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, some  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. 029AB explains the difference between the two types of valuation. However, this choice exists only for plans in which an actuarial valuation for funding purposes is required to be prepared to comply with legal, regulatory or contractual requirements¹.   It is important to note that an actuarial valuation prepared using a solvency or liquidation basis does not in itself constitute a funding valuation. For all other defined benefit plans, only an actuarial valuation prepared for accounting purposes can  be used.

Remember  that 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 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.

1. Section 3462 was amended in November 2020 to remove the possibility of using a funding valuation for defined benefit plans without a funding valuation requirement. These amendments apply to annual financial statements for years beginning on or after January 1, 2022.

Updated by the Professionnal Practice team of the Ordre des CPA du Québec.

Initially written in March, 15, by:

Paul Beauvais, CPA, CA
Partner, Demers Beaulne
Member of the Technical working group on ASPE – Financial Accounting – Part II

Last update : 2021-06-28