Canada: Reform seen in reporting firms' pension obligations

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Canada: Reform seen in reporting firms' pension obligations

By PATRICK BRETHOUR, Globe and Mail

June 3, 2003

Calgary - The looming funding shortfall in pension plans is pushing the accounting profession to write tough new rules for how companies report their long-term obligations to retired employees, says the point man for accounting standards in Canada.

The tumult in stock markets over the past three years has depleted the surpluses of many plans, and left others in a deficit -- but that information is extremely difficult to ferret out of financial statements and footnotes, Paul Cherry, chairman of the Accounting Standards Board, said yesterday.

"People are saying, 'I can't understand the accounting,' because it only makes sense if you have the accounting standards in one hand and a calculator in the other."

One possibility is to require companies to have changes in the market value of a plan's assets fully and immediately reported in a firm's income statement -- a major departure from the current practice of reporting such gains or losses over several years.

Mr. Cherry stressed that no decisions have yet been made on how rules will be altered, but he said there should be no doubt that some changes are in the offing.

He said he personally favours a two-tracked approach that would see immediate changes to allow the financial community to accurately assess the extent of current pension obligations, combined with a lengthier debate over a major overhaul of accounting rules for the plans.

In the short term, that might mean a snap actuarial valuation to take into account the broad decline in stock markets over the past three years, Mr. Cherry said. A second interim step would be to have funding obligations, particularly cash that needs to be paid in the next fiscal year, spelled out in the footnotes of financial statements.

There may be a need for more fundamental changes, such as the immediate expensing of market gains or losses, Mr. Cherry added.

Another change might be to require companies to explicitly and obviously state when gains from pension surpluses reduced their expenses.

Mr. Cherry said he does not think that companies should be told to conduct more frequent actuarial assessments of their future payout obligations as a matter of course. But he said there is a growing feeling that the rules should be altered to allow for one-time reassessments after periods of major stock market volatility.

The ASB head said the process to review accounting rules for pension plans will likely be a lengthy one.

His European counterparts have only about six months to float proposals for new rules because of a 2005 deadline for Europe to meet certain international accounting standards.

A major overhaul is unlikely to happen within that tight time frame, he said, meaning it will probably take two to three years for various international accounting standards bodies to achieve a consensus.