16.9 Appendix A: Accounting for Post-Employment Benefits Under ASPE

Prior to 2014, there were some significant differences between ASPE and IFRS with respect to pension plan accounting. The former ASPE standard allowed the use of a technique referred to as the deferral and amortization approach. This technique allowed the costs of past service amendments, and other actuarial gains and losses, to be deferred and recognized in expense over time. This approach was eliminated when Section 3462^[1] of the ASPE standards was issued. Section 3462 is effective for all year-ends commencing on January 1, 2014, or later, and it is this standard that we will examine in this appendix.

The approach to accounting for pensions under ASPE 3462 is similar to that of IAS 19, but there are some differences in definitions and procedures. For example, one of the key differences is that ASPE allows for two different methods of valuing the DBO. The company may choose to use the actuarial valuation that has been prepared for the purposes of determining the funding levels for the plan, or the company may choose to use a separately prepared actuarial valuation for accounting purposes. It is possible that certain actuarial assumptions, and other factors, may differ between these two valuations. If the company chooses to use a valuation prepared specifically for accounting purposes, then it must choose between two approaches used for valuation of the DBO. The company may choose to use either the accumulated benefit method or the projected benefit method. The accumulated benefit method essentially calculates the present value of future pension payments for vested and non-vested employees using their current salary levels. Whereas, the projected benefit method performs this calculation using future expected salaries. Generally, the projected benefit method will result in a larger DBO. Whichever method the company chooses, it must apply the policy consistently to all of its pension plans. A detailed discussion of the different types of actuarial valuations is beyond the scope of this text. They all represent variations of a present value calculation that will normally be provided by the actuary.

Another key difference between ASPE 3462 and IAS 19 is that any remeasurement gains or losses due to changes in actuarial assumptions, or differences between the actual return on plan assets and the calculated return based on the appropriate interest rate, are charged directly to the pension expense for the year, rather than being captured by other comprehensive income.

Let’s consider our previous example using the facts presented for Ballard Ltd. in 2021:

Note that the remeasurement gain due to changes in actuarial assumptions, and the remeasurement loss due to the deficiency in the actual return on plan assets, are both included in pension expense for the year, rather than in other comprehensive income. This treatment will result in the following journal entry in 2021:

The absence of other comprehensive income in the adjustment means that current net income will be more volatile for companies reporting under ASPE. However, under Section 3462, companies are required to disclose the effects of any re-measurements separately, so readers will be able to clearly see the effects of these items on net income.

Another difference between Section 3462 and IAS 19 is in the treatment of net defined benefit assets. While IAS 19 requires the amount be reported at the lesser of the surplus amount or the asset ceiling, Section 3462 instead requires the use of a valuation allowance. The valuation allowance essentially represents the amount of the surplus that will not be recoverable through future reductions in contributions or withdrawals. The net effect of this approach is essentially the same as IAS 19, but Section 3462 provides more detailed guidance on how to calculate the amounts recoverable from the plan in the future.

Section 3462 also provides a choice of interest to use for discounting purposes. The first option is the same as IAS 19 (i.e., the rate on high-quality debt instruments), but the second option allowed is the imputed interest that would be determined if the plan were to be settled. This option, however, should only be used in cases where the option of immediate settlement, such as through the purchase of an annuity contract from an insurance company, is actually available.

The treatment of defined contribution plans under Section 3462 is essentially the same as IAS 19, although Section 3462 provides a more detailed description on how to determine when future payments for current services are to be discounted. Additionally, Section 3462 discusses how to treat unallocated plan surpluses that could arise when a defined benefit plan is converted to a defined contribution plan. Interest on these surpluses would be deducted from the pension expense otherwise determined.

Section 3462 requires that an actuarial valuation of the plan be carried out at least every three years, and more frequently if there have been any significant changes in the plan. IAS 19 does not specify the frequency of actuarial valuations, but suggests that they be carried out with sufficient frequency as to ensure there are no material errors in the reported balance.