Accounting For Post-employment and Retirement Liabilities:

With the release in 2000 of the Canadian Institute of Chartered Accounts new Handbook, Section 3461, Canadian employers are currently being faced with new accounting rules with respect to the manner in which they account for post-employment and post-retirement benefit costs, including:

• Pensions
• Health & Dental Benefits
• Life Insurance
• Disability Income Benefits
• Severance Benefits
• Compensated Absences
• Termination Benefits

The goal of the new standards is to bring Canadian accounting practices in line with the U.S. Generally Accepted Accounting Practices (GAAP). The new standards will be applicable to fiscal years commencing on or after January 1st, 2000. While Canadian subsidiaries of U.S. companies, and Canadian companies with U.S. operations are already following these standards implemented in 1992 for U.S. employers, the impact of these new rules on Canadian employers will represent a significant unanticipated liability for most employers who have been reporting the cost of post-retirement or post-employment benefits on a cash basis each year.

The CICA standards require employers to implement accrual accounting for the expected obligation for benefits to be paid after employment has ceased. Plan sponsors must report the expense based on an actuarial calculation of projected benefit obligations for active and retired employees. This amount is expensed over the employee's working years, starting on date of hire and ending when the employee becomes eligible for benefits. This new approach considers these benefits as deferred compensation.

The accrued cost of future benefits will be entered on the employer's balance sheet each year as the Accrued Benefit Liability. Employers will have to review their current commitments and accounting practice to determine the changes required to meet the new rules, and the impact on their balance sheet. Both public and private sector employers will be faced with this requirement commencing this year.

As a result of this change, employers who are providing post-retirement group health and/or dental benefits on an employer paid, or shared cost basis, are now reviewing these benefits and related costs. The introduction of new, more costly drugs and inflationary cost increases which are driving up the cost of Extended Health Care plans for retirees are yet other reasons for employers to re-examine their plans and cost sharing. Those with collective agreements providing post-retirement will not be able to effect a unilateral change to the provision of these benefits.

For public sector employers who currently provide for the payment of unused "sick leave" upon termination and/or retirement it will force a re-examination of this costly practice that is not common in the private sector, and which no longer relates to the employees' need in view of the excellent superannuation plans now in place. Taxpayers, who in the main do not enjoy this gratuity payment on termination or retirement, will for the first time be able to clearly see the extent of these liabilities on the financial statements.

Employers should recognize the requirements by:

• preparing and maintaining an inventory of their post-retirement and post-employment plans to determine which are subject to the new rules;
• having their actuary estimate costs and determine the impact on the financial statements on an annual basis for public companies;
• preparing data for the annual valuation of non-pension benefit plans and the liabilities involved;
• considering the possibility of changing the post-retirement benefits, including plan design, future eligibility and/or cost sharing arrangements to the extent possible taking into account collective agreements as well as established practice which could be considered precedents in a court of law.

It is imperative that employers determine if they are CICA compliant, and if not, what alternative courses of action are possible.

Alternative Benefit Solutions Inc. offers the Menuflex™ Retiree Benefits Program as a potential solution to the provision of post-retirement health and dental benefits worthy of your consideration! It is a fully retiree paid program with no CICA implications. Please let us know if you require any additional information. We would be pleased to provide a supply of the brochures for distribution to eligible retirees or terminating employees to meet your needs.

Alternative Benefit Solutions Inc.
5045 Orbitor Drive, Unit 10
Suite 300
Mississauga, ON L4W 4Y4

Phone: (905) 629-1252
Toll-free: 1-866-636-8359
Fax: (905) 602-7983
E-mail: info@alternativebenefits.ca