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Riley Turnbull: Hi everyone. Thanks for joining us. Just wait a few moments, and then we’ll get going.
All right, I’ve gotten the all clear!
Well, I just want to say: Welcome everyone and thank you for joining us for today’s webinar on the Public Sector Accounting Board’s new standard, section PS 3251, Employee Benefits.
I’m Riley Turnbull. I’m a Principal with the Public Sector Accounting Board, and I’ve worked as the lead on this project. And I’m very excited to be with you here today for this webinar that’s intended to provide you with an overview of what’s in the new standard.
Before we start, I’d like to mention some features of our webinar.
First, we’re pleased to offer simultaneous translation of the English presentation to French. This is a function within Zoom that allows you to select the language you would like to listen in. At the bottom of your screen, you'll see a button called Interpretation. This will allow you to listen to the webinar in French.
We’re also committed to providing closed captioning to promote accessibility of our webinars. As a result, you have the option of turning on closed captioning today. At the bottom of your screen, there’s a CC, or closed captioning, button that you can use to put up subtitles or view a live transcript. Unfortunately, I will note that it does appear that we’re having some technical issues with our AVA captioning system. And as a result, live closed captioning in French will not be available for the session today. We do our best to provide live closed caption translation. However, there may be the occasional error. So thank you in advance for your understanding.
We also wanted to bring your attention to the fact that the recordings of today’s webinar in English and French will be available on PSAB’s Employee Benefits Project page in due course. Check back on the project page regularly if you’re interested in the on-demand version.
If you have any technical issues, please use the Q&A function, and we will try to respond to your questions as soon as possible. We have our Zoom expert, Deven McFadden, available today to assist with technical issues.
And lastly, I do see a question on this. Today’s webinar may qualify for CPD hours upon successful completion of the webinar quiz. And that quiz will be available at the end of the session.
Now that we’ve concluded the tech setup, we’d like to start today with the Land Acknowledgement.
PSAB has a commitment to diversity and inclusion. With Indigenous protocol and building respectful relationships between Indigenous and non-Indigenous peoples in Canada, it’s customary to acknowledge the true territories or ancestral lands of Indigenous peoples on which we reside. We are meeting virtually, so I would like to acknowledge that the Indigenous peoples are the traditional stewards of the lands and waters where each of us attends the meeting this afternoon or morning, depending on the locations from which each of us call home.
We’ll begin today with some project background, where we’ll briefly step back and talk about what this project is, why PSAB undertook it, and what problems the new standard is intended to address. The context here is important because section PS 3251 is more than a technical update, but it’s actually a consolidation and modernization of employee benefits guidance in the Public Sector Accounting Handbook.
From there, we’ll move into the scope of the new standard, verify which types of employee benefits are included and how the standard organizes employee benefits into different categories.
We’ll then turn to short-term employee benefits that are expected to be settled within 12 months, including things like paid absences and bonuses.
After that, we’ll spend a significant portion of the webinar on post-employment benefits. This is one of the most technically complex areas of the standard, and we’ll spend a majority of our time going through these types of arrangements in more detail.
We’ll also touch on other topics covered by section PS 3251, including other long-term employee benefits and termination benefits.
Toward the end of the session, we’ll discuss transitional provisions and the effective date.
Finally, we will leave time for questions and answers. We need you to submit your questions, and I see a few of you have, throughout the webinar, using the Q&A function. As many as we can during the dedicated Q&A portion at the end.
Before we move into the content, I want to briefly situate section PS 3251 within the broader project strategy that PSAB followed. Employee Benefits Standard was developed as part of a multi-phase project. PSAB took this approach deliberately because employee benefits in the public sector are complex and varied, and a phased strategy let the Board deliver modernized foundational guidance—in the first phase, to replace the two Employee Benefit Standards in the PSA Handbook: Section PS 3250, Retirement Benefits, and section PS 3255, Post-Employment Benefits, Compensated Absences, and Termination Benefits that were issued more than 20 years ago—while at the same time deferring detailed [inaudible at 5:57] considering specific to non-traditional pension plan issues to a later date.
In developing section PS 3251, PSAB began with the key principles of IPSAS 39, Employee Benefits, with modifications made to either align with the PSA Handbook Conceptual Framework and Reporting Model or in the Canadian public interest.
Two areas are worth highlighting for Phase 1 that were key areas of Board discussions:
First, discount rate guidance. The new standard introduces prescriptive guidance for determining discount rates for defined benefit plans, including an annual assessment of funding status. This is a significant change from the previous sections, which lacked such guidance.
Second, the removal of deferral provisions. Under previous standards, actuarial gains and losses could be deferred and amortized over the expected average remaining service life of planned members. Section PS 3251 eliminates that approach, with these remeasurements being reflected immediately in the statement of financial position in net assets, and do not flow through the statement of operations, resulting in a more faithful presentation of the plan’s economic position at the reporting date.
Now that the first phase of the project is complete, the Board will move on to the next phase of the project, considering non-traditional pension plan issues.
These are arrangements that don’t fit neatly into traditional defined contribution or [inaudible at 7:31] benefit classifications and often involve risk-sharing features.
While Phase 2 isn’t the focus of today’s session, it’s worth noting that the guidance in section PS 3251 is already relevant to plans with risk-sharing provisions.
Finally, PSAB has also signaled the possibility of future phases involving incremental guidance where needed reflects the reality that employee benefits continue to evolve and that the Handbook may need to respond to issues over time.
With that foundation in place, let’s look at what the standard actually covers.
Section PS 3251 applies to all— Yes, I missed a slide. I thought so.
Just want to cover off the high level first in that section 3251 establishes a single cohesive set of principles for accounting for all employee benefits in the public sector, covering off recognition, measurement, presentation, and disclosure.
One of the key objectives of the project is to bring together guidance that had previously been spread across multiple sections of the Handbook, so preparers have one place to look regardless of the type of benefit.
And as I previously mentioned, the new standard replaces the two previous PSA Handbook sections. If you’re currently applying either of these two sections, 3250 or 3255, the new standard will apply to you.
Now, let’s move on to scope.
Let’s cover off what the standard actually covers. And again, it applies all benefits provided in exchange for employee service. If a benefit arises because an individual is an employee and is provided in return for services rendered, it falls [inaudible at 9:26] of the section
The form of the benefit doesn’t matter. And as a result, there may be instances where a benefit would be either a financial liability or a non-financial liability, depending on the substance of the benefit provided.
The standard then organizes employee benefits into four main categories, which we’ll work through over the course of the presentation: short-term employee benefits, post-employment benefits, other long-term employee benefits, and termination benefits.
It’s equally important to understand what’s excluded from the scope, which is social benefits, which are not employee benefits for the purposes of this section.
The dividing line here is that exchange test that I just talked about, really. The social benefit programs are provided to the public at large or to broad groups based on social policy objectives rather than in exchange for employee service. So, a government providing income report to residents, for example, would be outside the scope of this section.
Let’s start with this first category—Short-Term Employee Benefits. These are benefits expected to be settled within 12 months after the end of the period in which employees render the related service. So, think salaries, wages, paid vacation, and annual bonuses. Note that the test is when the benefit is expected to be settled, not what the benefit is called. Under provision of the previous two sections, 3250 and 3255, short-term benefits weren’t actually addressed directly. So, and now 3251 does provide descriptive guidance. On recognition, the principle is straightforward. Short benefits are recognized when the employee services are rendered. As employees earn the benefit through their service, the entity recognizes the expense and any associated liability. On measurement, these benefits are measured at the undiscounted amount expected to be paid. Because settlement happens in the near term, the standard doesn’t require discounting or actuarial techniques for these benefits. For paid absences, recognition depends on whether the benefit accumulates. For accumulating absences like vacation that carries forward, they’re accrued as employees earn them, because the entitlement builds with service. For non-accumulating instances, like forms of sick leave, but not all, that lapse if they’re unused, they are recognized only when the absence occurs. Bonuses and similar arrangements are recognized only when two conditions are both met. And that’s that the entity has a legal or constructive obligation to make the payment and a faithfully representative estimate of the amount can be. The constructive obligation piece is worth emphasizing here in that because a documented past practice of paying onuses may, depending on the facts and circumstances, obligation even without a contractual requirement. However, I will note here that past practice does not automatically result in a constructive obligation. The analysis of whether these exist is performed with reference to section PS 3200, Liabilities, and requires professional judgment.
Now let’s move into Post-Employment Benefits. Think pensions, retiree health [inaudible at 13:04] and post-retirement life insurance. This is the heart of the standard, and where many of the most significant changes from the previous standards appear. So we will spend the next portion of the presentation here.
The starting point under section PS 3251 is classification because recognition and measurement depend fundamentally on how risk is allocated between the entity and its employees. Before any accounting happens, every post-employment benefit plan must be classified as either a defined contribution plan or a defined benefit plan, and everything downstream follows from that answer. Defined contribution plans are arrangements where the entity’s obligation is limited to making fixed contributions to a separate entity or fund. Once those contributions are paid, the entity has no other legal or constructive obligation. The entities then—in that case, the employees—bear the actuarial and investment risk. What they ultimately receive depends on the contributions made and how the investments perform. To find benefit plans are everything else. So the classification question is quite narrow. Is the entity’s obligation truly limited to fixed contributions with nothing further? Or not. If there’s any circumstance in which the entity could be required to fund a shortfall or top up benefits, the plan may fall within the defined benefit category where the entity bears actuarial and investment risk.
Some of the things you may want to consider as you’re contemplating classification:
First, classification is based on the substance of the arrangement or the label that’s attached to it. A plan can be marketed as a contribution-based plan but still fall into defined benefit category. Entity retains risk—for example, through a guaranteed return, a minimum benefit, or permission to fund a shortfall. And that brings us to the next slide, where we’ll look at some multi-entity plan types that may still need to be assessed through the defined contribution and defined benefit lens.
Section PS 3251 includes guidance on four common structures of where more than one public sector entity may be participating. The same defined contribution and defined benefit principles apply throughout, and the standard provides guidance on how to apply those principles to each type of plan.
Multi-employer plans involve two or more entities that are not under common control participating in a single plan, typically with pooled assets and shared administration. The accounting is driven by the substance of the arrangement. A multi-employer pension plan is classified as defined contribution or defined benefit, based on its terms substance, like any other plan. When a multi-employer plan is defined benefit in substance, the key question is whether the entity has sufficient information to identify its share of the underlying obligation and planned assets. If it does, the entity applies defined benefit accounting for its proportionate share of the overall plan. If sufficient information is not available, it accounts for its participation as if the plan were a defined contribution plan, expenses, its contributions, and as the service is rendered, and discloses the nature of the arrangement. The fact that it is a defined benefit plan accounted for on a defined contribution basis, and it accompanies that with the rationale for concluding that insufficient information exists to apply to find benefit accounting as part of the disclosures. Now, that assessment requires professional judgment and, again, depends on the unique facts and circumstances of the plan. This is a change from the previous standards, which assumed that insufficient information existed for participating entities in a defined benefit multi-employer plan to apply the benefit accounting. And as a result, all participants used defined contribution accounting [inaudible at 17:24].
The next category is Defined Benefit Plans that share risk between entities under common control, where a public sector entity and its controlled entities may be covered by one plan. These are not multi-employer plans. And the accounting here depends on whether an allocation mechanism for the plan’s obligations exist. Each participating entity obtains information about the plan as a whole and where there is a contractual agreement or stated policy for charging the net cost to individual entities, each entity would recognize the cost allocated in its own financial statements. Where no such agreement or policy exists, the full net defined benefit cost is recognized by the controlling public sector entity, and all the other participating controlled entities recognize a cost equal to their contributions payable for the period with disclosure of the nature of the arrangement. Joint defined benefit plans are those that have joint control and joint governance and jointly share the risks and rewards under the terms of the arrangement between public sector entities that participate and plan participants. Each participating entity recognizes its share of the defined benefit obligation in the same way as any other defined benefit plan, along with its share of plan assets in accordance with defined benefit requirements.
Now, a natural question here is: What’s the difference between a multi-employer plan and a joint defined benefit plan?
Both may involve multiple participating entities. The key distinction is participating versus joint governance. In a multi-employer plan, entities participate alongside unrelated employers. The practical issue is whether usually each can obtain sufficient information about its share. In a joint defined benefit plan, the participating entities jointly govern the plan and jointly participate, and their respective shares flow from the risk-sharing arrangement itself rather than from an informational test. Governance and risk sharing are the dividing lines, and because of that, a joint defined benefit plan is assumed to [inaudible at 19:45] information to account for its participation of each entity and therefore applies defined benefit accounting. There’s no sufficient information test for a joint defined plan.
The final category here is that I’ll go through is Insured Arrangements, meaning the use of insurance policies to fund or settle defined benefit obligations. The presence of insurance doesn’t automatically result in defined contribution accounting. The question is whether the contract fully transfers the actuarial and investment risk to the insurer. Where the risk is fully transferred, the arrangement may be accounted for as a defined contribution plan. Where the entity still retains some exposure, it remains a defined benefit plan with the insurance policy being treated as a qualifying plan asset if it meets the criteria in the standard. So classification for each of these types of plans depends on [inaudible at 20:42]. Once you understand the entity’s obligation and risk exposure, you can determine whether defined contribution or defined benefit accounting applies. I will note that there is an illustrative flowchart, illustrative example in the appendix to the standard that also helps guide you through the classification between these.
Now, with that in mind, let’s turn to defined contribution plans. I’ll just take a moment to take a drink.
Now, as we established earlier, these arrangements are those in which the entity’s obligation is limited to make specified contributions. Once those contributions are made, there’s no further obligation. The accounting here mirrors the economic reality because the entity doesn’t retain actuarial or investment risk. From a recognition and measurement perspective, contributions payable in exchange for employee service are recognized as an expense in the period in which the services are rendered. If contributions are unpaid at the end of the period, the entity recognizes a liability for the outstanding amount. Conversely, if contributions have been prepaid, the entity recognizes the asset to the extent that the prepayment will lead to a refund or a reduction of future payments. And that’s the model. Expense gets matched up service with a payable or prepaid to balance the truth or true things up the long-term obligation beyond the amount currently payable. Now, because the entity doesn’t retain actuarial or investment risk, no actuarial valuation is required, and there’s no defined benefit obligation or plan assets to measure. Measurement is simply based on the contributions required under the terms of the plan for services in the period. One nuance to be aware of is that if contributions relating to current service are not expected to be settled within 12 months, which is less common but certainly can happen, those amounts are discounted to reflect the time value of money. In a typical plan with regular remittances, this discounting wouldn’t necessarily occur. The standard pairs this simple measurement model with specific disclosure requirements designed to give you a clear understanding of the nature and size of these arrangements. Entities disclose three things: the nature of the plan, defense is recognized for the period, and any significant changes to the plan during the period.
Now, before leaving the slide, I want to connect back to our earlier discussion of the different types of employee benefits. Everything on the slide depends on the conclusion that there’s no further obligation. So again, if there’s a guarantee, a top-up, or a funding commitment, then that may lead to defined benefit accounting, which is where we’re going to go next.
Defined benefit plans are when a public sector entity retains the actuarial and investment risk. And section PS 3251 reflects that risk by requiring the entity to recognize a net defined benefit liability or in some cases [inaudible at 23:57] on the statement of financial position. The accounting follows the sequence that you see on this slide, and I would encourage you to think about it as answering four questions in order:
First, what’s the plan’s overall funding position? The entity determines the cumulative plan surplus or deficit, the difference between the defined benefit obligation measured using actuarial techniques, and the fair value of plan assets.
Second, what belongs on the statement of financial position? But the cumulative plan surplus or deficit is then used to determine the net defined benefit liability or asset to be recognized.
Third, what flows through annual surplus? These are the components that reflect the cost of the benefit promise for the period, so current service cost, past service cost, and net interest on the net defined benefit liability [inaudible at 24:54].
And fourth, what happened wasn’t predicted. These are the remeasurements, changes in actuarial experience gains and losses, and differences between actual returns on plan assets and [inaudible 25:08] at reflected in net interest.
Let’s take a closer look at that first step in the sequence, measuring the defined benefit obligation itself. Section PS 3251 requires the obligation to be measured using the projected unit credit method. Each period of employee service earns an additional unit of future benefit, and the obligation at any reporting date is the present value of all units earned to date. So even though we only count service rendered to date, we measure those benefits using projected final amounts. For example, with a salary-based plan, the objective reflects expected future salary increases, not current salaries, because that’s what the benefit promise will actually be settled at. The cost of the benefit is also attributed across an employee’s service period. The default is to follow the plan’s benefit formula in many cases. So if a plan grants 2%, a final average earnings, then each year of service attributes that piece of the promise to it. What this means is for backloaded plans where the benefits earned in later years are materially higher than in earlier years, the standard requires attribution on a straight-line basis over the service period instead. So the obligation builds up systematically rather than being deferred to the end of a career. Attribution also determines when the buildup starts and stops. It runs from when the service first generates benefits under the plan until further service no longer increases the entitlement. This attribution requires estimates in the form of actuarial assumptions. And estimates can materially affect the amount of the obligation.
Let’s talk about those assumptions.
Measuring a benefit promise that may [inaudible at 27:07] over the next 50 or 60 years [inaudible at 27:09] best estimates about the future. And section PS 3251 organizes these estimates into two groups: demographic and financial assumptions.
Demographic assumptions are about people. What plan members actually do, and for how long. The big three are on the slide: Mortality, which drives how long pensions will be paid. Employee turnover, which drives how many employees will stay long enough to earn the full benefit. And retirement age, which drives when payments begin.
Depending on the plan, this group could also include assumptions like rates of disability, the proportion of members with eligible spouses, and for some types of benefit arrangements, expected claim rates and utilization. Financial assumptions are those relating to economic conditions that determine the size of payments and their value at the financial [inaudible at 28:06]. Key assumptions would include salary escalation and discount rate. These assumptions are based on market expectations at period end, not a projection of future changes that an entity might expect. The standard requires all actuarial assumptions to be unbiased and therefore neither imprudent nor excessively conservative and in order to provide faithfully representative estimations of the obligation. This standard also requires assumptions to be internally consistent with each other. So if your inflation assumption says one thing, your salary growth and discount rate assumptions can’t assume a different context.
Let’s talk about perhaps the most significant assumption in the model: the discount rate.
Before we walk through the framework that’s on this slide, it’s worth remembering why this particular assumption gets such attention.
The discount rate translates decades of future [inaudible at 29:08] payments into their present value at the financial reporting date. And because these obligations are so long in duration, small [inaudible at 29:17] in the rate produce large movements in the measured obligation. Under the previous standards, there was no prescribed framework for determining discount rate. And as such, there was considerable diversity in practice. Section PS 3251 introduces a structured framework for determining the appropriate discount rate for a plan. And the starting point for that is something new, an annual assessment of the plan’s funding status. Every year, for a defined benefit plan, the entity must conclude whether the plan is fully funded or underfunded, and that conclusion determines the basis for discounting the defined benefit obligation.
The assessment follows the three [inaudible at 30:02] on the slide. Entities begin with primary indicators, the existence of legal, regulatory, or contractual requirements to fund the plan and the results of the most recently prepared actuarial valuation for funding purposes. These primary indicators generally provide the clearest evidence of whether planned assets are sufficient to support benefit payments as they come due. Where the primary [inaudible at 30:29] provide a clear answer, secondary indicators are considered based on the entity’s specific facts and circumstances.
Progressional judgment runs through the whole assessment here. It’s a holistic assessment, and entities do need to disclose the basis for their assessment conclusion. I will note here that there is no bright line test within here. It’s not an intentional choice in order to provide principles-based guidance that can be applied broadly across the [inaudible at 31:02]. So there’s not one particular rate you’re looking at, for example, in a funding valuation. It’s intended to be a holistic assessment because there is so much diversity.
And what does all of this mean?
Well, if the plan is fully funded, meaning plan assets are sufficient to support the promised benefit payments without relying on future contributions beyond those already required, the obligation gets discounted at the expected market-based return on plan assets.
The logic is intuitive. When a pool of assets is expected to fully settle the benefits, the economics of the obligation are tied to what those assets are expected to return. If the plan is underfunded, the entity is exposed to funding shortfalls, and the benefit payments will rely on remediating that funding deficiency. In that case, the discount rate is based on an appropriate financial instrument rate, which is, in most cases, the yield [inaudible at 32:02] reflecting the timing and amount of the expected benefit payment stream.
Because this assessment is performed annually, a plan’s funding status may change over time. However, the intent is not for plans to move between fully funded and underfunded status based on temporary fluctuations. Rather, the assessment should reflect a longer-term view of the plan’s funding position, supported by the primary and secondary indicators. Where those indicators no longer provide sufficient evidence to support a fully funded assessment, or conversely, where an underfunded plan now has sufficient evidence to support a fully funded assessment, the change in funding status may change the discount rate. This can result in significant remeasurements of the net defined benefit liability, so particular attention and care should be [inaudible at 32:57] to the funding status assessment.
Given the significance of this guidance, actuarial experts should be engaged early where appropriate to ensure that the implications of the assessment and the resulting discount rate are understood well in advance of the standard’s effective date.
Plan assets are the other half of the plan’s cumulative surplus deficit. They’re measured at fair value at the reporting date, with no smoothing or averaging permitted. To qualify as planned assets, the assets must be held to settle employee benefit obligations and be legally or constructively restricted for that purpose. In other words, they have to be beyond the reach of the entity’s creditors and generally unavailable to the entity, except in limited circumstances. Qualifying insurance policies are treated the same way when the proceeds can only be used to pay or fund employee benefits. The key exclusions here are unpaid contributions and non-transferable financial instruments issued by the entity, which are sufficiently independent of the entity and can offset the option.
Now that we’ve measured the [inaudible at 34:11] and the planned assets, this slide answers the next question from our roadmap.
When the numbers move— When do the numbers move, and where do the numbers go?
Section PS 3251 separates the total cost of the divine benefit plan into distinct components based on their nature. That separation determines where each lands in the financial statements. Costs that reflect the entity’s benefit decisions and the financing of the promised flow through annual surplus and deficit. While unexpected changes driven by the markets and assumptions flow through the statement of financial position.
So let’s start with the surplus or deficit components. The first is service cost, which has three pieces. The first is current service cost, which is the increase in the obligation from the benefits employees earned this period. Next is past cost, which arises from events, not the [inaudible at 35:11], and would result from a [inaudible at 35:14] that changes the benefits that get attributed prior to services. Past cost is recognized when it occurs. And finally, gains or loss on settlement are recognized when the entity eliminates its obligation, for example, by purchasing an annuity that fully discharges the promise.
The second surplus or deficit component is net interest on the net defined benefit liability or asset. This is an important change from the previous standards where interest cost on the obligation and expected return on plant assets were calculated separately. Under section PS 3251, those amounts are combined into one net interest figure. The same discount rate used to measure the defined benefit obligation is applied to the net liability or asset, rather than separately. Apart from the components of defined benefit cost recognized in surplus or deficit, there are remeasurements, which are recognized in the statement of financial position in net assets as a component of accumulated re-measurement gains and losses. Re-measurements capture the changes driven by updated assumptions and add experience and actual asset returns.
Let’s spend some time talking about remeasurements of the net defined benefit liability. So what employees earned belongs in operating results, but what the world did and how that differs from your assumptions are unexpected changes that don’t show up in the statement of operations.
Group measurements come from three sources. First, actuarial gains and losses, which arise three ways: experience [inaudible at 36:56] where reality differed from what was assumed; second, from the return on planned assets excluding amounts that are already reflected in the net interest on the net defined benefit liability, and— Remember that uses a single discount from the funding status assessment. And then we [inaudible at 37:20] the capture the difference between that and what the actual assets returned. So if your plan assets returned at 8% in a year, and the expected market-based return on planned assets was 5%, that excess lands in the accumulated for measurement gains and losses on the statement of financial position, not on the statement of operations.
Third are changes due to the asset ceiling, where a plan is in surplus and there are limitations that affect how much of that surplus can actually be recognized as an asset. The impact of changes in that asset ceiling flow through remeasurement gains and losses. All of our measurements go directly to net assets as a component of accumulated remeasurement gains and losses, and they’re never recognized through in the statement of operations, either immediately or through deferral and amortization. This is a significant [inaudible at 38:17] from the old deferral and amortization model in sections PS 3250 and PS 3255. A note here for presentation that these accumulated remeasurements gains and losses related to employee benefits are separate from other accumulated remeasurements gains and losses, such as through financial instruments that may settled statement of operations.
Now, this change results in a more faithful representation of the plan’s economic position at the reporting date by reflecting the effects of updated assumptions, experience, and market conditions as they occur, rather than bring them over periods.
At the same time, they’re presented outside of annual surplus or deficit in net assets because they don’t represent the cost of benefit earned in the period, but rather remeasurements previously recognized balances.
So now there is a settlement piece that I will note. It’s nuanced in that the settlement is the one situation that permits limited reclassification of accumulated remeasurements gains and losses only within net assets on a net basis, and never through the statement of operations. So when there’s a settlement, it’s permitted to reclassify to accumulated surplus and deficit, for example. But the reclassification never flows through the statement of operations. It’s done on a net basis.
I’ll just reiterate that accounting for remeasurements is a significant change from the prior standards, and one that it’s really important to be aware of as you approach implementing this new standard.
I’m going to spend a moment on past service costs and settlement accounting. This is separate from the earlier discussion about accumulative remeasurements, gains and losses.
Past service cost arises when a plan amendment changes benefits for service employees that have already— services that employees have already rendered. Under PS 3251, past service cost is recognized immediately as an expense. There’s no deferral or amortization. The key judgment here is timing. Recognition occurs at the earlier of when the amendment occurs and when the entity recognizes any related termination benefits.
Settlements are transactions that eliminate all or part of the obligation other than through normal benefit payments—for example, purchasing annuities. Any settlement gain or loss is recognized when the settlement occurs. And again, just to avoid confusion, the settlement [inaudible at 40:56] is not [inaudible at 40:58] as the reclassification, accumulative or measurements, gains and losses we discussed on the previous slide. That’s a separate presentation matter in the statement of financial position.
Let’s turn briefly to disclosure. I’m not going to walk through the requirements here in detail, but the objective is similar to the previous standards to help users understand the nature of funds, their financial effects, and the related risks. That said, Section PS 3251 is more explicit about what needs to be disclosed.
The main areas include plan characteristics and risks, reconciliations of the obligation and planned assets, information about future cash flows and key assumptions, and significant plan-specific events such as amendments or settlements. While the substance may feel similar to the previous sections, entities shouldn’t assume that disclosure will be business as usual. The standard may require more detailed information coordination with actuarial experts and systems or processes to capture the necessary data. It’s worth assessing this early so that your disclosure ready when the standard becomes effective.
At this point, we’ve covered short-term employee benefits, defined contribution plans, and defined benefit plans.
Before we wrap up, I’ll briefly touch on two other categories: other long-term employee benefits and termination benefits.
Other long-term employee benefits are benefits not expected to be settled wholly within 12 months and that are not post-employment benefits. So, for example, long-service awards, long-term disability benefits, or accumulating sick leave. These are often measured using actuarial techniques where appropriate, with remeasurements being recognized directly in annual surplus or deficit rather than in the [inaudible at 42:57] as would be required for defined benefit plans.
Termination benefits are different because they arise from [inaudible at 43:05] rather than from service rendered. Recognition is triggered when the entity can no longer draw the offer.
Now, we’re actually coming up on the end of the presentation. So I’ll close out with an overview of the effective date and the transition provisions.
The standard is effective for fiscal years beginning on or after April 1, 2029, and early adoption is permitted. Application of the standard is retroactive. And that means that your work for transition will need to begin well before the 2029 effective date. While that effective date might sound distant, the date for the comparative information you’re going to need to determine is fast approaching. The standard does include limited transitional expedients to ease [inaudible at 43:56] where full retroactive application would be the most challenging. And I’m not going to go into detail on all of them here, but I would encourage you to look at those, because they are important.
From here, I just actually would like to close things out by saying: Thank you for joining us today. And we’re going to take the time to move into some questions and answers. There is a QR code on the slide, which will take you to the post-webinar quiz for your CPD certificate. And that should also have been posted to the chat while I’m talking.
That brings us to the Q&A portion of the session.
Thank you for the questions that have been submitted so far. I’ll work through as many as I can as time permits. If I’m unable to address all your questions today, I would encourage you to reach out using the [inaudible at 44:46] information that’s in the slide deck at the end of the [inaudible at 44:51] or also available on the webinar or project page.
On behalf of PSAB, thank you for joining today and for your continued engagement with Public Sector Accounting Standards. We appreciate your participation and your thoughtful questions.
At this point, I’m going to close, stop sharing my screen, and I will take a look at some of these questions.
All right. Sorry, just give me one moment to bring these up, and then we will take a look through. There we go. There we go. All right. So I’m having issues with this. There we go. All right.
When is a termination payment [inaudible at 45:52] over an 18-month period recognized? And I believe that we did cover that off. So it’s recognized when the entity can no longer withdraw the— It’s not cash-based. It’s not necessarily one that the payment the paid associated with the payment. It’s recognized what offer can no longer be withdrawn. So that would be, I believe, there’s also an illustrative example that helps with that in the standard. So hopefully that helps you out there.
Okay, the next question is: For large jointly sponsored defined benefit plans with hundreds of participating employers, has PSAB considered the administrative practicality of defined benefit accounting at the employer level? It may not be feasible for the plan administrator to determine and provide employer-specific allocations of pension obligations and assets to each participating employer. In [inaudible at 46:56], does PS 3251 [inaudible at 46:59] participating employers to apply to find benefit accounting, or is an alternative approach intended?
So it’s an interesting question because multi-lawyer plans and joint defined benefit plans are already classifications that exist within the previous standards, section PS 3250. So they’re not new. The only difference is that the difference introduced in section PS 3251 is that for multi-employer plans, there’s no longer this default defined contribution accounting. So there is that sufficient information assessment that needs to take place. So if a plan is a joint defined benefit plan and substance under the previous section, it would still be a joint defined benefit plan under the current standard. So this question isn’t new. It’s something that already exists in 3250. In terms of if it is a multi-employer plan and gets classified as that, then there is that sufficient information consideration that has to occur there. So I will note that these types of plans are something that might get more consideration as the Board moves into the second phase of the project. So something that I would say, looking at joint defined benefit plans and these other types of multi-employer plans, is something that might be within the scope of a future phase. So keep your eyes peeled on the project page as the Board looks towards project proposal relating to these types of plans and non-traditional plans more broadly.
We do have a question here in French. I’m not sure whether, Deven, you’re able— Ha! Thank you. Look at that, Deven!
How does PSAB expect entities to determine the discount rate for underfunded plans? Would it be reasonable to use the accounting discount rate curve based on high-quality corporate bonds published monthly by the Canadian Institute of Actuaries through Fiera Capital, or does PSAB expect entities to use a rate curve based solely, based exclusively on government bonds?
Yes, so that’s an interesting question. And that is one where there’s no explicit requirement to use a particular type of government bond. So it’s really based on the facts and circumstances of the plan in terms of determining what kind of curve for government bonds would be applicable whether that includes government bonds and a mix of corporate bonds as well, and whether there’s an extrapolation that takes place as well, because a lot of these high-quality bonds don’t have necessarily— there’s not enough depth to have the full length of time because the time value of money requires that financial instrument that gets used to match up with the timing and amount of payments being made. So as the time goes on, there’s more of this extrapolation and using of yield curve. So I could definitely see that being used, that yield curve as an option, but it’s really between the public sector entities and discussing with their actuarial experts and their auditors and determining what kind of curb or what kind of yield or basket of bonds would be appropriate for these underfunded plans. So really the key principle to go back to is that it’s the discount rate should be based on the appropriate financial instruments determined by the entity that matches the amount and timing of payments to be made. Great question!
What is the status update on timeline on phase two? Another good question. So that’s something that the Board is moving into now. So I would say look forward to the one of the upcoming meetings for information on project proposal of what phase two might look like. So that is coming up. It’s something that the Board is looking at right now. So more information to come.
Okay. Is the early measurement of planned assets and defined benefit obligations under 39 still permitted under PS 3251?
So early measurement— the particular— so it gets reduced back to 32. It’s a really interesting question because 3250 had a pretty explicit principle around using the same early period year over year and that being permitted. So there’s no— That really has been scaled back to key principles and what the requirement under the standard public sector entity should determine the net defined benefit, liability or asset with sufficient regularity that the amounts recognized in financial statements do not differ materially from the amounts that would be determined at the end of the reporting period. So what this does is it does permit early measurement, and it gets— it comes back to a question of materiality and significance. So that early measurement is permitted. Certainly, and that also applies to the funding status assessment, by the way. It’s not just in terms of measurement of the liability; it’s also in relation to performing the funding status assessment, but as long as the amount that gets calculated early would not differ materially from the amount that would be determined at the end of the reporting period. So if it’s done earlier, the model evaluation would need to be updated for material transactions, changes in circumstances and actuarial assumptions up to the end of the reporting period. So, I don’t know whether that fully answers your question, but certain early measurement is still permitted. Just going back to principles and principles-based requirements, as opposed to more explicit requirements under 3250. Really a modernization thing.
All right. For the transitional provisions, will there be a need to unwind all past actuarial gains and losses to move from the surplus and deficit to remeasurements?
So this is a techie question. Unfortunately, I’m not— might need to have another session that goes into some more detailed case studies on this, because there is a transitional expedient that allows not having to calculate the split that would take place between surplus and deficit and accumulative remeasurements. So there is an expedient that takes place that would allow calculating the total amount that needs to be reclassified, but not having to calculate the split, which would be quite onerous and cumbersome. So, definitely, that’s why I definitely look at the transitional expedients and open to do a detailed session on some of this, because that’s a great question and gets to the some of the nuances of the standard.
Okay. Is controller access to assets held for future payment in pension benefits a consideration in recognizing assets of a joint defined benefit plan?
This is one— It’s really dependent on the facts and circumstances. So I really— That’s one that I can’t necessarily fully answer, because it is dependent on the facts and circumstances of the plan. So really, it’s a requirement to look at the key elements of the standard in order and interpret them using professional judgment and discussions between the auditor and the preparer. It is a consideration. Control is always a consideration. But what that looks like and how you interpret that within the [inaudible at 54:56] of a joint defined benefit plan is just beyond what I can do, give a broad answer to, because there is so much in these types of plans and how they’re [inaudible at 55:08].
What are some examples of non-financial benefit obligations?
So I think one that I would go to is where [inaudible at 55:20] dental. So that’s an example that could be a non-financial. Certainly a lot rarer than financial liability, but those would be where you’re providing a service instead of settling on a cash basis. So those post-retirement benefits would potentially be a non-financial obligation. It’s another great question.
These are awesome questions. We’re running short on time. I’m going to do my best.
What are participating entities, and how do they differ from sponsoring entities?
So, sponsoring entities is an actuarial. It’s a legal term used in fund accounting and was a term in the previous standard. So, moving away from that terminology towards whether an entity is [inaudible at 56:07] plan as opposed to a sponsoring entity, which is less relevant within the going towards the accounting terms. It’s just really generalizing to looking at the entities that participate in the plan rather than defining which entity is a sponsor to that, which can be a different piece that is relevant more towards Part 4 of the Accounting Handbook than it is when looking at the entities and their accounting for their participation in these plans.
Can I give some examples of insufficient information?
So yes, I can. They’re actually in the standard. So there’s a few insufficient information: insufficient access to information, for example, from the administrator to be able to prepare an allocation and break it out; situations where the way that the plan participants interact with each other and the plan members, the employees have so much movement between them and that there’s no really creative systemic basis to split them out. There are a number of different examples. Let’s see whether I can— Yes. So those are some that are in there. The two that are included in the standard. It’s paragraph 37. So really the two are the participating entities are exposed to the actuarial risks of current and former employees of other entities. So then there’s no consistent basis for splitting it out, as I said, and then the other one being sufficiency to access the information. If that’s not available, then this kind of accounting can’t be performed.
All right. What is the treatment of the changes that are linked to funding status or asset rents? Are they prepaid service costs?
No. So are you talking about plan amendments? I’m not sure whether this is talking about plan amendments or talking about change in the funding status. Oh, I think… oh, I understand. Plus, this is so— this is an interesting question and really, I think, one that will get more review as the Board looks into phase two, because you’re really looking at conditional benefits. And so when you have conditional benefits, there’s some guidance within the standard that talks about elements like type performance targets and contribution limits that may be related to that. When that occurs, those get reflected in— the best estimate gets reflected in the measurement of the obligation, and those would end up being remeasurements. So, that’s different from a plan amendment here, because a lot of these elements are already part of the plan, not something that’s new that’s being introduced. If they’re new, that’s a plan amendment. Those would end up in past service costs, but they’re just using the levers that are within it, you’re looking more towards remeasurements, but certainly something that more leans into phase two of the project, because there’s a lot of nuance in the actuarial calculations for that.
I do have time for one more question here. Okay, so: Can a plan be both JDBP and the multi-employer plan in terms of the accounting classification?
No. The decision needs to be made as to whether the plan for the accounting purposes within the standard. But in terms of legal construct and what it’s being called, you can call a plan a joint defined benefit plan or a multi-employer plan. It gets back to the substance. So the plan needs to be within the context of the standard. A determination needs to be made whether it is a multi-employer plan or a JDBP for the purposes of section PS 3251. And I would definitely encourage going to the decision tree that’s in the appendix to the standard to help with making that determination.
Well, we’re at our time now. So I’m going to pause off there. Thank you very much. If you do have questions, please feel free to reach out by email. I’m happy to go through them. I hope you all enjoyed the session and found it useful. With that, everyone, have a great day, have a fantastic Canada Day, and we’ll see you soon! Bye for now.