Decision No. 97-R-2012

INTRODUCTION

[1] This Decision addresses three issues:

1. whether cash or accrual cost accounting methods should be used to recognise pension costs for regulatory costing purposes and for the determination of the labour price index (LPI);
2. the appropriate interpretation of the pension expense items listed under Account 821, pension costs, in the Uniform Classification of Accounts (UCA); and,
3. the appropriate averaging methodology to apply in development of the LPI, considering Decision No. 176-R-2006.

AGENCY DECISION

[2] The Canadian Transportation Agency (Agency) has decided that:

[3] The pension costs recognized by the Agency for regulatory purposes for the Canadian National Railway Company (CN) and the Canadian Pacific Railway Company (CP) (railway companies) will comprise, for each year, current funding payments made into their respective pension plans, an amortized portion of statutory pension plan deficit payments, and direct railway company pension fund administrative expenses, as follows:

1. cash payments in respect of contributions to pension plans and employee pension accounts (paid during the reference year or payable at the end of the reference year, both in respect of the reference year,) for Defined Contribution Plans, Supplemental Benefit Plans, Non-Registered Pension Plans, Post-Retirement Benefit Plans, and the current service portion of Defined Benefit Plans;
2. cash payments in respect of contributions to pension plans (paid during the reference year in respect of the reference year or payable at the end of the reference year, both in respect of the reference year) to meet a statutory plan deficiency in Defined Benefit Plans, which will be amortized over the employee average remaining service life; and,
3. direct administrative expenses (paid during the reference year or payable at the end of the reference year, both in respect of the reference year) incurred by the railway company (not the pension fund) in connection with the company pension plans.

[4] UCA Account 821 – Pensions shall be read so that:

1. Contributions made by railway companies shall be amounts actually paid during the reference year or payable at the end of the reference year, both in respect to the reference year, to employee pension accounts and pension trusts in respect of Defined Contribution, Defined Benefit, Supplemental Benefit, and Non-Registered Pension Benefit plans, and shall not include any provisional amounts that can be reaffected at the discretion of the railway company or over which the company has control or access;
2. iThe component for “current services” shall relate only to the pension earned by employees in the current year and exclude pension service earned by employees in past years, or yet to be earned in future years;
3. Payments made during the reference year or payable at the end of the reference year, both in respect of the reference year, by the railway companies directly to eligible pension beneficiaries under Post-Retirement Benefit plans are eligible pension costs and do not represent double counting of costs; and,
4. Direct pension administrative costs can include direct salaries and expenses of railway company staff who manage the relationship of the railway company with the pension fund to ensure that the railway company is informed of its pension obligations. No administrative costs of the pension fund shall be included in such direct costs.

[5] The multi-year averaging methodology for development of the LPI will be discontinued and be replaced by the standard price indexation methodology, i.e., use of single year input prices and quantities indices.

BACKGROUND

Components of labour costs

[6] The cost of pensions is one of five components of total labour cost incurred by the railway companies which are taken into account in the LPI. These components, and the way they are currently submitted to the Agency for regulatory purposes, are explained below:

1. Salaries and Wages
   This comprises the salaries and wages of all employees. The costs accepted are the actual wage payments (not accrued expenses) to employees for work done in the year, as identified in the detailed Schedule S-12 (which reconcile directly to Revenue Canada T-4 statements) of the Annual Report submitted to the Agency.
2. Wage-Related Benefits
   This comprises payments to employees in respect of bonuses, employee gain-sharing compensation plans, and other employee benefits. The costs accepted are the actual payments in respect of work done in the year, as identified in the detailed Schedule S-12 submitted to the Agency.
3. Fringe Benefits
   This comprises company payments for Health and Welfare, Canada Pension Plan, Quebec Pension Plan, and Employment Insurance, on behalf of employees. The costs accepted are the actual payments in respect of work done in the year, as identified in the detailed Schedule S-12 submitted to the Agency.
4. Stock-Based Compensation Benefits
   This comprises payments in respect of stock-based compensation plans. The costs accepted are the actual payments in respect of work done in the year, as directed in Decision No. 176-R-2009.
5. Pension Benefits
   This comprises costs incurred on Defined Contribution, Defined Benefit, Supplemental Employee Retirement Benefit, Non-Registered Pension Benefit and Post-Retirement Benefit plans. The costs currently submitted by the railway companies for regulatory purposes are those recognized under Generally Accepted Accounting Principles (GAAP) for the year in respect of all pension plans.

[7] The Agency uses the annual labour costs submitted by the railway companies for regulatory purposes. These costs are transformed into unit costs which form the basis for determination of railway company costs as directed under the Canada Transportation Act, S.C., 1996, c. 10, as amended (CTA) (competitive line rate, interswitching rates, public passenger service providers, etc.); and they are also used to compute the LPI component of the volume-related composite price index (VRCPI) which is one of the inputs used to set the maximum revenue entitlement (Revenue Cap) for the railway companies for the transportation of western grain. The VRCPI is a volume-weighted index of component prices for inputs used by the railway companies in providing grain transportation service: labour, fuel, material and other, investment and depreciation, as well as adjustments for hopper car maintenance costs.

Development of the labour price index

[8] Until Decision No. 253-R-2006, the LPI was developed using the standard Laspeyres price indexation methodology. This means, prices of all components in the reference year were related to equivalent prices in the base year, for each of 79 labour occupational categories (that is, the 79 labour occupational categories from which the overall LPI is derived), with all prices weighted by the hours worked by employees in each category in the base year. In Decision No. 253‑R‑2006, the Agency directed that the LPI must incorporate multi-year averages of various components for forecasting purposes, with the components to be computed as follows: Salaries and Wages, 1 year (no averaging); Wage-Related Benefits, Fringe Benefits, and Stock‑Based Compensation Benefits, (averaged over five years); and Pension Benefits, (averaged over ten years).

[9] For the 2006-2007 and 2007-2008 crop years, multi-year averages of prices and quantities, over the time period for each component as directed in the Decision, were inputted into the Laspeyres formula to determine the LPI.

[10] Starting with the 2008-2009 crop year, the methodology for developing the LPI has been as follows. First, the standard Laspeyres methodology is used to develop a price index for each of the five labour cost components for each year, based on relative prices between the current year and the base year in each of 79 categories, with all prices weighted by the quantity of hours worked by employees in the base year. As well, the proportion of each index component in total labour cost is calculated for each year. Next, the component indices and the component weights are, separately, multi-year averaged: wages and salaries are unaveraged; wage-related benefit costs, fringe benefit costs and stock-based compensation costs are averaged over five years; and, pension benefit costs are averaged over ten years. Then, the multi-year averaged component weights are normalized to sum to unity, and finally, the multi-year averaged component indices are weighted with the multi-year averaged and normalized component weights, to arrive at the LPI.

[11] Each year, the Agency determines the VRCPI for the following crop year and the Revenue Cap for the past crop year. The component price indices in the VRCPI must therefore be forecasted. The current Agency methodology for forecasting of the LPI starts with forecasts of the sub-component indices. For salaries and wages, the forecasted component index is based on wage increments from negotiated labour contracts. For Wage-Related Benefits, Fringe Benefits, and Stock-Based Compensation Benefits, the forecasted component indices are the 5-year averages of the component indices, and for Pension Benefits the forecasted component index is the 10-year average of the component indices. The forecasted component indices are then weighted based on the proportions of each component in total labour cost, to arrive at a forecast of the LPI.

Issues with pension costs to be recognized for regulatory purposes and UCA Account 821

[12] During the development of the LPI for the 2010-2011 crop year, CP proposed a change in the information provided to the Agency regarding its submission of pension costs for regulatory purposes under UCA Account 821 (UCA 821). Specifically, CP proposed to submit the cash amounts it contributes to fund its pension plans, in place of the accrued expenses it currently reports for financial reporting purposes under GAAP. CP stated that this change in practice would bring its regulatory submissions into line with the requirements of the Agency’s regulatory mandate and with the proper interpretation of the UCA.

[13] CP explained that it had in the past provided the Agency with the GAAP expenses as its pension costs, but that the accounting rules under GAAP do not reflect its economic costs for regulatory purposes. CP expressed its view that the GAAP expenses it had previously filed with the Agency did not comply with regulatory costing purposes as required by the UCA, and that it now intends to file the amounts paid for pension funding in respect of the categories defined in UCA 821.

[14] Time constraints and the complexity of this matter did not permit consultation or a full assessment of this issue as part of the VRCPI determinations for the 2010-2011 and the 2011-2012 crop years. The Agency also determined that consultations ought to be held before making a decision on the issue so as to ensure a fair opportunity for comment on this proposed change to the regulatory accounting for pensions. As a result, the Agency postponed a Decision on this issue pending an industry consultation conducted by Agency staff.

Issue with multi-year averaging in the development of the labour price index

[15] During the consultation on the 2010-2011 VRCPI, CN raised concerns about the Agency’s labour price indexation methodology. CN disagreed with the multi-year averaging of component indices, arguing that “the calculations are numerous and convoluted with multiple layers of averaging and re-indexing to base years” and that “the process develops its results by repeatedly averaging averages.” CN suggested that the methodology is subject to producing distorted results.

[16] In Decision No. 159-R-2010 related to the VRCPI determination for the 2010-2011crop year, the Agency stated:

The Agency acknowledges that it did make a minor modification, after the consultative process last year, to address a technical issue surrounding the general principles of labour price indexation. Time constraints this year did not permit the Agency to review this revised methodology with participants. The Agency plans to revisit this complex issue before next year’s determination and allow all participants to comment.

Industry consultation by Agency staff

[17] Agency staff undertook a consultation in the months of July and August, 2010, to seek input from western grain participants on the appropriate method to account for pension costs for regulatory purposes and on the appropriate methodology for incorporating averaging into the development of the LPI.

[18] With respect to the issue of regulatory accounting for pensions, staff invited participants to provide their views on:

1. Whether cash or accrual accounting methods should be used to recognize these costs for regulatory costing purposes; and,
2. The appropriate interpretation of the pension expense items listed under UCA 821.

[19] With respect to the issue of the appropriate averaging methodology, the Agency has used two multi-year averaging methodologies for developing the LPI. Method 1, the current Agency methodology, used since the 2008-2009 crop year, is a normalized and weighted average of component price indices for salaries and wages, non-pension fringe benefits, pension, and stock-based compensation. Each component index is calculated with the Laspeyres price indexation methodology using single-year expenses and employee hours. Method 2, the methodology used by the Agency in the 2006-2007 and 2007-2008 crop years, uses multi-year averages of expenses and employee hours for each labour category, to calculate a single LPI. The detailed description of each of these methods was included in the Agency staff consultation document.

[20] Staff invited comments on an appropriate methodology, including the two methods presented or other suitable ones, for incorporating averaging into the index.

[21] Staff received submissions from CN, CP, the Government of Saskatchewan (Saskatchewan), Manitoba Infrastructure and Transportation (Manitoba), The Canadian Canola Grower’s Association (CCGA), and the Canadian Wheat Board (CWB).

PROCEDURAL MATTERS

[22] A number of procedural issues were raised by some participants in relation to the extent and nature of the consultation carried out by Agency staff to determine the methodology issues considered in this Decision. On the basis of these procedural concerns, Saskatchewan requested that the Agency expand its consultation by issuing a new consultation document.

A. Provision of relevant railway company data to the parties

Government of Saskatchewan

[23] Saskatchewan states that the Agency’s consultation document posed a number of questions related to UCA 821, but did not provide for examination by participants the annual historical amounts over the past decades for CN and CP for this account. Saskatchewan also states that it has been the long standing Agency practice to include the historical context of the issue under discussion in consultation documents. This historical context frames the issue for consultation participants and provides essential information to allow for a full understanding of the changes being proposed. Saskatchewan further states that as a quasi-judicial body the Agency is subject to rules of natural justice and procedural fairness, which dictates that equal access to information related to the case being heard be provided to all participants.

Government of Manitoba

[24] Manitoba submits that it is difficult for it to provide any meaningful analysis and comments on the consultation questions without access to actual railway data to accurately measure and test examined options. Manitoba suggests that in order to have equal footing with the railway companies in this consultative process, it requires access to the specific railway company data. Manitoba notes that while details on the proposed equations and process are helpful, they only provide a small part of the picture, and that railway company data is critical in order to fully understand the complex methodology proposed by the Agency. Manitoba argues that, to ensure a fair and transparent consultative process, the Agency should provide equal data access to all participants, under an undertaking of confidentiality if necessary.

Canadian Wheat Board

[25] CWB states that the entire issue of pension plan accounting is complex, yet, in contrast to many other Agency consultations relating to the Revenue Cap, there is a lack of detail, particularly relating to actual costing data, for consultation participants to analyze when formulating a submission. CWB submits that, without sufficient data, consultation participants are not able to evaluate the impacts of various costing methodologies or develop potential alternative methodologies. CWB suggests that the Agency could address this issue, while continuing to maintain the required levels of confidentiality, by requiring participants to sign an undertaking of confidentiality, as is done with the annual VRCPI consultation. CWB indicates that it would welcome the opportunity to provide additional comment should the Agency provide consultation participants with pension plan costing data and detailed illustrations of potential cost calculation methodologies.

Agency Analysis

[26] The Agency acknowledges that there may be circumstances where it would be appropriate for actual railway company data or illustrative scenarios to be disclosed to assist participants in consultation processes dealing with costing determinations.

[27] However, the Agency considers that given the nature of the issues considered in the consultation, actual or illustrative data was not necessary for the consultation. In this decision, the Agency is only deciding on the appropriateness of the methodology for two elements taken into account in the determination of the LPI component of the VRCPI, more specifically, the methodology to be used to account for pension costs and the use of an averaging methodology.

[28] The Agency notes that the consultation questions were framed to engage participants in a discussion of the concepts and principles and methodology that should form the basis of the pension costs used by the Agency for regulatory purposes and the concepts and principles underlying alternative methodologies for development of the LPI.

[29] Consistent with the consultation process, this Decision considers the nature and characteristic of each methodology option irrespective of the data submitted by the railway companies and irrespective of the economic or financial implications this may have on the railway companies or the railway customers.

[30] The Agency considers that the actual financial or economic outcome resulting from the choice of a methodology is irrelevant to the determination of whether the methodology is appropriate for regulatory purposes. The Agency therefore finds that lack of actual data did not preclude or hinder the ability of the participants to make submissions on the issues considered in the consultation.

Agency conclusion

[31] As the Agency was soliciting the views of consultation participants regarding methodological concepts and principles only, historic railway company data was not relevant to the consultation. The Agency therefore finds that the consultation process was not compromised by that information not being provided to participants for that purpose and denies the request for that information.

B. Disclosure of CP’s presentation made to Agency staff

[32] CCGA and Saskatchewan note that the consultation document indicates that CP made a presentation to Agency staff “on the issue of cash versus accrual accounting”. They argue that, in accordance with natural justice and procedural fairness requirements, CP’s presentation should have been included as part of the consultation document.

[33] The Agency notes that while participants were not in attendance during CP’s presentation, the participants were informed of the topics that were the subject of that presentation.

[34] As set out in the consultation document, the purpose of the presentation was only to provide an explanation with respect to the characteristics of different pension reporting methodologies.

[35] Agency Members did not attend the presentation and have only considered the documents filed in the record by CP in accordance with the consultation process, which were disclosed to all participants.

[36] The Agency considers that the CP presentation did not result in any information being provided which other participants to the consultation could only obtain by having attended the presentation.

[37] For this reason, the Agency finds that the fact that participants were not present during CP’s presentation to Agency staff did not prejudice the consultation process, nor constitute a denial of natural justice or procedural fairness.

C. Consultation of other bulk shippers

[38] Saskatchewan and CCGA state that because bulk shippers in other industries use the VRCPI to negotiate and establish rail rates, they should have been included in the consultation.

[39] The consultation document was provided to those organizations that are directly affected by the VRCPI determination, as is the standard practice. Those same organizations have been invited to participate in past consultations on VRCPI issues.

[40] Furthermore, the Agency is not obligated to consult non-grain shippers who are not directly affected by the VRCPI determination, but may use the VRCPI for commercial negotiation purposes unrelated to the VRCPI regulatory purpose in the Revenue Cap program.

D. The nature of a cost change versus a price change

Government of Saskatchewan

[41] Saskatchewan notes that the subject of cost change versus price change has been discussed many times over the years during Agency and grain industry meetings on the development of the VRCPI where industry’s repeated concerns about the rising price index in the face of declining total rail costs have been met by standard Agency explanations that the CTA calls for the Revenue Cap to be adjusted for price changes and not for changes in expenditures. Saskatchewan is of the opinion that the consultation document raises serious doubt about whether the price index for pensions correctly reflects price changes. In support of that position, Saskatchewan refers to the consultation document which, in its description of Method 2 for developing an index that incorporates multi-year averages, repeatedly refers to “multi-year averages of expenses.”

[42] Saskatchewan states that it is impossible to observe from the consultation document exactly how the price index is to be derived for the labour pension component. Saskatchewan argues that it is important to ensure that the price index reflects price changes only, and is not an index of company pension expenditures or costs. Saskatchewan submits that given that annual inflationary price increases for labour and labour components are typically in the low, single-digit range, there is no doubt that proposed pension prepayments by the railway companies reflect a quantity change and not a price change.

[43] Saskatchewan submits that changes in expenditures for a railway component, or changes in the expenditure index for a railway component, have little, if any, bearing on the change in prices for that same component. Saskatchewan argues that changes in costs cannot be reflected under the Revenue Cap Program unless Parliament passes specific legislation to do so, as it did in the case of hopper car maintenance with Bill C-11. Saskatchewan warns that failure by the Agency to ensure that this basic tenet of the indexing process is respected without seeking legislative authority from Parliament could only be considered a breach of the CTA, and would be subject to court challenge.

Canadian Canola Growers Association

[44] CCGA submits that under well-established precedent in repeated decisions from the CTA, only changes in price, not total expenditures, are used to calculate costs for the Revenue Cap. As an example, CCGA notes that if a railway company’s labour contract stipulated a 2 percent increase in labour rates, those increased labour prices would be used to calculate the Revenue Cap, not whether the railway companies had reduced overall labour expenditures over the course of the year. CCGA suggests that in this single case, where it clearly benefits them, the railway companies are asking for a different standard to be applied.

Canadian Wheat Board

[45] CWB submits that an issue that needs to be addressed is whether railway company pension prepayments reflect a change in the price or a change in the cost of the railway company’s pension plan. CWB notes that under the Revenue Cap regime input prices are updated while the quantity of inputs used to calculate total costs of the inputs are not updated, and that, therefore if the two prepayments reflect a change in cost, then only a portion of the total amount of the prepayment, or perhaps even none of it, will be captured within the price indices. CWB observes that the notes accompanying CP’s financial statements refer to pension costs and the estimation of these costs through actuarial determinations, and suggests that, therefore, it would appear the prepayments are intended to address projected pension plan costs.

Agency analysis

[46] The Agency agrees with the observation that the legislative scheme governing the Revenue Cap is designed such that the revenue entitlements of railway companies are adjusted by input price changes rather than expenditure/cost changes.

[47] In this respect, the Agency notes that the formula for the Revenue Cap is meant to provide CN and CP with price-setting flexibility within an overall revenue entitlement, which varies according to the average length of haul, the volume of grain carried, and a factor, the VRCPI, that reflects the inflation of railway inputs. The VRCPI component is derived from costing information going back to the 1992 costing review.

[48] The Agency has no authority to amend the “costs” that are reflected in the VRCPI and set at unity for 2000-2001 under the Revenue Cap program, unless it is authorized by Parliament to make a cost adjustment. That was the case in Decision No. 67-R-2008, when the Agency was mandated to make an adjustment to reflect the costs of maintaining the fleet of hopper cars pursuant to Clause 57 of Bill C-11, or as the Agency did in Decision No. LET-R-113-2006 dealing with CWB hopper car leases.

[49] However, the Agency has an ongoing mandate to adjust the VRCPI value to reflect the prices of the inputs used by railway companies. To do so, the Agency adopts the same approach for all inputs. It uses costs recognized by the Agency for regulatory purposes, and divides these costs by the associated quantity of input. In this way, the revenue entitlements of CN and CP are annually adjusted through the VRCPI to reflect the price changes of their inputs.

[50] To determine the price of an input, the Agency first determines the associated costs which are recognized for regulatory purposes in a given time period, and then divides the associated costs by the quantity of input being used in the same time period. For example, to determine the price of fuel for railway companies, the Agency divides the fuel costs by the quantity of fuel consumed in a given time period (in this case, it does not simply examine the average price of fuel in that year, but it considers the fuel costs of railway companies, including any hedging practices that would allow the railway companies to risk-manage their purchases, and the associated quantity of fuel consumed).

[51] In the case at hand, the quantity of input to be used to develop the LPI is clear. It is the number of hours of labour used in the relevant time period. What is not so clear is the appropriate methodology for the pension costs that the Agency should recognize. While the focus of the attention of the Agency in this case has been centered on determining the amount of pension costs to be recognized for regulatory purposes, those costs are not equivalent to the input price index. Rather, the input price index reflects the cost recognized in a given time period divided by the quantity of input used in that same time period. All of the Agency’s historical input price indices embedded in the VRCPI are developed in this manner.

[52] While the methodology for pension costs will be addressed later in this Decision, the Agency notes the above points so that it is fully understood how the determination on the recognition of pension costs will be factored into the determination of the VRCPI.

Agency conclusion

[53] The Agency will continue to derive its historical price indices by dividing the costs that it recognizes for regulatory purposes in a given time period by the quantity of input used in the same time period.

E. Call for a costing review

Government of Manitoba

[54] Manitoba requests that the Agency conduct a detailed costing review as soon as possible, in order to adjust the Agency’s cost-based revenues to account for what it believes are extensive productivity gains and changed market conditions in railway company operating costs. Manitoba notes that the last extensive costing review was conducted in 1992 and that since then costs have primarily only been adjusted for inflation using the VRCPI.

Agency analysis and conclusion

[55] In Decision No. 425-R-2011 (cost of capital decision), the Agency stated in response to a similar request by Manitoba that the Agency does not have the mandate to carry out the cost-based review then requested by Manitoba. However, the Agency does have an ongoing legislative mandate and responsibility to determine the VRCPI, which requires consideration of the costs to be recognized for regulatory purposes, as has been done in the current consultation process.

DETERMINATION ON THE PROCEDURAL MATTERS

[56] Given the conclusions of the Agency on the procedural matters raised by the parties, the Agency finds it unnecessary to issue a new consultation document. The request for a new consultation is therefore denied.

ISSUE 1: PENSION COSTS TO BE RECOGNIZED

Positions of the parties

Canadian National Railway Company

[57] CN submits that using cash-based accounting is in line with the wording of the UCA, and that using cash-based accounting would be consistent with the Agency’s treatment of stock-based compensation. CN cites excerpts of the UCA definition in support of its position:

The UCA manual defines pension costs as “- amounts contributed to private pension plans ...”, “- pensions paid directly to retired employees ...”, and “- amounts contributed to pension trusts ...”. The consultation document asks if [the UCA] definition should be interpreted as cash costs or accounting accrual costs. It is obvious that the words “contributed” and “paid” can only mean cash payments and not amounts accrued for accounting purposes.

That said, the VRCPI should use cash payments for pensions costs in order to be compliant with the UCA definition of pensions costs. In addition cash pension costs would be consistent with the Agency’s treatment of Stock Based Compensation cash costs in the development of the labour price index.

Canadian Pacific Railway Company

[58] CP submits that the UCA is an economic costing tool that was created in accordance with the CTA in order to capture the railway companies’ annual costs, and that every account in the UCA is expressed using the terminologies of expense, cost or payment somewhat interchangeably. CP states that:

The UCA clearly expresses the reporting of pension costs as amounts contributed to pension plans and pensions paid by the railways as opposed to amounts accrued.

[59] CP claims that its proposed reporting on a cash payments basis is fully consistent with the requirements of UCA 821. CP explains that its contributions to pension plans consist of the sum of amounts contributed in respect of current services of employees, and amounts contributed as special payments in respect of past services of employees, which are specifically included in the UCA 821 definition. CP also states that it pays benefits of supplemental pension plans directly from operating cash, and reports these amounts as provided for in the UCA 821 definition.

[60] CP indicates that pensions differ from traditional expenses, as accrual of pension expenses can result in a delay in recognizing expenses by 15 or more years. That is, unlike most accounts where the accrued expense is, for all practical purposes, identical or close to the actual payments, for pensions the rules for accruing the expense employ sophisticated techniques such that an annual payment may be smoothed over 15 or more years, thus delaying the ability of the railway company to recover its pension costs. CP suggests that the principle of using an accrued expense to represent uncertain future pension liabilities, in place of the actual payments made in respect of those liabilities, is similar to the one deemed inappropriate by the Agency regarding stock options. In this regard, CP states:

In its Annual Report to Transport Canada, CP typically reports its costs on an expense basis (accrual) as required by [GAAP]. For most cost items, the time difference between expensing an amount on an accrual basis and making the corresponding cash payment is typically a couple of months or less. However, for pension costs, the recognition of pension costs pursuant to GAAP can defer the recognition of CP’s pension costs for 15 or more years.

As opposed to a straight forward recognition of costs, as for example in track maintenance expenses, recognition of pension costs pursuant to GAAP (accrual basis) is based on numerous assumptions that may not materialize, including liability discount rates and expected long-term pension fund investment returns. This accrual basis recognition is similar to the accrual basis recognition of stock options that the Agency deemed inappropriate (Decision: 176-R-2009). Similar to stock options, GAAP accrual accounting for pensions focuses on balance sheet recognition of future liabilities (as opposed to annual incurred costs) so as to provide a more accurate picture of the company’s financial state.

[61] CP also notes:

The rationale for including an item in regulatory cost determinations is that it constitutes an incremental cost, which is a cost that would not have been incurred if the railway company did not provide the service in question.

[62] CP points out that the Agency’s ruling on stock-based compensation listed the rationale for including an item in regulatory cost determinations, namely whether it constitutes an incremental cost, and that the GAAP accrual cost does not represent the net incremental cost to the railway company.

[63] CP further submits that as GAAP contains extensive mechanisms for smoothing the volatility of pension expenses, the Agency’s 10-year averaging of pensions further defers recognition of gains or losses by exacerbating GAAP smoothing techniques for both the historical LPI and the pension unit cost. CP suggests that not averaging any components of the historical LPI is the correct methodology, and instead proposes the following matching technique:

Pension contributions must be recognized as the pension cost in the year in which the contributions are made to the pension fund, except that contributions in excess of statutory minimum requirements (i.e., CP’s December 2009 $500 million prepayment of statutory annual solvency contribution requirements) should be recognized in the years in which such excess contributions are applied to reduce the statutory contribution requirement.

Government of Saskatchewan

[64] Saskatchewan recommends accrual accounting over cash because accrual accounting is consistent with GAAP and because no business of any significant size uses cash accounting. Saskatchewan notes that CP, in respect of its statutory pension plan deficit, made a large voluntary prepayment of $500 million into its pension fund in 2009, and has indicated that it plans to make another voluntary prepayment of about $650 million into the fund in 2010. Saskatchewan suggests that CP’s voluntary prepayments are examples of why accrual accounting typically takes precedence over cash accounting. In this regard, Saskatchewan states:

Under cash accounting, the amount paid is all attributed to one year, thus putting aside the “matching principle” in accounting, which determines the accounting period in which expenses and revenue are recognized. Putting the entire prepayment amount into one year will overstate the expense for that year, particularly when most of the amount relates to future years.

If regulated companies are allowed, on their own volition, to make voluntary prepayments to accounts that are used (without revision) by the regulator to establish rates or revenue, then the regulator is vulnerable to manipulation.

[65] Saskatchewan points out that a key question under cash accounting is whether the $500 million voluntary prepayment was actually paid, in full, and that shareholder reporting can be very different from income tax reporting. To this end, Saskatchewan submits:

Should the Agency consider the use of cash accounting for Account 821, it must ensure that the annual amounts in Account 821 are the same as the amounts claimed, and allowed, by the Canada Revenue Agency. This will ensure that the amounts reflect paid amounts, as compared to amounts that have simply been set aside for possible, future application.

[66] Saskatchewan provides its interpretation of each component of pension costs as follows:

Four “sub-accounts” are listed in the UCA for Account 821. Interpretations for each sub‑account are provided below:

a) Amounts contributed to private pension plans in respect of current services of employees.

These are amounts that have been contributed by the railway company and must reflect expenses (and not amounts that have simply been set aside,) and be identical to amounts that were reported for income tax purposes, and allowed by Revenue Canada. Finally, the amounts must relate only to the plans in respect of current employees.

b) Pensions paid directly to retired employees, gratuities paid to the heirs and families of employees, amounts paid to trustees to provide annuities for retired employees, and other similar items.

These are amounts that are paid by the pension plan, and not by the railway company, to retired employees. Thus, they should not be reported in Account 821 - which is to reflect railway expenses. Further, such amounts do not reflect any new, or current, expense to the railways. The amounts paid by the Pension Plan stem from the principal and growth of prior-years’ contributions that were accounted for under a) above (in prior years).

As these amounts are paid by the pension plan, using pension plan funds, they will not be shown as a deduction in the Income Tax filing for that year for the railway companies. Amounts from this sub-account must not be included in any composite figure for Account 821, as doing so would constitute a double counting.

c) Amounts contributed to pension trusts as special payments in respect of past services of employees to cover revisions of pension benefits or adjustments resulting from an actuarial valuation of pension obligations.

These are amounts that have been contributed by the railway company and must reflect expenses (and not amounts that have simply been set aside), and be identical to amounts that were reported for income tax purposes, and allowed by Revenue Canada.

As for voluntary pre-payments, which has just occurred for CP ($500 million) and has recently been announced for CN ($250 million), these amounts are not in response to requests by the pension plan regulators. Shippers and farmers should not be required to pay higher rates for situations when CN and CP prepay pension amounts, particularly if such contributions are not recognized by Revenue Canada until future years.

d) Related Administrative costs

Administrative costs are usually paid for by the pension plan, from amounts that have been contributed to the pension plan, which have already been recorded under sub-account 821 a) above. If this is the case, then no amounts should be recorded in this sub-account, as none of the administrative costs are paid by the railway, and this is a railway expense account.

[67] Saskatchewan considers that the main purpose of the UCA is to provide a method and instructions for accounting for railway companies subject to Agency regulation, and that accounting information may be an input into various costing and price index systems, but it is only an input to such systems. Saskatchewan points out that UCA data do not by themselves determine costs for the movement of grain or other traffic, nor of related price indices, which are calculated through other methodologies and processes within the costing and price indices systems.

Government of Manitoba

[68] Manitoba supports using the accrual method to report pension costs. Manitoba notes that the definition of pension costs in UCA 821 does not restrict the terms “amounts”, “paid”, or “contributed” to a strict cash definition, and that these terms are commonly used in accounting to describe depreciation and other expenses that are accrued. Manitoba suggests that if UCA 821 meant to strictly limit the interpretation to a cash basis, the definition would need to reference the actual term “cash” in its terminology.

[69] Manitoba submits that GAAP-based accrual accounting is considered to be the standard practice for all large corporations such as CN and CP, and that GAAP accounting provides a more accurate picture of the company’s current condition, as economic events are recognized by matching revenues to expenses at the time in which the transaction occurs rather than when a cash payment is made or received. Manitoba adds that the accrual system for estimating pension costs is independently established and controlled through GAAP standards and requires complex actuary estimates based on established regulatory guidelines. This GAAP standard ensures, in its view, consistency and accurate reporting.

[70] Manitoba further states:

It is important to note that in the UCA, the Agency applies depreciation rates to determine the railway companies’ annual depreciation expense – a historically significant expense in capital intensive industries, such as railways. When a capital asset is purchased or constructed the expense is not recorded as a one-time lump sum cash payment in the financial income statement. As per GAAP standards, management applies good-faith estimates concerning the asset’s useful life and various mathematical formulas are used calculate the annual depreciation amount over the useful life of the asset. Similar to pension costs under GAAP, these depreciation calculations can easily extend beyond 15 years for most long-term railway assets. Manitoba suggests that pension costs in UCA-821 should be treated under the accrual system, similar to how capital expenditures are depreciated over time. The accrual system of accounting uses depreciation estimates to calculate the cost of assets rather than actual cash expenditures, since it reduces distortion in financial reporting with the deferment or advancement of large capital projects.

[71] Manitoba points out that it is no coincidence that the railway companies would now like to adopt a cash-basis system for recording pension expenses, as many Defined benefit pension plans in the industry are now in deficit and require substantial cash infusions to ensure long-term financial health. Manitoba submits that a switch to reporting pension expenses on a cash basis will create a very significant increase in pension costs in the short term, distorting the VRCPI.

Canadian Canola Growers Association

[72] CCGA contends that CP and CN are attempting an end-run around both the letter and spirit of the Revenue Cap and GAAP, as both railway companies have indicated that they have prepaid or intend to prepay pension costs for the purpose of reducing the volatility of future funding requirements, and have these payments apply on a cash accounting basis. CCGA is of the opinion that this would artificially increase current compensation and benefit costs with expenses that have not yet been incurred, and that this goes against GAAP, which prescribes the application of an accrual basis of accounting and generally matches current costs with associated current revenues. CCGA submits that it also appears to contravene UCA 821, which indicates that pension costs are to be measured by both current and past employee service. CCGA contends that instead of reflecting recent changes in the UCA Manual as the railway companies assert, this is simply an attempt to manipulate the regulatory system.

[73] CCGA notes and supports the major findings of an exhaustive review conducted by Saskatchewan of the implications of the proposed accounting change. CCGA stresses that it has two major objections to the proposed change. First, that it appears to apply future expenditures to the present and, second, it appears to represent changes in total expenditures, not changes in price.

[74] Finally, CCGA indicates that the proposed change raises in its opinion a more serious concern, and that is what it considers the casual nature in which both railway companies propose to turn their backs on GAAP standards and establish one-off guidelines that benefit them with short-term gain. CCGA is of the opinion that this is a clear extension of what it considers the disastrous trend towards opaque accounting that has been seen repeatedly over the past several years, with what were, in hindsight, predictable results.

[75] CCGA concludes with an encouragement that the Agency and the Government of Canada continue to enforce sound accounting principles and ensure the transparency of these publicly traded businesses.

Canadian Wheat Board

[76] CWB notes that CP recently made a $500 million pre-payment into its defined benefit pension plan, with a note in the accompanying financial statements stating that CP has significant flexibility with respect to the rate at which CP applies these voluntary payments to reduce future years’ pension contribution requirements. CWB also notes that CP is currently projecting that a portion of the pre-payment amount will be applied against pension funding requirements for 2010 and 2011and that, even if this projection comes to pass, CP would retain a significant portion of the pre-payment for future years, perhaps in the range of $105 to $165 million.

[77] This suggests to CWB that CP could carry some portion of its $500 million prepayment forward for a number of years, particularly if changes to calculations reduce CP’s pension funding requirements in the future. CWB also points out that CP has announced that it will be making a second voluntary pre-payment to its defined-benefit pension plans, valued at $650 million, which will presumably be allocated after the $500 million prepayment has been allocated. CWB suggests that:

if the $500 million is allocated over a number of years, as opposed to a single year, the magnitude of the potential impact will be lessened in the nearby term.

[78] CWB is of the view that, in light of these pension plan pre-payments, the Agency’s pension expense methodology should prevent voluntary pre-payment type contributions from being captured as a pension expense when these contributions have not been applied to actual plan funding requirements. CWB suggests that if pre-payment contributions were to be included in the year they were made, that would create a significant distortion in cost calculations. CWB notes further that if the railway company were able to carry the pre-payment forward for a number of years before applying it to the pension, then the distortion could exist for an even longer period of time. The CWB does not believe that this effect is consistent with the objectives of the Revenue Cap process.

[79] Finally, CWB points out that another issue in allocating costs to UCA 821 is to ensure that the costs are allocated correctly between the company’s operations and the railway company’s pension plan. CWB notes, for example, that the term “administrative costs” is sufficiently general so that administrative costs that should be borne by the pension plan itself could inadvertently be captured by UCA 821. CWB urges the Agency to ensure that the costs that are reflected in the UCA accounts accurately reflect costs that are directly attributable to the operation of the railway company, as a misallocation of costs could result in a double-counting of expenses.

Agency analysis

Introduction

[80] Pensions may be one of the factors considered by employers and employees when negotiating labour compensation. They form part of the total labour compensation package. As such, any pension costs recognized by the Agency comprise one of the components of the LPI used in the VRCPI. Several different types of post-retirement benefit plans exist and the railway companies use a variety of plans to attract and retain employees. To provide some context and comparison, Appendix I provides a brief discussion of the types of post–retirement benefit plans used by the railway companies and how the amounts under each of these plans is calculated for both funding and accounting purposes.

[81] Pension funding and pension accounting are two separate and unrelated exercises. Understanding how the various pension plans are funded and accounted for is necessary to appreciate the Agency’s approach in recognizing these costs for regulatory purposes. Furthermore, other regulatory bodies such as the Office of the Superintendent of Financial Institutions (OSFI) and the Canada Revenue Agency (CRA) have distinct responsibilities with respect to pensions which are also described in Appendix I.

[82] Before commencing the comprehensive analysis, the Agency has general observations on two matters raised in the consultation. First, on the amounts prescribed by the UCA to be submitted to the Agency for regulatory purposes and, second, on which of cash payments or accrued expenses is appropriate for use for regulatory purposes.

Pension costs prescribed by the UCA

[83] A major revision of the UCA manual has not been undertaken since 1982. Therefore, parts of the manual still reflect Agency practices and railway company accounting conventions prevalent in those and prior years. With respect to UCA 821, this account also has remained unchanged since 1982. At that time, GAAP conventions called for pension expenses to reflect the funding payments amortized over a certain number of years and since at least 1992, the railway companies’ practice has been to submit GAAP-based pension expenses.

[84] However, the UCA is not specific about application of GAAP to pension expenses and the Agency also notes that there are deficiencies in the current UCA. In particular, Key terms such as costs, expenses, contributions, amounts payable, amounts paid or payable, etc., are not defined and the document does not adhere to a strict consistent terminology.

[85] The Agency therefore concludes that it cannot rely solely on the specific wording in the UCA to determine whether funding payments or GAAP-based pension expenses are the most appropriate expenses to recognize for regulatory purposes.

Cash payments versus accrued expenses

[86] The Agency observes three clear threads in the participants’ comments: the issue of whether cash payments or accrued expenses are more appropriate for regulatory purposes; respecting the “matching principle” in accounting; and, similarity of pensions with stock-based compensation.

[87] With respect to the appropriateness of cash payments or accrued expenses for regulatory purposes, one viewpoint, expressed by CP, is that the Agency’s regulatory purposes as mandated under the CTA involve economic interventions in the marketplace, which are facilitated by identification of the railway companies’ annual costs. This view sees the UCA as an economic costing tool created to identify and organize the railway companies’ annual costs that should be structured to clearly capture the information necessary to identify incremental costs.

[88] The alternative viewpoint, expressed by the shippers and the provinces, is that accrued expenses are, and should remain, consistent with GAAP. Those participants submit that GAAP provides a more accurate picture of the company’s current condition, as economic events are recognized by matching revenues to expenses in the time period over which the transaction occurs rather than the date a cash payment is made or received. This view considers GAAP‑based accrual accounting the standard practice for all large corporations, such as CN and CP, and argues that no business of any significant size uses cash accounting.

[89] The second thread observed in the responses is the fundamental reason cited by the shippers and the Provinces for advocating use of the accrued expenses instead of the cash payments, which is the matching of revenues and expenses. The shippers and the provinces are unanimous in their view that large cash payments do not reflect incremental costs in the years they are paid. Saskatchewan submits that putting the entire prepayment amount into one year will overstate the expense for that year, particularly when most of the amount relates to future years. CCGA is of the opinion that applying the payments on a cash accounting basis would artificially increase current compensation and benefit costs with expenses that have not yet been incurred. CWB opines that the Agency’s pension-expense methodology should prevent voluntary prepayment type contributions from being captured as a pension expense when these contributions have not been applied to the actual plan funding requirements.

[90] Finally, a third thread, raised by the railway companies, concerns the similarity between pensions and stock-based compensation. CP submits that the accrual basis for pensions is similar to the accrual basis that was deemed by the Agency as inappropriate for stock-based compensation, while CN suggests that using cash payments for pensions would be consistent with the Agency’s treatment of stock-based compensation.

[91] With respect to these latter submissions, there are significant differences between stock-based compensation and pensions. For example, stock-based compensation rewards past performance, while pensions are directly fixed to contributions made to fund future benefit obligations. Another significant difference is that stock-based compensation is at the discretion of the railway company, whereas payments to meet statutory deficits are based on  contractual obligations in the future, are subject to strict regulation, and must meet minimum funding requirements. The Agency finds that these submissions on similarity between the two components of the LPI are not relevant to the determination to be made in this Decision. In any case, the Agency considers methodological issues and options on a case by case basis, as was done in recent decisions on stock-based compensation and cost of capital, and as is set out below in this Decision.

Assessment of methodologies for recognizing pension costs

[92] The submissions from the participants reveal two diametrically opposed views on the appropriate pension costs to be used for regulatory purposes. On the one hand, both railway companies assert that funding payments are the true costs for regulatory purposes and that the UCA specifies them as such, while on the other hand the shippers and the Provinces assert that GAAP provides the generally accepted measures of all expenses, and that the UCA is ambiguous in its terminology and should not be interpreted or applied as advocated by the railway companies.

[93] Considering the divergence of views, it is appropriate for the Agency to use a systematic and objective approach to assess the conflicting claims in order to determine the appropriate pension costs to be recognized for regulatory purposes. The Agency has therefore identified criteria for the recognition of costs rooted in its regulatory mandate and has assessed options for pension costs against each criterion to determine the appropriate methodology

Criteria for assessment

[94] The Agency approach for determining regulatory costs is based on the MacPherson Commission, whose recommendations are embedded in the CTA, and on a number of regulatory railway costing instruments, including, among others, the Railway Costing Manuals, the Uniform Classification of Accounts, Order No. 6313[1] and Reasons for Order No. 6313[2] ).

[95] Two fundamental principles underlie this approach. First, the costs of railway companies must reflect the use of a resource that has an opportunity cost (i.e., the use of an economic resource) that was incurred for the purpose of providing rail transportation service. Second, for the proper determination of which costs are “variable” and which are “constant” with respect to traffic volume, the costs must be reasonably matched to the time period in which the work done to incur the costs was actually performed. The application of these two principles ensures that the costing determinations of the Agency reflect the costs of the real resources necessary to provide certain services to certain traffic, i.e, it ensures the establishment of a causal relationship between the real resources consumed and the activities that caused these real resources to be consumed. The Reasons for Order No. 6313 provides detailed assessments of various railway company expense accounts based on these two principles.

[96] These two fundamental principles continue to guide the Agency’s determination of railway company annual costs for regulatory purposes and will be used as criteria to assess the different options for recognizing pension costs. In addition, the Agency is also responsible for ensuring that the methodologies it uses are fair and reasonable to all parties. This will form a third criterion for assessing the appropriate pension costs.

[97] Based on these considerations, three criteria are to be applied for determining the methodology for recognizing the pension costs for regulatory purposes. Specifically, the methodology must:

1. Real Economic Resource

(i). recognize costs that reflect the use of real economic resources incurred for the purpose of providing rail transportation service.

2. Matching Principle

(ii). reasonably match the costs to the time period over which the work was performed.

3. Fair and Reasonable

(iii). be consistent with the objective of being fair and reasonable to all parties;

(iv). be transparent (by relying as much as possible on a structured methodology and by minimizing the use of judgmental factors); and,

(v). be reliable and reasonably responsive to a broad range of economic and financial conditions.

Pension Cost Options

Option 1: Recognize expenses based on GAAP accrual accounting

[98] Under the GAAP accrual accounting methods currently in use, the gains or losses in a pension plan are smoothed using the 10-percent corridor rule (see Appendix, section 5 for details). Any amounts that exceed the upper limit of the corridor are adjusted for the discounted value of future cash flows and the notional net liability is amortized. The result of using these accounting rules is that the impact of the special (deficit) payments on the LPI is lower than it would be if the actual amount of cash paid in a year to the pension plan was used. This is also true for the converse. When the company takes a contributions holiday, the pension expense is not zero as, for accounting purposes, the pension expenses still exist, even though there is no cash paid out.

[99] Accrual accounting using GAAP rules can result in negative entries for pensions. These negative amounts indicate that the long-term valuation of the company’s pension plan is in surplus, to the extent that the expected return of assets exceeds not only the expected obligations but also the current service costs and all other pension costs.

[100] The corridor approach evaluates long-run obligations on a long-term basis, allowing for the likelihood that much of the short-term volatility will be counteracted before recognition of the final cost. This allows for the possibility that much of the short-term volatility will be counteracted before recognition of the final cost. The implicit underlying assumption is that the surpluses and deficits balance out in the long term.

[101] This option is the status quo, and represents what was described as “accrued expenses” in the industry consultation. If the Agency determines that the GAAP expenses are the appropriate costs to recognize, no adjustment would be required in the Agency’s regulatory treatment of pension costs.

Option 2: Recognize a full funding payment in the reference year

[102] Accounting rules smooth out funding payments on the basis that short term volatility in the pension plans will balance out in the long run (see Appendix). Pension plan regulators, however, require that once a deficit is reported in a pension plan, the sponsor must contribute funding to eliminate the deficit over a specified period. When this occurs, companies are required either to make immediate cash payments or to provide Letters of Credit towards statutory plan deficits, while GAAP accounting rules do not allow these payments to be immediately recognized under the assumption that the deficits would be self-correcting in the long term.

[103] This option represents what was described as “cash” in the industry consultation. The cash payments are credited to the year for which the contributions are made (the reference year) either paid during the reference year or payable at the end of the reference year. Under this option, the payments in respect of contributions for all pension plans and employee pension accounts, including both the payments made for the current service and the statutory plan deficit payment, both in respect of the reference year, would be recognized costs to fully reflect the actual payments and contributions made, without any further adjustment.

Option 3: Match real resources to the periods of work by applying GAAP amortization

[104] This option arose out of the consideration of the responses of CWB and Manitoba in the industry consultation, both of which suggested some form of amortization of payments and combines features of both the accounting and funding options. Under this methodology, costs recognized would include all payments and contributions for all plans made with respect to the reference year, plus an amortized portion of the statutory deficit payment made in respect of the reference year. Amortization of statutory deficit payments would recognize that a payment in any period is made to ensure that sufficient pension funds are available to meet pay-out obligations over a future period of time. The amortization of the payments made in respect of the statutory deficit would be based on the recognition by the Agency of such payments as long-term investments being made to keep the workforce productive, and applying GAAP amortization principles to the recognition of these investments.

Assessment of options against Agency criteria

Option 1: Recognize expenses based on GAAP accrual accounting

Real economic resource criterion

[105] The accrual basis of accounting recognizes the effect of transactions and events in the period in which the transactions and events occur, regardless of whether there has been a receipt or payment of cash or cash equivalent. For pensions, the economic event to which GAAP assigns a cost is the additional year of future benefits earned by employees in exchange for the services they provided to the railway companies over the course of a given year. In order to measure the value of this economic event, accounting conventions use the discounted value of future cash flows required to settle the liability.[3] Therefore, the expense to be recognized under GAAP in each period is not the same as the employer’s cash funding contribution.

[106] Accordingly, GAAP expenses are not aligned with the actual economic resources used by the railway companies on pensions and therefore do not represent the economic costs incurred by the railway companies in the provision of rail service. In addition, under the GAAP rules for accruing pension expenses, negative expenses can occur when the assessed value of pension assets is higher than pension liabilities. However, economic costs are not negative costs unless, in the case of pensions, the company receives payments from the pension fund. While such a situation is not entirely impossible, this would likely only occur in extremely rare situations. Given that GAAP rules are not aligned with the actual economic resources used by the railway companies, this approach does not meet the economic costs criterion.

Matching principle criterion

[107] One of the fundamental concepts of accrual accounting is the matching principle, which provides that when assessing net income for an accounting period, the costs incurred in that period shall be matched against the revenue generated in the same period. This requires recording an expense when future benefits are earned by the employees and recognizing an existing obligation to pay pensions later based on current services received.[4]

[108] GAAP rules are sophisticated and attempt to precisely assess an accrual for pension for a given time period. However, the foundation of the exercise is based on long term, speculative, present value calculations. What is being matched to a given time period is therefore not the actual economic resources used to fund the pension plan. Hence, GAAP expenses do not meet the principle of matching the real resources to the work done.

Fair and reasonable to all parties criterion

[109] GAAP is a structured and well defined methodology. Both railway companies are compliant with US GAAP, as stated on their audited financial statements. Adherence to accounting standards, ensures that financial statements are free of bias and judgemental factors.

[110] However, GAAP rules by which expenses are accrued do not contain any mechanism for ensuring that, over an economically relevant period of time, the total amount expensed for pensions equals the total economic resources expended by a railway company on pensions. GAAP assumes that, in the long run, expenses recognized under GAAP will eventually catch up to the resources consumed.  The railway companies may not be able to recover their pension costs in an economically reasonable period, and purchasers of their services in any given period may not be paying a price under the Revenue Cap program that properly reflects the economic cost of providing the services. Thus, GAAP expenses do not meet the criterion of being fair and reasonable to all parties.

Agency conclusion

[111] The Agency concludes that this option does not meet any of the three Agency criteria for an appropriate methodology to recognize pension costs.

Option 2: Recognize the full funding payment in the reference year

Real economic resource criterion

[112] Payments and contributions made by a railway company for employee pensions represent use of real economic resources (cash) for pensions, as the cash could have been used for alternative economic purposes such as buying locomotives, laying additional track, and so on, for the purpose of providing rail transportation service. Therefore, this approach meets the criterion of reflecting the Agency’s requirement that costs reflect real economic resources.

Matching principle criterion

[113] The funding payments and contributions are in two parts. The payments in respect of Defined Contribution plans, Supplemental Benefits plans, and Non-Registered Savings plans, as well as a portion of the Defined Benefit plans, are made towards the current service of employees. That portion of the funding payment matches the work done by employees in the reference year. However, the second part of the funding payment, the portion to meet any statutory deficits in the Defined Benefit Pension plans, represents resources invested now to keep the plan solvent to meet future benefit obligations. Hence, the deficit payment does not match the reference year. Instead, the deficit payments can be reasonably associated with every hour of work offered by an employee over his or her remaining service life, as the deficit payments constitute contributions that will ensure that the contract between the employee and the employer will be honoured and that the defined benefits will eventually be fully paid. Hence, assigning the full payment to the reference year is inconsistent with the principle of matching the real resources to the work done.

Fair and reasonable to all parties criterion

[114] This approach is transparent, being simply based on the cash disbursement. Furthermore, while management has some discretion in establishing the amounts to be paid, this discretion is limited by the application of rules imposed and administered by OSFI and the Canada Revenue Agency (see Appendix). The pension payments can be easily determined, and the accuracy of the amounts paid and reported for regulatory purposes can be verified by Agency audit staff.

[115] However, the payments to meet a statutory deficit are made to ensure that the funds remain solvent so as to meet benefit obligations into the future. As such, the work done to match the cost will be performed by employees well into the future. To ask current railway company customers to pay in the present for work that will be done in the future is not fair and reasonable to the railway companies’ current customers. Conversely, to recognize the pension deficit payments made in one year would contribute to giving railway companies more than a fair and reasonable return in that year, followed by many subsequent years where the returns would be less than fair and reasonable. Therefore, recognizing the full fund payment in the reference year is not fair and reasonable to all parties.

Agency conclusion

[116] The Agency concludes that this option meets the criterion of reflecting real economic resources, but it does not meet the matching principle criterion, nor does it meet the criterion of being fair and reasonable to all parties.

Option 3: Match real resources to the periods of work by applying GAAP amortization

Real economic resource criterion

[117] In this option, the payments and contributions for all pension plans relating to the reference year are assigned to the reference year, while payments to meet statutory Defined Benefit Plan deficits are amortized over a specified period. Similar to the second option, this option recognizes the use of cash for pensions. Therefore, the payments and contributions represent the use of real economic resources, so this option meets the first criterion.

Matching principle criterion

[118] No specific representations were made during the consultation as to what the time period should be for amortizing payments made towards the statutory deficit. In principle, however, each employee works to earn pensionable service over their entire service life and a deficit payment made to keep the pension plan solvent directly benefits those employees. Therefore, the estimated average employee remaining service life should represent a reasonably true period over which employees, on average, will work to earn that portion of the pension funded by the deficit payment. The Employee Average Remaining Service Life (EARSL) is an actuarial calculation that estimates, for each employee, the remaining service life based on the employee’s age, the years expected to retirement, and cohort survival and other actuarial considerations, and averages these estimates over all employees. EARSL is used in GAAP as a reasonable period over which components of pension expenses, including net actuarial gains and losses and past service costs are amortized. It is therefore one alternative which would appear to provide an appropriate period over which to amortize the deficit payment. Another alternative would be to select some other period of time which provides a sufficiently long amortization period, such as ten or twenty years.

[119] Without another more appropriate basis to select some other period, the Agency considers EARSL as the most logical period for amortization as it most accurately connects the deficit payments to the remaining average working life of all employees who will receive the future benefit. As this also matches the years in which the work is done to earn the benefits, this option meets the matching principle.

Fair and reasonable to all parties criterion

[120] This option guarantees that, over the average remaining working life of the employees, the railway companies will recover the full funding payments and shippers will be charged for only the economic resources associated with work done in the reference year. Furthermore, because the payments would be amortized over a time period that the Agency has determined to be fair and reasonable (EARSL), using the cost of capital for railway companies also set by the Agency in a manner that is fair and reasonable, it would result in a return in each year that is fair and reasonable.

[121] This option is based on a proper recognition of the payments actually made by railway companies. When the fund is in deficit and railway companies must make large cash infusions, the resulting resources are recognized. On the other hand, when the funds are in surplus and railway companies choose to stop making contributions, no resources are recognized. Thus, the option is fair and reasonable to all parties.

Agency conclusion

[122] The Agency concludes that this option meets all three methodology assessment criteria.

Agency conclusion on pension cost options

[123] The Agency notes that both option 1 and option 3 apply GAAP approaches. The main difference is that option 1 amortizes a notional net liability outside the 10 percent corridor rule, whereas option 3 amortizes the real resources invested by the railway companies. Both options amortize the recognized amount over the EARSL period. However, the Agency is of the opinion that the application of EARSL amortization in option 3 is preferable because real resources are matched to the appropriate time period.

[124] Option 3 is also the only option which meets all three assessment criteria. Accordingly, the Agency determines that option 3 shall be applied for recognizing pension costs for the Agency’s regulatory purposes.

ISSUE 2: INTERPRETATION OF UCA 821

[125] Issues of interpretation have been raised during the consultation in relation to the specific categories of expenses mentioned under UCA 821 that warrant clarification.

[126] The Agency agrees with Saskatchewan that it is important to ensure contributions are indeed made by a railway company in a reference year and not just reported to shareholders, and that contributions reflect amounts actually paid to arms-length parties and not just set aside by the company. In addition, the Agency accepts that a railway company must not have control over, be able to reaffect or have access to any payment or contribution for the payment or contribution to constitute a recognized cost for regulatory purposes.

[127] The Agency also agrees with Saskatchewan that the amounts contributed to pension plans in respect of the current services of employees are normally identical to those reported and allowed for income tax purposes. Accordingly, the cash payment made by a railway company relating to the current service of employees, as reported to and allowed by Revenue Canada for income tax purposes, would be accepted, subject to verification by the Agency.

[128] The Agency agrees that the term “current services” in UCA 821 implies that only the pension earned by employees in the current year is to be included in this component. Pension service earned by employees in past years, or yet to be earned in future years, must be excluded.

[129] Saskatchewan states that amounts paid to retired employees are paid directly by the pension plan and not the railway company, and that as these amounts are transferred by the railway company to the pension fund, including them in a composite figure of the account would result in double-counting. The Agency agrees with Saskatchewan that most pension payments are indeed paid directly by the pension fund. However, the Agency notes that certain post-retirement benefit pension plans, covering health, drug and related benefits, may be administered directly by a railway company. Indeed, CP states in its submission that it pays the benefits of its post-retirement benefit pension plan directly “from operating cash.” The Agency thus concludes that the recording of direct pension payments, as appears to be the case with CP’s post-retirement benefit pension plans, meets the requirements of the UCA and does not represent double-counting of costs.

[130] The Agency does not agree with Saskatchewan that the full funding payment covering all pension plans that is accepted by the Agency must be identical to the amounts declared for income tax purposes and accepted by Revenue Canada. The Agency notes that the amounts accepted by Revenue Canada for income tax purposes in a reference year include the full cash payment made by the company, up to the limit of the statutory plan deficit. For regulatory purposes, however, the Agency considers it necessary to match, as closely as possible, incremental costs incurred with the work activities performed to incur those costs. This requirement is met by amortizing part of the full funding payment over future periods. Hence, the full pension amount accepted by the Agency in any given year need not be identical to the amount reported to Revenue Canada for income tax purposes.

[131] Saskatchewan submits that administrative costs are usually paid for by the pension plan, and should not be recorded in this sub-account. CWB also notes that the term administrative costs is sufficiently general so that administrative costs borne by the pension plan itself could inadvertently be included in this component. The Agency agrees that many costs related to the administration of the pension fund are paid for by the fund itself and not by the railway company.

[132] The Agency considers that direct administrative costs incurred by the railway company, and not the pension fund, can be included in this component. Payments made by the railway companies in respect of contributions to a pension fund, and the subsequent returns on such funds invested by the pension fund, pay for both the administrative costs of the pension fund and the pension of the employees. Were the Agency to recognize as legitimate pension costs both the administrative costs of the pension fund itself and the contributions made by the railway companies, it would in effect give railway companies a double benefit, which would be obviously inappropriate. However, this component could include such items as the salaries and expenses of railway company staff responsible for overseeing the pension fund to ensure that the railway company is informed of its pension obligations. These expenses would be direct administrative costs incurred by the railway companies and not pension fund expenses. Clearly, that component is a real cost to the railway companies, is associated with ensuring that pensions be paid to employees, and is not already covered by the railway payments in respect of contributions to the pension plans.

Agency conclusion

[133] The Agency concludes that:

1. Pension costs recognized by the Agency for regulatory purposes will comprise amounts actually paid by railway companies to employee pension accounts and pension trusts in respect of Defined Contribution, Defined Benefit, Supplemental Benefit, and Non‑Registered Pension Benefit plans and shall not include any provisional amounts that can be reaffected at the discretion of the railway company or over which the company has control or access;
2. The component for “current service” shall relate only to the pension earned by employees in the current year and exclude pension service earned by employees in past years, or yet to be earned in future years;
3. Payments made by the railway companies directly to eligible beneficiaries under Post-Retirement Benefit plans shall be included in pension costs; and,
4. Direct pension administrative costs can include direct salaries and expenses of railway company staff who manage the relationship of the railway company with the pension fund to ensure that the railway company is informed of its pension obligations. No administrative costs of the pension fund shall be included in such direct costs.

[134] This indepth reconsideration of the pension accounts has reinforced the Agency’s view that a review of the UCA manual is needed. Accordingly, the Agency intends to undertake a comprehensive review and revision of the UCA. The purpose of the review will be to align the UCA with the regulatory mandate of the Agency and with modern accounting conventions, and to establish clear, consistent definitions and terminology.

ISSUE 3: AVERAGING METHODOLOGY

[135] The Agency has used two multi-year averaging methodologies for developing the LPI. Method 1, the current Agency methodology, used since the 2008-2009 crop year, is a normalized and weighted average of component price indices for salaries and wages, non-pension fringe benefits, pension, and stock-based compensation. Each component index is calculated with the Laspeyres price indexation methodology using single-year expenses and employee hours. Method 2, the methodology used by the Agency in the 2006-2007 and 2007-2008 crop years, used multi-year averages of expenses and employee hours for each labour category, to calculate a single LPI. A detailed description of each of these methods was included in the Agency staff consultation document.

Positions of the parties

Canadian National Railway Company

[136] CN submits that the two multi-year methodologies currently and previously used by the Agency produce poor results when compared to what it calls the actual price index, one that uses unaveraged single year expenses and employee hours, the methodology used by the Agency until 2006. CN states:

It should be noted that both methods proposed by the Agency produce poor results. The best way to evaluate the averaging method is to compare the actual index for each year versus the multi-year average index, over a period of at least 5 years. A valid averaging method would be higher than the actual in some years, lower in others, but balanced over time. Such an analysis shows that both Method 1 and Method 2 produce unbalanced results that over time do not reflect the actual labour price index.

[137] CN raises concerns that multi-year averaging is complicated by occasional rebasing of weights in the LPI, and suggests that “the mix of base years and [changing] methodologies produces inaccurate and unpredictable results.” CN proposes that:

If the Agency insists on using multi-year averaging, then it should do so with a simple, reliable, and predictable method. Method 2 from the Agency’s consultation document provides such a method and over time produces results similar to Method 1, given adequate base year calculations.

Method 1 is more complicated and subject to distortion. For example to properly determine the index we need the Stock Based Compensation (SBC) index for 1998 through 2002. However there was no SBC reported prior to 2002, thus the index for those years is undefined. Method 1 does not work properly for this case.

[138] CN recommends recalculating at least 2002 and 2006 results using the same methods, and ideally going back as far as to 2002.

[139] In the main, CN questions the rationale for multi-year averaging of inputs in the historical price index formulation, and suggests that multi-year averaging be used only for forecasting purposes. CN states:

This consultation provides an opportunity to improve the indexation process so that it is simpler, more manageable, more accurate, and more reliable. This can be done by eliminating multi-year averaging for historical indices. Multi-year averages for historical indices are unnecessary. The multi-year averages are only appropriate for forecasted indices.

Multi-year averaging was introduced by the Agency to reduce volatility in the Labour Price Index (LPI). While averaging is appropriate for forecasting indices, there is no reason that volatility should be removed from historical price indices. If actual historical prices are volatile, then the VRCPI should reflect that reality. The Agency rightly does not average the very volatile historical fuel prices, so why average labour?

The whole historical averaging process is an unnecessary complication that produces inaccurate results. CN urges the Agency to use averaging only for forecasted indices.

Canadian Pacific Railway Company

[140] CP dismisses both multi-year averaging methodologies used by the Agency as either biased (Method 1) or may be biased (Method 2). CP states:

With respect to Methods 1 and Methods 2 (for averaging non-wage related benefits and pensions) proposed by the Agency, CP finds that the results produced by Method 1 are biased. This is because they consistently produce a lower index than a non-averaged index, this as opposed to being random in tracking that index.

Even though Method 2 is easier to follow, it still does not produce accurate results and may create a bias that could be difficult to identify as opposed to using a simple non-averaged method.

It is CP’s understanding that Agency staff revised this method for the 2010-2011 crop year determination to method 1 in order to correct certain inaccuracies. Unfortunately, this resulted in the development of two inaccurate and complex methods, the pitfalls of which are exacerbated by averaging weights and chaining to past indices that did not include similar average.

[141] CP questions the rationale for multi-year averaging of index inputs, suggesting that the methodology is technically incorrect, and proposes that Agency staff consult Statistics Canada on proper indexing methodologies. CP states:

The term “forecast” used in the decision [253-R-2006] is a clear indication that the index in question is the forecasted index in the VRCPI component for a given crop year. In this case, averaging components or variables for forecasting purposes is a common theoretically acceptable method when used outside the determination of a historical event. Several forecasting methods such as time series or other econometric modelling use moving averages and smoothing techniques with larger sets of data than 5 or 10 years, without skewing a historical event, such as the Labour Price Index. Therefore, the issue at hand is not the averaging in forecasting methods but incorrectly smoothing a historical event that will eventually be an input to the forecasting model. This approach will only skew forecasting results. In addition, averaging in a Laspeyres index is theoretically incorrect as the Laspeyres index compares the historical and current price changes of a basket of goods and it is not a forecasting tool. CP suggest the Agency consult Statistics Canada on the proper treatment of a Laspeyres index and forecasting methods, similar to the treatment of the Material Price Index a few years ago. Again, CP stresses that this proposal does not contradict the Agency’s decision but reinforces the proper application of this decision according to well known price indexing and forecasting principles.

The development of the historical Labour Price Index must be consistent with the development of the Fuel Price Index and the Material Price Index. The Agency does not average those indices to reduce fluctuations in market conditions and inflation before being forecasted.

Other participants

[142] The shippers and the Provinces have not commented directly on the issue of the appropriate averaging methodology. The comments made by the Provinces relate to procedural issues, in particular the lack of access to railway company data and the difference between a price and a cost change, which have been addressed earlier in this Decision.

Agency analysis

[143] Substantive comments on the averaging methodology were provided only by CN and CP.

[144] The Agency considers it important to distinguish between two applications of the multi-year averaging, for forecasting of future price indices and for development of the historical price index. The Agency is of the opinion that multi-year averaging of historical indices is a legitimate methodology for arriving at a forecast of the index. Depending on the volatility of the price movements, multi-year averaging may produce directly a reasonable forecast, or a forecast that may need to be refined using other approaches. The Agency has, however, reconsidered multi-year averaging of components in the development of historical price indices based on the comments in the consultation.

[145] First, multi-year averaging of inputs may be a technically incorrect methodology as compared to the recognized standard price indexing approach. A price index tracks changes in price over time by comparing the weighted price in one period with the weighted price in another period. If the weighted price in a given (base) period is kept constant, and weighted prices over time are compared to this constant, the price index is known as a Laspeyres index, a well-known and well-established price index. By definition, therefore, averaging prices over several years and using the multi-year averaged price as the price for a specific year may defeat the purpose of the price index and introduce unknown biases.

[146] Second, forecasting future price changes requires that historical price changes are accurately measured to understand the nature of the price movements. Multi-year averaging in the historical index can result in inaccurate measures of price changes and can produce a distorted view of historical price movements. Therefore, forecasts built on such distorted price movements are likely to be inaccurate and misleading. A forecast which is projected from already-smoothed historical events clearly would not reflect actual price changes.

[147] Third, multi-year averaging of prices may result in a built-in bias in the index. This is because, in order for such an average to be unbiased, prices must be just as likely to be high as to be low. As CN notes, a valid unbiased averaging methodology is such that the average is higher than some observations and lower than others, but is balanced over the averaging period. If, however, prices are rising over time, then a multi-year average will consistently be lower than the current price. Similarly, in a period of dropping prices the multi-year average will consistently be higher than the current price.

[148] Fourth, multi-year averaging of inputs is inconsistent with the treatment of other price indices developed by the Agency. As CN and CP both point out, the Agency does not average the even more volatile fuel prices over several years before using the averaged prices to develop the fuel price index, so there is no reason to average the labour prices. CN points out that if actual historical prices are volatile then the historical price index should reflect that reality.

[149] And fifth, multi-year averaging is inconsistent with the principle of matching in time labour prices and employee hours, which is central to the review of pension expenses.

Options for labour price index development

[150] The Agency considered the following options for development of the LPI.

Option 1: Multi-year averaging of component indices

[151] This option, described as Method 1 in the industry consultation, is the current Agency methodology. The methodology develops a normalized and weighted average of component price indices for salaries and wages, non-pension fringe benefits, pension, and stock-based compensation. Each component index is calculated using single-year expenses and employee hours. Both railway companies described this methodology as complicated, subject to distortion and inaccurate.

Option 2: Multi-year averaging of input expenses and hours

[152] This option, described as Method 2 in the industry consultation, was employed by the Agency in determination of the LPI for the 2006-2007 and 2007-2008 crop years. The methodology uses multi-year averages of expenses and employee hours to calculate the current price for each labour category, which are then compared with the corresponding base year prices, both sets of prices weighted by the base year hours, to calculate a single LPI. Both railway companies prefer this to Option 1 as being more simple and straightforward, although the methodology may produce biased indices relative to the indices calculated using the standard price indexation methodology.

Option 3: Discontinue multi-year averaging and use the standard single year methodology

[153] This option arose out of the industry consultation, and refers to the standard price indexation methodology of comparing the actual prices in the current year against the corresponding prices in the base year, all prices being weighted by the base year employee hours.

[154] On consideration, the Agency agrees with the railway companies that the multi-year averaging of inputs in the development of the historical price index: is contrary to price indexation principles; distorts the movement trends of historical prices and may lead to distorted forecasts; may also lead to a bias of the index; is inconsistent with the development of other Agency price indices; and, is inconsistent with the matching principle used elsewhere in the development of the LPI.

[155] The standard price indexation methodology, which is described in academic texts and universally applied by statisticians, refers to prices (weighted by quantities) in a specified single period compared to the prices (weighted by quantities) in a specified equivalent (base) period. Thus, an annual price index compares weighted prices in one single year with weighted prices in the base year. By reverting to the use of single year prices and quantities for both the current and base years, the Agency would conform with the widely understood standard methodology.

Agency conclusion

[156] The Agency concludes that the multi-year averaging methodology for development of the LPI should be discontinued and replaced by the standard price indexation methodology, i.e., use of single year input prices and quantities indices.

AGENCY DECISION

[157] The Agency has decided that:

[158] The pension costs recognized by the Agency for regulatory purposes for CN and CP will comprise, for each year, current funding payments made into their respective pension plans, an amortized portion of statutory pension plan deficit payments, and direct railway company pension fund administrative expenses, as follows:

1. cash payments in respect of contributions to pension plans and employee pension accounts (paid during the reference year or payable at the end of the reference year, both in respect of the reference year,) for Defined Contribution Plans, Supplemental Benefit Plans, Non-Registered Pension Plans, Post-Retirement Benefit Plans, and the current service portion of Defined Benefit Plans;
2. cash payments in respect of contributions to pension plans (paid during the reference year in respect of the reference year or payable at the end of the reference year, both in respect of the reference year) to meet a statutory plan deficiency in Defined Benefit Plans, which will be amortized over the employee average remaining service life; and
3. direct administrative expenses (paid during the reference year or payable at the end of the reference year, both in respect of the reference year) incurred by the railway company (not the pension fund) in connection with the company pension plans.

[159] UCA Account 821 – Pensions shall be read so that:

1. Contributions made by railway companies shall be amounts actually paid during the reference year or payable at the end of the reference year, both in respect to the reference year, to employee pension accounts and pension trusts in respect of Defined Contribution, Defined Benefit, Supplemental Benefit, and Non-Registered Pension Benefit plans, and shall not include any provisional amounts that can be re-affected at the discretion of the railway company or over which the company has control or access;
2. The component for “current service” shall relate only to the pension earned by employees in the current year and exclude pension service earned by employees in past years, or yet to be earned in future years;
3. Payments made during the reference year or payable at the end of the reference year, both in respect of the reference year, by the railway companies directly to eligible pension beneficiaries under Post-Retirement Benefit plans are eligible pension costs and do not represent double-counting of costs;
4. Direct pension administrative costs can include direct salaries and expenses of railway company staff who manage the relationship of the railway company with the pension fund to ensure that the railway company is informed of its pension obligations. No administrative costs of the pension fund shall be included in such direct costs.

[160] The multi-year averaging methodology for development of the LPI will be discontinued and replaced by the standard price indexation methodology, i.e., use of single year input prices and quantities indices.

CONSEQUENTIAL ADJUSTMENTS

[161] The following consequential adjustments will be made to give effect to this Decision:

A. Implementation of a pension asset

[162] The railway companies are directed to implement, with the approval of the Agency, two new accounts in the UCA to reflect the decision to amortize the statutory deficit payments. One account will reflect the unamortized statutory deficit payments, and the other account will reflect accumulated amortization of the deficit payments. Amortized amounts will be reflected in the existing pension account, UCA 821.

B. Chaining of the labour price index

[163] Determinations of the LPI will be chained back to the 2002 base year, which was the last base year to employ single year indices. Specifically, the use of amortized funding payments in place of the GAAP expenses, and the change in methodology due to elimination of multi-year averaging, will result in an index series that deviates from the existing series, and a need to chain back to the existing series.

C. Primary weights in the VRCPI

[164] The primary weights used to construct the VRCPI from its component indices (labour, fuel, material and other, investment, depreciation, etc.) are obtained from the relative proportions of each component in the railway companies’ total system costs. By using amortized funding payments in place of GAAP expenses for the pension costs, the relative proportion of labour in total costs may change because of the recent large funding deficit payments by both CN and CP. Currently the primary weights are based on CN and CP 2007 system costs. The Agency will redevelop new primary weights that reflect the change in pension costs.

D. Forecasting of the Labour Price Index

[165] Total labour costs include five component costs, for salaries and wages, wage-related benefits (bonuses, employee gain-sharing, etc.), fringe benefits (health and welfare, employment insurance, CPP/QPP, etc.), stock-based compensation, and pensions. In the current Agency multi-year averaging methodology, a price index is developed for each component, and the labour price index is a normalized weighted average of the component indices. Forecasting of the labour price index is based on a forward extension of the multi-year averages of the component indices. As a consequence of the Agency’s decision to discontinue the multi-year averaging methodology, a new forecasting approach will need to be developed for the labour price index.

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APPENDIX TO DECISION NO. 97-R-2012

[1] This is an overview, prepared by Canadian Transportation Agency staff, of the current treatment of pensions in Canada.

REGULATION OF PENSIONS IN CANADA

[2] Several bodies have regulatory oversight of pensions in Canada, among them the Office of the Superintendent of Financial Institutions (OSFI), and the Canada Revenue Agency.

The Office of the Superintendent of Financial Institutions

[3] OSFI is responsible for the supervision of federally‑regulated Defined Benefit (DB) Plans, such as those for railway companies and air carriers. Other pension plans may be supervised by provincial authorities. However, all registered pension plans in Canada must comply with the Income Tax Act, R.S.C., 1985, c. 1 (5th Supp.). OSFI administers pensions according to the Pension Benefits Standards Act, 1985, R.S.C., 1985, c. 32 (2nd Supp.), and the Pension Benefits Standards Regulations, 1985, SOR/87-19. OSFI prescribes actuarial rules for estimating plan assets and liabilities, and hence any surpluses or deficits, under two scenarios: with the pension plan continuing in operation assuming the company continues in operation (Going Concern basis), and with the pension plan hypothetically being shut down at the valuation date (solvency basis).

Defined benefit pension plans must file actuarial valuations every three years, or more frequently as required by the Superintendent of Financial Institutions (the "Superintendent"). When these valuations show a pension plan's assets to be less than its liabilities, payments must be made into the plan to eliminate the deficiency over a prescribed period of time. One of the main purposes of regulation is to set out standards for funding and investment of pension plans to ensure that the rights and interests of pension plan members, retirees and their beneficiaries are protected. In particular, regulation is intended to ensure that pension plan assets are sufficient to meet pension plan obligations.[1]

[4] The document further states:

Actuarial valuations of defined benefit plans are conducted using two different sets of actuarial assumptions: "solvency valuations" use current market based assumptions consistent with a plan being terminated, while "going-concern valuations" are based on the plan continuing in operation, therefore on long-term expectations. If a solvency valuation reveals a shortfall of plan assets to plan liabilities, the Regulations require the plan sponsor to make special payments into the plan sufficient to eliminate the deficiency over a period not exceeding five years. Where a deficiency exists on the basis of a going-concern valuation, the Regulations require special payments to eliminate the going-concern deficiency over a period not exceeding 15 years. In general, the payments that a plan sponsor must remit to a plan in a given year include the amount necessary to cover the ongoing current service costs associated with the plan, plus any "special payments" required in that year to pay down a funding and/or a solvency deficiency over the relevant time period.[2]

[5] In 2006, Finance Canada promulgated the Solvency Funding Relief Regulations in response to several factors that had led to many DB plans being underfunded when examined on a solvency basis. Some of the factors were a decline in long‑term interest rates and changes in the longevity assumptions for actuarial standards that led to increases in the solvency liabilities (SL) as well as low investment returns.

To address the pressure that increased funding requirements put on plan sponsors, the government adopted the temporary Solvency Funding Relief Regulations (the "2006 Regulations") in November 2006. The 2006 Regulations provided solvency funding relief through four temporary measures. These measures provided for the solvency deficiencies of federally regulated defined benefit pension plans to be addressed in an orderly fashion while providing safeguards for pension benefits. The options included: a consolidation of solvency payment schedules with amortization over a single, new, 5-year period; an extension of the solvency funding payment schedule from 5 to 10 years, subject to a condition of buy-in by plan members and retirees; an extension of the solvency funding payment schedule from 5 to 10 years with letters of credit;[3]

[6] In 2009, Finance Canada provided similar temporary relief measures to pension plan sponsors. Under these measures, a federal pension plan sponsor had the following four options: (i) extension of the solvency funding payment period by an additional year; (ii) extension of the solvency funding payment period to 10 years with member and retiree support; (iii) extension of the solvency funding payment period to 10 years with letters of credit; and, (iv) extension of the solvency funding payment period to 10 years for Agent Crown Corporations.

[7] The minimum amount a company can contribute to its pension plan is dictated by OSFI as per section 9 of the Pension Benefits Standards Act, 1985, and section 8 of the Pension Benefits Standards Regulations, 1985. The following components apply.

1. Normal Cost- established on the Going Concern basis- the cost of providing the upcoming year's worth of benefits (regardless of the financial situation of the plan);
2. Going Concern Deficiency Special Payments (Going Concern Deficit amortized over up to 15 years); and
3. Solvency Deficiency Special Payments (The difference between the Solvency Deficit amortized over up to 5 years and the Going Concern Deficit amortized over up to 15 years).

[8] In the railway companies’ case, OSFI will dictate the minimum required based on the sum of these three components. It may be observed that if there is a solvency deficit, the sum of the three components results in an OSFI minimum payment comprising the normal cost plus the solvency deficit amortized over five years.

Canada Revenue Agency

[9] Canada Revenue Agency controls the maximum amounts of a company’s contributions into its pension funds. The Income Tax Act defines maximum eligible employer contributions as per paragraph 147.2(2)(a) of the Income Tax Act. For the railway companies, the Income Tax Act dictates the maximum permissible contribution as the Normal Cost plus the greater of the Solvency and Going-Concern Deficits.

[10] An employer can, theoretically, exceed the maximum permissible contributions limit under the Income Tax Act, however this is exceedingly unlikely as it carries severe sanctions. In the case of over‑contributions, in principle the plan puts itself in a revocable position under subsection 147.1(1) of the Income Tax Act, and the Minister may remove its registration status - resulting in dire tax consequences for the employer and members. As an example, the plan can be deemed as a salary deferral arrangement defined in subsection 248(1) of the Income Tax Act. The Canada Revenue Agency could apply a range of measures, from forcing the company to remove contributions from a plan to full revocation of registration.

[11] When a pension plan is in surplus under OSFI, the minimum contribution is normal cost, which can be funded through a contribution holiday. Under the Income Tax Act, the maximum contribution when a plan is in surplus is based on an "Excess Surplus" threshold (25 percent of the Going Concern liabilities). The excess surplus threshold determines the maximum level of surplus allowable before additional employer current service cost contributions can be paid. Employee contributions are not influenced by the existence of excess surplus (defined as Going Concern Surplus less 25 percent of Going Concern liabilities, provided the result is positive).

[12] If the surplus level is below the threshold, full employer service cost can be paid. If excess surplus exists, then employer service cost contribution must be stopped until the excess surplus is brought down to zero. The notion of excess surplus does not apply if any solvency deficit is revealed. That is, a plan could be in an excess surplus, but full employer service cost contributions and solvency special payments must be made if there is a solvency deficit, regardless of its magnitude.

RAILWAY PENSION PLANS

Defined contribution plans

[13] Defined contribution (DC) plans are intended to provide retired employees with monthly pension income. However, only the employee and sponsor (company) contributions are defined, not the pension benefits. Eligible employees make fixed contributions into individual employee accounts held in a pension trust. There are formulae for determining the level of matching contributions made by the sponsor into each employee’s account. The Pension Trust invests the contributions by purchasing securities (assets) and the gains or losses on those investments are credited into the employee’s account. The holdings in the account are used to provide retirement benefits for the employee.

[14] The retiree’s pension amounts will vary based on the amount contributed and the performance of the invested funds. With DC plans, the onus is on the employee to select investments (typically, from options within the plan) that would generate sufficient funds to provide future pension income. The company’s main responsibility, apart from making contributions on behalf of the employees, is overseeing administration of the plan, including selection of the plan providers and the investment options available to the employees. In such plans, the risks related to investment and longevity are borne by the employees.

Defined benefit plans

[15] The most important post-retirement benefit plan provided by the railway companies is the DB plan. DB plans are much different from DC plans and are the focus of much of the accounting literature related to pensions. DB plans provide each participating employee, on retirement, with a monthly pension. Usually the amount of the pension is predetermined based on a formula related to the employee’s earnings, length of service, and age, among other factors. All plans must provide a surviving spouse a monthly pension which is a proportion of the retiree’s pension. The pensions may be partially or fully indexed to inflation.

[16] In DB Plans, such as those used by the railway companies, both the employee and the company contribute specified percentages of the employee’s pay into the pension plan. The contributions are determined by actuaries based on each employee’s annual expected retirement amount, life expectancy, expected retirement age, expected employee turnover rates, and future interest rates based on actuarial cost methods. Since the future returns on an investment, as well as the future benefits (i.e., company obligations) to be paid, are not known in advance, there is no guarantee that a given level of contribution will be enough to meet the benefits, or conversely, that the contributions will not exceed the benefits required.

[17] In DB plans, the onus is on the plan sponsor (employer) to ensure that the pension plan has enough assets to meet the pension obligation to its employees. As most DB Plans pay pension benefits to the employee as an annuity for life, the employee does not have to bear the risk of low investment returns on contributions or of outliving their investment income. This aspect of DB plans is the major difference between DB plans and other plans. It is interesting to note that the open-ended nature of the risks to the employer is the main reason for attempts by many companies to move away from defined benefit to defined contribution plans. Although the risk is borne by the company, during favourable interest rate times, the employer could pay less into a DB plan than a DC plan. Specifically, when the assets earn more than what is required to cover the plan’s liabilities, the company may under certain circumstances take a “contribution holiday”. Under DC plans, as there are no calculated surpluses, the amount required to be contributed by the employer is not diminished. Therefore, it is logical to conclude that an employee would be required to sacrifice more in terms of its overall labour compensation under a DB plan relative to a DC plan, where the burden of the risk is shifted from the employer to the employee.

[18] The contributions to DB plans are made to an independent pension trust that invests the payments into different financial instruments in accordance with prescribed policies, and according to the plan’s investment policy. The actual monthly payments to retirees are made by the pension trust from contributions and investment earnings made on the plan assets. Contributions and payments made to the pension trust, as well as any income earned from the investments are, in most cases, not recoverable by the company.

Supplemental benefit plans

[19] Companies use Supplemental Benefit Plans to cover senior executives and other individuals in the higher income brackets for whom the company is unable to make the full amount of its contribution into the executives’ registered DC plan or into the registered DB plan on behalf of the executive, because of the legislative ceilings imposed on contribution limits and benefits under the Income Tax Act. For DB plan participants, a Supplemental Executive Retirement Plan (SERP) provides supplemental pension so that the combined pension from the main DB plan and the SERP equals the amount to which the employee would otherwise be entitled if there were no Income Tax Act limitations. For DC plan participants for whom employer contributions are restricted by Income Tax Act contribution limits, the SERP provides additional employer “contributions” so that the total employer contributions to the DC plan and SERP equal the amount to which the employee would otherwise be entitled from the DC plan if there were no Income Tax Act limitations.

Non-registered pension plans

[20] Non-registered pension plans (NRPP) are similar to SERPs, but for all employees instead of for senior executives, and act as additional savings vehicles for the employees. The NRPP is designed to take contribution amounts above and beyond the RRSP and pension contribution limits imposed by the Income Tax Act. Employees make voluntary contributions up to prescribed limits, while the company contributes an amount such that the employer contributions to the DC plan and the NRPP equal the amount to which the employee would otherwise be entitled from the DC plan if there were no Income Tax Act limitations. An NRPP retains many of the same features as a Group RRSP, except the NRPP is not registered and lacks the tax shelter components of an RRSP. Payments by both the employees and company are made into individual employee accounts maintained by an independent investment trust.

Post-retirement health and other benefit plans

[21] The railway companies pay amounts to insurance companies, who act as plan administrators, to cover life insurance as well as health and medical benefits for retired employees. Both CN and CP indicate they operate what may be termed a self-insurance scheme, where the company pays invoices submitted by retired employees to cover approved medical expenses. The self-insurance scheme is administered by an insurance company, but the company pays the full cost every year.

PENSION AMOUNTS UNDER FUNDING AND ACCOUNTING

[22] The amounts under each of the railway company pension plans are calculated differently for funding and for accounting purposes. The Certified General Accountants of Canada outline the differences in the two concepts as follows:

Simply stated, pension funding is the amount of cash that is set aside to secure the pension promises made by a plan sponsor to plan members. The amount of cash set aside in particular year is the function of multiple factors such as the organisation’s availability of cash, alternative investment opportunities as well as minimum and maximum funding requirements as respectively defined by provincial and federal pension standards legislation and the Income Tax Act.

Pension accounting represents the cost of a pension plan as reported by an organisation in its financial statements. Pension accounting is not dictated by the factors that influence pension funding. Pension accounting is based on a set of principles and rules established by accounting standard setting bodies (e.g. Accounting Standards Board in Canada and the Financial Accounting Standards Board in the U.S.) to enhance comparability between different organisations’ financial results.” [4]

[23] The funding payments represent the amounts described as “cash” or “cash accounting” in the industry consultation, while the GAAP expense represents the amounts described variously as “accruals” or “accrued expenses” or “accrual accounting” in the industry consultation. It is important to note in this connection, however, that the Agency relates the funding payments to the year for which the payment is referenced. That is, the Agency considers both the payments made in the reference year in respect of the reference year, as well the funds payable to the pension fund at the end of the reference year in respect of the reference year. Thus, for example, a payment made in respect of funding of the pension plan for the year 2010 is credited to the year 2010, even if the actual payment was made in 2011 as long as the funds were payable to the pension fund at the end of the reference year. In this respect, then, the funding payment does not reflect what is commonly understood as cash accounting, as a pure cash accounting approach would simply account for the payments at the moment the payment is made, without any attempt to match these payments to the appropriate time period.

Defined contribution plans

[24] The company contributes, to each qualifying employee’s pension investment account, a negotiated percentage of the employee’s compensation. The funding payment is the sum of the contributions on behalf of all qualifying employees. The GAAP expense is the same as the funding payment.

Supplemental benefit plans

[25] For each qualifying executive on a DC or DB plan, the full amount of the negotiated company contribution into the DC or DB plan is checked against the Canada Revenue Agency contribution limit rules. If the full amount is allowed, the full contribution is paid into the executive’s DC plan, or into the DB pension fund, and no amount is paid into the Supplemental Benefits Plan. If, however, the full amount exceeds the Canada Revenue Agency contribution limit, an amount up to the allowed limit is paid into the DC plan or into the DB pension fund, and the remaining amount is paid into the executive’s Supplemental Benefit Plan. The total company contribution is the sum of the contributions for all qualifying executives. The GAAP expense is the same as the funding payment for DC SERPs.

Non-Registered pension plans

[26] The funding payment is calculated in the same way as for supplemental benefit plans, except that it covers regular employees, not executives. The GAAP expense is the same as the funding payment, for a DC NRPP.

Post-retirement health and other benefit plans

[27] Both railway companies pay invoices as they arrive, covering health, drug and medical expenses for retired employees as specified in the post-retirement benefit plans. The funding payment is the total of payments for the year. The GAAP expense, however, is an actuarial estimate of the expected health, drug and medical expenses for qualifying retired employees over the year. The funding payment and the GAAP expense may be significantly different.

Defined Benefit Plans

[28] Among all pension plans, only defined benefit plans show a complete difference in the approaches used to estimate the funding amounts and the accounting amounts. The following quote from Thomas H. Beechy, Professor Emeritus, York University, points out the reason for the difference:

Pension accounting is difficult because of two factors: the large number of long-range esti-mates that must be made, and the differences between funding and accounting. As things now stand in Canada and the United States, pension accounting is a convoluted exercise in smoothing. Past and prior service costs are amortized over the remaining service life of employee group; the “corridor method” keeps actual changes in experience or estimates from showing up in pension expense; and the return on assets is reported at the expected rate of earnings rather than the actual rate during the period — a weird situation in which a known outcome (actual earnings) is ignored and an assumed outcome (estimated earnings) is used as a component of expense instead.

An important aspect of pension accounting is that the funding aspect is almost completely ignored. Strangely, none of the current discussions by standard-setting bodies pays any attention whatsoever to reporting this important aspect of pensions. Current standards require disclosure of the company’s pension liability and the value of the plan assets, without ever acknowledging that the two measures are not compatible. All standards require that the “overfunded” or “underfunded” pension amount be reported (either by note disclosure or on the face of the balance sheet), but the basis of funding is not compatible with current accounting methodology used to determine the pension obligation, even when both accounting and funding use the same actuarial method and the same estimates. However, the underlying estimates almost always differ to some extent, and actuarial methods often differ as well. If the accounting and funding actuarial method and / or some of the underlying estimates differ, the problem is much greater. [5]

[29] The following describes the approaches used to calculate the funding payment and the corresponding GAAP expense for DB plans.

A.  Calculation of the funding payment

[30] The funding payment comprises one or two components: the payment in respect of the current year service of employees (normal cost) and, if necessary, a payment to meet a statutory deficiency in the pension plan. As noted earlier, funding payments are governed by rules established by OSFI (minimum permissible limits) and Canada Revenue Agency (maximum permissible limits).

1. Normal cost

[31] This represents the payment in respect of the pension benefits earned in the current year of service by the employees. For each qualifying employee, the stream of future expected benefits due on retirement is estimated based on actuarial calculations, which takes into consideration such factors as the employee’s length of service, age, expected time to retirement, current salary, salary on retirement, expected length of life, etc. Next, the benefit stream is discounted to the present using an actuarial discount rate which is based on expected long-term pension fund returns. Then, the present value is typically turned into a ratio to reflect accrued liabilities and the cost of future service amortized over the expected remaining working life of the employee. Finally, the company pays its negotiated proportion of the current amount, which is usually the total normal cost minus the employee contributions. As noted earlier, depending on the Canada Revenue Agency contribution limits the full payment may be made into the into the pension fund on behalf of the employee, or part of the payment may be into a SBP or NRPP.

[32] The funding payment is the sum of contributions into the pension fund on behalf of all qualifying employees. The normal cost is generally expressed as a percentage of total payroll.

2. Payment for statutory plan deficiency

[33] The status of the pension plan is calculated under two scenarios: a Going Concern scenario, which values the pension plan’s financial situation as if the plan would continue indefinitely into the future; and a solvency scenario which depicts a snapshot of the pension plan’s financial situation if it was shut down as at the valuation date.

(a) Going Concern scenario

[34] First, the present value of the future stream of benefits to qualifying employees (prorated on accrued service) is estimated as described for current service above. To this is added the present value of the future stream of benefits to retired employees, and the present value of the future stream of benefits to deferred members. The Actuarial Liability (AL) is the sum of the present values of the future obligations to current and retired employees and members entitled to a deferred pension.

[35] Next, the value of pension assets (PA) is estimated using one of numerous asset valuation methods, ranging from straight Market Value to elaborate smoothing techniques.

[36] A Going-Concern Deficit or surplus is estimated as the value of pension assets (PA) less the Actuarial Liability (AL). If there is a Going Concern Deficit, a Going-Concern Special Payment is estimated as the Going-Concern Deficit amortized over 15 years.

(b) Solvency scenario

[37] A Solvency Liability (SL) is estimated in a significantly different calculation from the Going Concern actuarial liability. SL assumes that no further service is accrued and there are no further salary projections. Its purpose is to depict the pension plan’s financial situation if it was shut down as of the valuation date, reflecting current market conditions rather than long term expectations.

[38] Next, the current market value of pension assets is estimated. The solvency surplus or deficit is the difference between the pension assets and the solvency liability. If there is a solvency deficit, the deficit is amortized over five years. The Plan’s solvency ratio is determined by dividing the solvency assets by the solvency liabilities. The OSFI directs that the plan administrator file actuarial reports annually if the solvency ratio of the plan is less than 1.20. Minimum funding requirement are now determined using a three-year average solvency position.

(c) Statutory contribution requirement

[39] The minimum funding requirements under the Regulation to the Pension Benefits Standards Act are based on the solvency deficiency as of the valuation date. In calculating the solvency deficiency, the average solvency ratio is to be applied. The minimum solvency special payment is equal to the amount by which the solvency deficit divided by five exceeds the amount of the Going Concern special payment (the GC deficit amortized over 15 years) for a particular year.

[40] The OSFI minimum statutory plan deficit payment is the sum of the Going Concern special payment (going-concern deficit amortized over 15 years) and the solvency special payment (solvency deficit divided by 5 less the going-concern deficit amortized over 15 years). It follows that the OSFI minimum plan deficit payment required is the solvency deficit amortized over five years.

B.  Calculation of the GAAP Expense

[41] The GAAP expense is made up of five components: current service cost, interest cost on benefit obligations, expected return on fund assets, amortization of prior service costs, and amortization of experience gains or losses. These are briefly explained below.

1. Current service costs

[42] The current service cost represents the annual cost to the fund for the pension service earned by all current employees in the current year. In other words, the current service costs typically differs from the estimated costs of the pension plan required for the services rendered within the current year as it is usually calculated using different assumptions. The current service cost is recorded in the financial statements of the company, regardless of whether or not a contribution has been made. It is calculated using the same methodology but potentially different assumptions as for the funding payment, namely with an accounting discount rate which is based on the expected yield of high quality corporate bond rates as at the date of valuation is used (in place of the actuarial discount rate used for the funding payments) to determine the present values of future obligations. The discount rate for accounting purposes is management’s best estimate.

2. Interest cost on benefit obligations

[43] DB plans are in reality a deferred compensation arrangement and they are recorded on a discounted basis so that changes in interest rates have an impact on the fund. As the projected benefit is measured as a present value, an interest cost is required to be accrued at a rate equal to assumed discount rates. To calculate the interest cost, first a projected benefit obligation (PBO) is estimated using the same assumptions and methodology as under the funding Going Concern scenario, except that an accounting discount rate is used to determine the present values of the future obligations. The present value is then multiplied by the accounting discount rate. This is added to the total pension expense. There is interest on the Service Cost which is also added to the pension expense.

3. Return on plan assets

[44] The fair value of assets is multiplied by the assumed estimated rate of return on assets. As a return on assets reduces the pension expense, this amount is subtracted from the total pension expense.

4. Amortization of prior service costs

[45] Prior service costs relate to changes in pension obligations due to new collective agreements or other causes. Prior service costs come into play either when the plan is initiated (taking into account the years of service that plan members have already rendered), or when the plan is amended (accounting for the years of service already rendered). It is calculated by first estimating the additional future stream of benefits to each qualifying employee resulting from a change in pension benefit terms, then calculating the present value of the benefits using the accounting discount rate. Next, the present value is amortized over the expected average remaining service life of the employee and, finally, the amortized amounts for all qualifying employees are summed and added to the total pension expense.

5. Amortization of experience gains and losses

[46] First, a PBO is calculated at the beginning of the period and expected and actual PBOs are calculated at the end of the period. Gains and losses on PBOs occur when the expected PBOs at the end of the period differ from each other. Similarly, gains or losses are established for the value of the pension assets. The experience gain or loss is the sum of the gains and losses on the PBO and assets.

[47] Next, a 10-percent corridor is established. This comprises the higher of 10 percent of the PBO or 10 percent of the pension assets.

[48] Then, if the absolute value of the experience gain or loss is less than the 10 percent corridor, no gains or losses are amortized. However, if the absolute value of the Experience gain or loss is higher than the 10‑percent corridor, the difference between the Experience gain or loss and the 10‑percent corridor is amortized over the expected average service life of the employees. The amortized experience gain or loss may add to or reduce the total pension expense depending on whether it is a gain or a loss.

C.  Observations on funding and accounting methodologies

[49] The two methodologies are similar in the calculation of the costs in respect of the current service of employees, the only difference usually being in the choice of discount rate for the present value calculations. However, the methodology for calculating the statutory plan deficit payment for funding purposes is completely different from the calculation for the remaining four components of the pension expense. Largely because of the corridor rule, where only the portion of the funding payment is greater than 10 percent of the higher of the fund’s assets or obligations is recognized as a gain or loss, and amortized as an expense, the GAAP expense is unrelated to the funding payment.

[50] US GAAP is one of the few remaining sets of accounting principles that has the corridor method as an option. In 2011, the International Accounting Standards Board removed the use of the corridor method from International Accounting Standard 19 – Employee Benefits. Prior to this amendment, companies using IFRS (International Financial Reporting Standards) had the choice of using the Corridor method or not. With the move of Canadian GAAP to IFRS, both CN and CP chose to use US GAAP and as a result may use the corridor method in reporting pension surpluses or deficits in their financial statements.

[51] The GAAP expense can be negative. That is, the result of the sum of all components other than the current service costs can be a negative amount, depending on the market performance of the fund assets and other experience gains and losses. A negative pension expense is reported as an income.

[52] The statutory solvency deficit is amortized over five years, and the company is required by law to pay into the pension fund not less than the amortized amount. However, the company has the option to pay more than the OSFI minimum, up to the entire amount of the statutory deficit. A payment above the OSFI minimum is sometimes referred to as a “voluntary prepayment.”

[53] The company makes a statutory deficit payment only if a statutory deficit occurs. The plan status in any year is determined mainly by the market performance of the plan assets on one hand, and on the actuarial assumptions and discount rates used on the other hand. As the funded plan status calculations may be made annually, the size of the statutory deficit, if any, can vary drastically from year to year, and the pension plan can go from a deficit in one year to a surplus the next, or vice versa. This means that the legislated minimum payment, one-fifth of the statutory solvency deficit, can also change drastically from year to year, and that a payment made in one year when the plan was assessed to be in a statutory deficit may be found unneeded in the next if the plan is assessed to be in a statutory surplus, due to changes in the market value of the assets, discount rates, or other macroeconomic factors. This result obscures the link between the GAAP pension expense in the reference year and any actual payments made.

[54] In the event of a statutory plan surplus (both on Going Concern and solvency bases), the company has the option of reducing its funding payment into the pension plan, up to the limit of the normal cost, and the actual payment can be zero. This is generally referred to as a contribution holiday. However, under GAAP accounting an expense in respect of the current service of employees (current service cost) is always accrued. This result may further obscure the link between the accrued pension expense in the reference year and any actual payments made.

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[1] Regulatory Impact Analysis Statement - Solvency Funding Relief Regulations, 2009 www.fin.gc.ca.

[2] Ibid.

[3] Ibid

[4] Certified General Accountants Association of Canada Addressing the Pensions Dilemma in Canada 2004 page 26.

[5] Accounting Perspectives, Vol.8, No.2, 2009, pp93-94

[1] Canadian Transport Commission, August 5, 1969

[2] Canadian Transport Commission, August 5, 1969

[3] CICA Handbook Section 1000 paragraphs 48 & 49

[4] Intermediate Accounting, Ninth Canadian Edition, Vol.2, Kieso et.al.,c. 19, pg. 1243