Canadian public sector accounting standards: Second exposure draft on the new standard for employee benefits

In mid-October, the Public Sector Accounting Board (PSAB) published a re-exposure draft on section PS 3251, the new standard for employee benefits that would apply to Canadian public sector entities and would replace sections PS 3250 and PS 3255. Read our August 2021 bulletin for more information on the first exposure draft. In the re-exposure draft, PSAB proposes to amend certain provisions in response to feedback received in 2021, particularly relating to the discount rate.

This technical publication is of particular interest to people taking part in the preparation of financial statements for public sector organizations.

PSAB is proposing to postpone the effective date of this new section to fiscal years beginning on or after April 1, 2029 (as of January 1, 2030 for municipal sector organizations), but early adoption is encouraged.

The main proposed amendments serve to clarify and simplify certain principles set out in the first exposure draft and can be summarized as follows.

The technical complexity of determining the discount rate for partially funded plans and the relevance of requiring the use of the market rate of return on provincial bonds for unfunded plans have raised concerns. As a result, the concept of a partially funded plan has been withdrawn, and the instructions concerning the discount rate to apply for a plan that is not fully funded (underfunded) have been modified.

Under the second exposure draft, a plan will either be fully funded or underfunded and will use one of the following discount rates.

• Fully funded plans: Rate based on the expected market-based return of plan assets, as set out in the first exposure draft.
• Underfunded plans: Rate based on the market yield of government bonds, high-quality corporate bonds, or another appropriate financial instrument. To determine the discount rate, judgment will need to be exercised in selecting the type of bond or financial instrument that best reflects the time value of money for the plan.

The approach to determining whether a plan is fully funded or underfunded has been simplified due to concerns about the complexity of the initially proposed method. Rather than conducting an annual quantitative analysis, PSAB proposes that a plan’s funding status be based on the preponderance of evidence, while relying on professional judgment. The evidence consists of primary indicators and, where they prove insufficient to draw a conclusion, secondary indicators, namely:

• Primary indicators:
  • Existence of regulatory, legislative, or contractual provisions requiring that plan assets be sufficient to ensure the payment of benefits
  • Financial situation on a funding basis according to the plan’s most recently prepared actuarial valuation for funding purposes
• Secondary indicators:
  • Requirement to take corrective actions to address deficits (e.g. amortization payments over a given period of time)
  • Past actions taken by the organization that demonstrate a clear commitment to maintaining sufficient assets for the payment of plan benefits

According to our interpretation, registered plans whose deficits must be completely offset by amortization payments will systematically be considered fully funded plans.

Since the new approach relies heavily on professional judgment, PSAB is proposing to add a disclosure requirement for fully funded plans on the sensitivity of the obligation of these plans to indicate the impact that measurement on an underfunded basis would have.

PSAB has not amended the proposal to recognize remeasurement gains and losses in net assets, with no recognition on the statement of operations. They will need to be recognized separately from other remeasurement amounts in accumulated remeasurement gains and losses.

Lastly, instructions have been provided on reclassifying accumulated remeasurement gains and losses on settlement of a plan.

The second exposure draft and the initial July 2021 exposure draft make up the first phase of the new PSAB work plan announced in 2020.

The last phases will be published at a later date and will focus on risk-sharing plans and other types of non-traditional plans.

The amendments to the current standard are significant, and the effect of changes in the financial position of employee benefit plans on financial statements will require in-depth analysis, particularly for several public organizations whose taxation is directly linked to the expected charges.

For additional information or to comment on this exposure draft, consult the PSAB’s website. The deadline for providing your feedback is January 20, 2025. Normandin Beaudry’s experts will respond to this exposure draft and keep you informed of upcoming developments.

For any questions or if you need assistance in responding to this exposure draft, feel free to contact your Normandin Beaudry expert or email us.