Canada's public sector financial reporting: a look at pensions

Public sector pensions have been in the spotlight recently because some governments cannot afford to fund them.

There are — and always will be — areas for improvement in Canada's existing public sector accounting standards issued by the Public Sector Accounting Board (PSAB). While Canada is a world leader in the adoption of accrual-based standards, better measures of assets, liabilities, revenues and expenses are always at the forefront of PSAB's deliberations.

What's happening in the pension world? Public sector pensions have been in the spotlight recently because some governments are finding that they cannot afford to fund them. And this is just not supposed to happen to a government. Today, people are living much longer than they used to. Returns on investments experienced in the 1990s are not the same today. Both of these circumstances are putting stress on funding pension requirements. The province of New Brunswick, for example, recently underwent a major change in how employee pension benefits are provided because of expected future funding requirements. Similar changes have happened in other jurisdictions.

What's happening in the accounting world? Standard-setters here and abroad are getting their accounting standards up to date in view of the reality of the current situation. Mortality tables are being amended and, at least from an accounting point of view, the assumptions underlying the estimates of amounts owing are being revised.

Recently, Canada's Accounting Standards Board decided that eliminating the option to defer and amortize gains and losses for defined benefit plans would significantly improve the understandability, comparability and transparency of financial reporting for private enterprises. It did this because gains and losses were being deferred and amortized into income in future years (i.e., "smoothed" into income). Consequently, defined benefit plan costs, and the related liability that goes with those plans, now include amounts resulting from current period activities and the amortization of amounts deferred in prior periods.

For similar reasons, the International Accounting Standards Board and the US Financial Accounting Standards Board have both eliminated deferral and amortization accounting.

What's happening in the world of PSAB? PSAB's existing standard on pensions was developed more than 25 years ago. While it served to raise awareness of the issue of pensions at the time, it too needs to reflect the current environment.

The practice of deferring losses and gains is still part of PSAB's existing standard. But, as noted above, other standard-setters no longer adopt this practice because they feel it doesn't give a fair representation of pension benefit obligations and the ability of governments and organizations to meet them.

These issues are just as valid now, if not more, for the public sector, given the extent of pension benefits that exist in this sector. Pensions, compensated absences and other post-employment benefits are a significant issue for governments and organizations.

PSAB's existing standard is due for review. It may not necessarily mean change, but PSAB needs to determine whether its existing standard is reflective of today's environment. We look forward to hearing from you when developments occur.