Canadian
Utilities Limited is based in Alberta and is involved in power generation,
utilities, logistics, and energy services and technologies. The company was
incorporated in 1927 and its shares trade on the TSX. PricewaterhouseCoopers is
the current auditor.
According
to the notes to the 2009 financial statements, the company accounts for
employee future benefits and stock-based compensation as follows:
Employee
Future Benefits
The
Corporation accrues for its obligations under defined benefit pension and other
post employment benefit (“OPEB”) plans. Costs of these benefits are determined
using the projected benefits method prorated on service and reflects management’s
best estimates of investment returns, wage and salary increases, age at
retirement and expected health care costs.
Pension
plan assets at the end of the year are reported at market value. The expected
long term rate of return on plan assets is determined at the beginning of the
year on the basis of the long bond yield rate at the beginning of the year plus
an equity and management premium that reflects the plan asset mix.
Expected
return on plan assets for the year is calculated by applying the expected long
term rate of return to the market related value of plan assets, which is the
average of the market value of plan assets at the end of the preceding three years.
Accrued
benefit obligations at the end of the year are determined using a discount rate
that reflects market interest rates on high quality corporate bonds that match
the timing and amount of expected benefit payments.
Experience
gains and losses and the effect of changes in assumptions in excess of 10% of
the greater of the accrued benefit obligations or the market value of plan
assets, adjustments resulting from plan amendments and the net transitional
liability or asset, which arose upon the adoption in 2000 of the current
accounting standard, are amortized over the estimated average remaining service
life of employees.
Pursuant
to an AUC decision effective January 1, 2000, the regulated operations,
excluding Alberta Power (2000), are required to expense contributions for other
post employment benefit and certain other defined benefit pension plans as paid.
The difference between the amounts accrued and paid is deferred in non-current
regulatory assets.
Employer
contributions to the defined contribution pension plans are expensed as paid.
Stock
Based Compensation Plans
The
Corporation expenses stock options granted on and after January 1, 2002; no
compensation expense is recorded for stock options granted prior to January 1,
2002 as permitted by GAAP. The Corporation determines the fair value of the options
on the date of grant using an option pricing model and recognizes the fair
value over the vesting period of the options granted as compensation expense
and contributed surplus. Contributed surplus is reduced as the options are exercised
and the amount initially recorded in contributed surplus is credited to Class A
and Class B share capital.
No
compensation expense is recognized when share appreciation rights are granted.
Prior to vesting, compensation expense arising from an increase or decrease in
the market price of the shares over the base value of the rights is accrued equally
over the remaining months to the date of vesting. After that date, compensation
expense arising from an increase or decrease in the market price of the shares
is recognized monthly in earnings.
Instructions
Adopt
the role of the auditor and discuss any financial reporting issues. Assume the
company is interested in how the move to IFRS will affect it. Even though it
will not follow ASPE, it is also interested in how the accounting differs.
Therefore, specifically, discuss the differences between ASPE and IFRS for the
issues raised.
Overview
- This is a public company since shares trade on TSX
and is therefore IFRS is a constraint. Note that the company has asked how IFRS
will affect the statements and also the differences between IFRS and ASPE.
- Regulated by government— may affect GAAP
- In the utilities business— able to pass on cost
overruns to customers through increased prices. In this case also able to sell
the rights to these future revenues.
- Users include investors/shareholders who will want
transparency.
- Option exercise price affected by stock price— which
is affected by net income— therefore net income a key number.
- As auditor—you will want to make sure that f/s are
conservative and reflect reality.
Analysis
and recommendations
Issue:
Pension plans
The accounting under IFRS and ASPE would/may change as
follows:
- The accounting is generally allowed under IFRS and
ASPE as is.
- Under IFRS would have an additional option to fully
recognize experience gains/losses in Other Comprehensive Income. This is not an
option under ASPE. IFRS also requires that any vested past service costs be
fully recognized.
- Under ASPE – may use the immediate recognition model
whereby all unrecognized surplus/deficit is recognized on the balance sheet.
Note that if this is used, the company would measure the obligation using the
actuary’s funding assumptions.
Issue:
Stock based compensation
- Under IFRS and ASPE – stock based compensation must
be recognized and measured at fair value when granted.
- Under ASPE, cash settled SARS are measured at
intrinsic value and entities have a choice as to how to measure equity settled
SARS (intrinsic value or fair value). Under IFRS all SARS are measured at fair
value using valuation methods such as options pricing models.
