Individual Pension Plans (IPPs)
Some entities account for the pension expense of defined benefit IPPs on a cash basis.
This approach is not ASPE-compliant since pension plans must be accounted for in accordance with Section 3462, Employee Future Benefits, of the CPA Canada Handbook – Accounting.
Determining whether an IPP meets the definition of a defined benefit or defined contribution plan under Section 3462 requires careful consideration, in order to choose the appropriate accounting treatment. However, before concluding that an IPP meets the definition of a defined contribution plan, it should be noted that virtually all IPPs are defined benefit plans, since defined contribution IPPs typically offer little or no tax benefits.
The terms of a plan may allow an entity to cancel future employee benefits. Paragraph 3462.028 states that “[i]n the absence of evidence to the contrary, accounting for the cost of employee benefits is based on the premise that an entity that is currently providing future benefits to employees under an existing plan will continue to do so over the remaining service lives of those employees, whether or not a legal obligation exists.” Thus, the fact that owner-managers can at any time unilaterally terminate a defined benefit IPP established for their benefit is not, in itself, sufficient justification for entities to avoid their obligation to recognize a liability in their financial statements, when the liability exists at the balance sheet date (i.e. until the owner decides otherwise, as the case may be). Before coming to any conclusion, it is very important to refer to the terms of the plan to see the sponsor’s actual obligations.
For all defined benefit plans, Section 3462 requires recognition of a defined benefit liability (asset) in the balance sheet at the end of the period. The asset (liability) recorded in the balance sheet at the end of the fiscal period is the difference between the defined benefit obligation and the fair value of plan assets at that date. However, be aware of the requirements respecting the limit on the carrying amount of an asset.
To measure a defined benefit obligation, entities may use either the most recently completed actuarial valuation prepared for funding purposes or a separate actuarial valuation prepared for accounting purposes. Paragraph 3462.030 explains the difference between the two types of valuation.
An actuarial valuation of the defined benefit obligation must be performed at least every three years but may occur more frequently. However, in the years between valuations, the entity must use a roll-forward technique to estimate the defined benefit obligation.
Paul Beauvais, CPA, CA
Partner, Demers Beaulne
Member of the Technical working group on ASPE – Financial Accounting – Part II
Updated : 2015.03.19