RONA Inc., Bank of Montreal, and Air Canada are all Canadian companies with defined benefit plans. Access these companies’ financial statements

RONA Inc., Bank of Montreal, and Air Canada are all Canadian companies with defined benefit plans. Access these companies’ financial statements for the 2009 fiscal year ends from SEDAR at www.sedar.com.

Instructions

Analyze the notes to the financial statements of each of the three companies, and provide answers to the following questions.

(a) For each company, identify the following three assumptions:

1. The discount rate

2. The rate of compensation increase that was used to measure the projected benefit obligation  

3. The expected long-term rate of return on plan assets

(b) Comment on any significant differences between the assumptions that are used by each firm.

(c) Did any of the companies change their assumptions during the period covered by the notes? If yes, what was the effect on each of the following: the current year’s accrued benefit obligation, the plan assets, and the pension expense? Explain.

(d) Identify the types of plans and the assumptions that underlie any future benefit plans other than pensions. Are these similar across the three companies? Comment on how any differences would affect an intercompany analysis.

(e) Are the pension plans and post-retirement plans in a deficit or surplus position? What are the amounts that have been reported on the statement of financial position?

(f) Calculate the debt to total assets ratio for each company using the reported numbers, and then using the actual funded status for the accrued benefit rather than the amounts originally reported. Comment.

(a) Relevant rates used to calculate pension information:

	2009 Air Canada	2009 Bank of Montreal	2009 Rona Inc.
Discount rate Rate of compensation   increase Expected long-term   rate of return on   plan assets	6.4% to 7.35% 2.50% 7.15%	7.3% 3.7% 6.6%	6.25% to 7.5% 3.5% to 3.6% 7.0%

(b) The discount rates are fairly similar for all three companies.  The expected       rates of of compensation increases though are different.  Air Canada’s rate of 2.5% is the lowest, with RONA and Bank of Montreal having similar rates of 3.5% to 3.7%.    This difference will have a significant impact on the projected amount of the accrued benefit obligation.  The expected rates of returns are similar ranging from 6.6% for the Bank of Montreal to Air Canada of 7.15%.   However, even small differences in these percentages (e.g. 6.6% to 7.15% is about a 9% difference) can cause a significant difference in the determination of the underlying amounts such as the ABO.

(c) The changes in the assumptions during the period covered in the notes of the companies’ financial statements are presented below.

	Air Canada	Bank of Montreal	RONA
Discount rate	Increased by 1.6% from 5.75% to 7.35%	Increased by 1.7% from 5.6% to 7.3%	Increased by 2% from 5.5% to 7.5%
Rate of compensation increase	No change, remains at 2.5%	Decreased 0.2% from 3.9% to 3.7%	Increased by 0.1% from 3.4% to 3.5%
Expected long-term     rate of return on     plan assets	No change- remains at 7.15%	No change, remains at 6.6%	No change, remains at 7%

The only significant change was in the discount rate used.  All companies significantly increased the discount rate with ranges being 1.6% to 2.0%.  This will result in a higher interest cost which will increase the pension expense, and lower the accrued benefit obligation.

The lower rate of compensation increase reported by Bank of Montreal will have the effect of reducing the current service cost which will reduce the pension expense and the value of the obligation.  The small increase in the rate of compensation increase will increase the pension expense and the obligation.  In addition, a decrease (increase) in the rate of compensation increase would also result in an actuarial gain (loss). Reductions in pension expense resulting from changes in assumptions would have the effect of lowering the accrued pension liability or increasing the prepaid pension cost, all else being equal.  Increases in pension expense resulting from changes in assumptions would have the opposite effect on the related balance sheet amounts reported.

 (d) Air Canada: The company provides to its employees defined benefit and defined contribution retirement benefits and other post-employment benefits such as health, life and disability. Assumptions stated: Discount rate is 6.25%, to 7.35% and rate increase in health care costs are 8.25%, with cost trend rates declining to 5.00% by 2015.

                  Bank of Montreal.: The company provides defined benefit and defined contribution pension plans for its employees in addition to health and dental and life insurance benefits for retirees and current employees.  Assumptions stated: Discount rate is 6.4%, Rate of compensation increase is 3.7%, and ultimate health care cost trend rate is 7.3%.

    RONAInc.: RONA provides defined benefit and defined contribution pension plans for its employees.  It does not provide any other post retirement plans.

    The types of assumptions made are standard among companies, depending on the actual post employment benefits provided. The rates applied in quantifying the components of the benefits are similar, although within a large range of 7.3% to 8.25%.  These rates will have a significant effect on the health-care plans obligation and related expense.

(e) Below is the information on the defined benefit pension plan and post retirement benefit plans for 2009 fiscal year end

	Air Canada $millions	Bank of Montreal $millions	RONA $thousands
Defined benefit plans
Funded status (deficit) surplus	(1,186)	(3)	2,864
Actual amount (liabilities)/assets reported	(120)	1,294	12,977
Difference	1,066	1,297	10,113
Other employee benefits
Funded status (deficit) surplus	(851)	(835)	N/A
Actual amount (liabilities)/assets reported	(1,109)	(735)	N/A
Difference	(258)	100

    There are very significant differences in the values recognized in the financial statements for the defined benefit liabilities or assets and the actual funded status of the plans.  In all cases, the companies report higher assets due to the unrecognized actuarial losses.  RONA has the highest difference, with a difference of $13.113 million.  The difference for the other employment plans are much smaller, and in both cases, still show a lower liability on the statement of financial  position that the actual deficit.

 (f)

	Air Canada $millions	Bank of Montreal $millions	RONA $millions
Debt as reported	8,759	126,719	971
Adjustment to funded status	1,066	3
Revised debt	9,825	126,722	971
Assets as reported	10,406	388,458	2,750
Adjustment to funded status	0	(1,294)	(10)
Revised asset	10,406	387,164	2,740
Debt /asset as reported	0.84	0.33	0.35
Debt/asset revised	0.94	0.33	0.35

Air Canada is the only company to show a significant change from 0.84 to 0.94.