Employee Future Benefits: A Guide to Understanding and Applying CICA 3461 (1999)

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A new accounting standard, effective for years beginning on or after January 1, 2000, deals with the recognition, measurement, presentation and disclosure of benefits payable to employees when they withdraw from active service.

This standard applies to:

• Pensions and other retirement benefits;
• Post-employment benefits such as severance and disability payments;
• Temporary absences from employment; and
• Termination benefits.

The following are the highlights of the Standard:

• Generally, an employer must accrue an expense and liability for the estimated cost of providing employee future benefits as employees earn entitlements to the benefits. While this method of accounting has been required for pensions for many years, it has not been required for other employee future benefits. Often, these benefits are expensed only when paid.
• The rules for accounting for pensions have been substantially revised. For many employers, the most significant change will be the requirement to discount pension obligations using a market rate of interest. Under existing GAAP, many employers have discounted pension obligations using the long-term expected rate of return on plan assets. This rate is not adjusted for temporary market fluctuations and, in the current interest rate environment, will be higher than a market rate of interest. Moving to the latter rate, therefore, will increase the value of accrued pension obligations. It will also increase the volatility of pension expense as the market rate changes from year to year.
• Special rules have been established governing the timing of recognition of the cost of employee downsizing. Under existing GAAP such costs are charged to expense when management commits the entity to reduce staff levels. Under the new rules, the timing of recognition depends on whether terminations are voluntary or involuntary, and whether the benefits are "one-time benefits" paid at the discretion of management or required by a pre-existing benefit plan. If terminations are voluntary, the expense is recognized only when employees accept the offer. If terminations are involuntary and the benefits are one-time in nature, the expense is recognized when employees are advised of the details of the arrangement. If the benefits are required by an existing plan, expense is charged when management commits the entity to reduce staff levels.
• Disclosure requirements are significantly enhanced.
• The rules may be implemented on a retroactive or prospective basis. Retroactive implementation means adjusting retained earnings as of the date the Standard is first applied for the difference between balances calculated under the old and the new rules. Prospective implementation means amortizing the adjustment against future years' earnings over a long period.

The rules are complex. This guide helps you understand and apply them.

To obtain a copy of the guide, please select the attached Adobe Acrobat file.