CICA Handbook from the following Web page:
https://www.knotia.ca/Login/HandbookHome.aspx?pageLanguage=en