2013-01 measuring performance in the public sector responses

Response Questionnaire Consultation Paper 2: Measuring Financial Performance in Public Sector Financial Statements

TO BE CONSIDERED, COMMENTS MUST BE RECEIVED BY JANUARY 31, 2013 Prepared by: Conceptual Framework Task Force

This form is not intended to constrain your response. Each text box will accommodate your full comments. You are able to save and forward this form to others in your organization for review prior to submission.

Name: Trevor Seibel

Organization: District of Coldstream

E-mail: [email protected]

1. Do you agree with an approach to a public sector conceptual framework that focuses on identified accountabilities to the public and their elected representatives rather than an approach focused on the needs of discrete user groups? Please explain your reasoning.

No I do not. For local governments, Accountabilities to the public and their elected representatives is a very subjective topic. Too much is being asked of the financial statements to consider "accountability" topics, which are most likely politically motivated.

2. Do you agree with the proposal that the objective of public sector financial reports is to provide information for accountability purposes? Please explain your reasoning.

No, I do not. The purpose of the financial statements is to provide a clear, objective reporting of the financial results of the municipality. In BC, Municipalities already produce an Annual Report which considers the goals and objectives of the municipality. This is more than sufficient to address the accountability factors for the community. They should NOT be included in the financial statements.

3. Do you agree with the proposal that public sector financial reports should be designed to provide accountability information to the public and their elected representatives (i.e., that the public and their elected representatives are the primary users of the financial reports)? Please explain your reasoning.

No I do not. In BC the primary users of local government financial statements are the Municipal Finance Authority and the Provincial Government. The elected representatives and the public are a secondary user of the financial statements.

4. Do you agree with the three proposed broad financial accountabilities expected to be demonstrated by a public sector entity about the financial affairs of the entity? Please explain your reasoning.

No I do not. The first principle deals with comparison of results in accordance with the financial plan. We already do this in that the budget to actual information is provided within the financial statements. As well, the Annual Report goes into more analysis of the projects and the financial plan implications. The impact of current results on future periods is subjective. Financial statements report historical information and NOT what might happen in the future. The financial condition of the entity should NOT be addressed in the financial statements. This is better served in the Annual Report.

5. Do you agree with the 16 proposed financial statement accountabilities? Are there any missing? Are there any that should not be included? Please explain your reasoning.

I DISAGREE with #1,3,5,6. All the other points are reasonable.

6. Which of the three financial statement presentation alternatives do you prefer? Is a hybrid model (hybrid in the sense described in this Consultation Paper) an option that the Task Force should pursue? Please explain the reasoning for your choice and indicate why the other two alternatives were not chosen.

The Current model (Asset/Liability) is the MOST appropriate for local governments. The other 2 alternatives do not serve any direct purpose for local governments.

7. If you do not like any of the three financial statement presentation alternatives set out in this Consultation Paper, do you have another preferred model that would meet the identified financial statement accountabilities? Please explain your suggested model in sufficient detail for the Task Force to evaluate the proposal.

The Asset/Liability model works just fine.

8. If new financial statement categories for deferred inflows and outflows are set up, what items would you see being accounted for in these categories (for example, endowments, general tax revenue, transfers received)? Do you have any suggestions for the criteria that should be used to determine what can/should be accounted for in those categories? For example, consider the following for inflows (and similar questions for outflows): Does there need to be an external restriction on an inflow, requiring it to be applied to cost of services provided in

future periods (time or performance requirement) in order for the inflow to be deferred? Is an internally made but publicly communicated commitment to consistently use a certain type of inflow to provide

future services enough to trigger deferral? If an internal commitment is allowed to trigger deferral, should an irrevocable designation for its application to the

cost of service provision in future periods be made upon receipt of inflow/levying of taxation? How direct should the relationship be between the inflow and the costs of services to be provided in future periods

in order for deferral of the inflow to be permitted? Should only items that do not meet the definitions of assets and liabilities be considered for inclusion in deferral

categories?

No comment as these will not be an issue when the current model is retained.

9. Should a set of general purpose financial statements of a public sector entity include other statements based on the identified accountabilities? For example, a separate (audited) statement of debt and other liabilities might respond to the financial statement accountability relating to debt and other liabilities, the sub-characteristic under “public accountability” that is “debt capacity” and provide useful information to consider in an evaluation of the financial condition of a public sector entity. Please explain your reasoning.

No they shouldn't. General purposes financial statements are just that...general purpose!! They should not attempt to address accountability issues for the elected representatives.

GENERAL COMMENTS

These changes appear to be brought about due to issues at the senior levels of government with their legislation. The proposed changes will create undue hardship and pressures (downloading) on local governments with no significant benefit to the users of local government financial statements.

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Name: Terry Martens, CGA

Organization: City of Armstrong, BC



Yes. By having each public sector group address the same set of accountabilities, better consistency is achieved.


Yes. This really is the only reason that such reports are created and distributed for a public sector organization.


Yes, so long as performance measures and other accountability results are sufficiently objective in their calculation/determination. It is recognized that some professional judgement and estimating is normal for financial statement items; however, relying too much on subjective data to create more of a "warm apple pie" type of report is dangerously turning financial statements into something they're not intended to be.


I agree with the first and third broad accountability. The second accountability would be nice to report to the public but is subject to too much uncertainty in calculating the actual results.


Yes. There is merit to all 16 accountabilities being dealt with in the financial statements. A suggested additional accountability would be the position of reserve funds and the change in reserve balances during the reporting period. This

would provide somewhat of a context to dealing with Accountability number 5 (consumption of TCA). However, this is not the best medium to deal with accountability - see Answer #9 and the general comments below.


The Asset & Liability Perspective alternative is preferred. I am not in favour of the other two models due to the uncertainties of accurately reporting the correct resource inflows and outflows. The current format is already nearly impossible for the average citizen to understand. Period inflow & outflow adjustments only add to the complexity of the statements and make the current situation worse.







categories?

Although I am not in agreement with deferred inflows and outflows, if it were enacted, only externally restrictions should trigger deferral. Internal policies, bylaws, and proclamations can easily be changed or reversed by various means (i.e. a change in government or change in majority of Council). Thus, an internally triggered deferral would need to be corrected if the internal restriction that triggered the deferral were to change. The complexity of reconciling such changes would add to the complexity of the deferral process.


No. If accountability is an issue, legislation should be changed forcing governments to issue separate public performance reports - apart from the financial statements. For example, if the Province created a legislated requirement for all local governments in its jurisdiction to regularly publish accountability documents, I believe that more of the general public would be interested in actually reading them since they would likely be more informal than audited financial statements. The result would be greater accountability. Changing accounting standards is not going to achieve this goal since the statements will be too complicated to understand.

GENERAL COMMENTS

I am a little surprised that PSAB is even considering this change. In my opinion, PSAB is somewhat overstepping its scope. Leave the accountability issue with legislation.


Formulaire de réponse Document de consultation 2 : La mesure de la performance financière dans les états financiers du secteur public

Ce formulaire ne vise pas à restreindre votre réponse. Chaque boîte de texte acceptera l'intégralité de vos commentaires. Vous pouvez sauvegarder le formulaire et l'envoyer, pour examen, à d'autres personnes de votre organisation avant de le soumettre.

Nom : JEAN MONFET

Organisation : Ministère des Affaires municipales, des Régions et de l'Occupation du territoire

Courriel : [email protected]

POUR ÊTRE PRIS EN CONSIDÉRATION, LES COMMENTAIRES DEVRONT ÊTRE REÇUS D'ICI LE 31 JANVIER 2013 Préparé par le Groupe de travail sur le cadre conceptuel

1. Êtes-vous d'accord pour que le cadre conceptuel pour le secteur public soit axé sur des responsabilités redditionnelles identifiées envers le public et ses représentants élus, plutôt que sur les besoins de divers groupes distincts d'utilisateurs? Veuillez expliquer votre raisonnement.

Nous sommes en accord avec cette orientation considérant que le public est un fournisseur de ressources des gouvernements ainsi qu'un bénéficiaire de leurs services. Il est ainsi légitime de positionner le public comme utilisateur de premier plan et d'accorder le cadre conceptuel en fonction des responsabilités redditionnelles envers cet utilisateur.

2. Êtes-vous d'accord avec la proposition voulant que l'objectif des rapports financiers du secteur public soit de fournir des informations à des fins de responsabilité redditionnelle? Veuillez expliquer votre raisonnement.

Nous sommes en accord avec cet objectif, le mandat des entités du secteur public étant de servir le public, il importe que les entités démontrent subséquemment de quelle façon ce mandat a été accompli.

3. Êtes-vous d'accord avec la proposition que les rapports financiers du secteur public devraient être conçus pour rendre des comptes au public et à ses représentants élus (autrement dit, que le public et ses représentants élus sont les principaux utilisateurs des rapports financiers)? Veuillez expliquer votre raisonnement.

Nous sommes en accord avec cette proposition. Voir réponse à la question 1 question ci-haut.

4. Êtes-vous d'accord avec les trois grands objectifs redditionnels proposés pour la reddition de comptes financière des entités du secteur public? Veuillez expliquer votre raisonnement.

Nous sommes en accord avec les trois grands objectifs redditionnels proposés, à l'effet que les entités du secteur public doivent rendre compte de la mesure dans laquelle elles se sont conformées à leur plan financier, de la mesure dans laquelle les activités ou les résultats actuels ont un effet sur les activités ou les résultats des périodes futures et de la condition financière de l'entité.

5. Êtes-vous d'accord avec les 16 éléments de reddition de comptes proposés pour les états financiers? Y en aurait-il d'autres à ajouter? Y en aurait-il à retrancher? Veuillez expliquer votre raisonnement.

Nous sommes en accord avec ces 16 éléments de reddition de comptes et ne voyons aucun autre élément à retrancher ou

à ajouter.

6. Lequel des trois modèles de présentation des états financiers préférez-vous? Le Groupe de travail devrait-il continuer à explorer l'option d'un modèle hybride (au sens donné à ce terme dans le Document de consultation)? Veuillez expliquer les raisons de votre choix et indiquer pourquoi vous n'avez pas retenu les deux autres modèles.

Nous préférons le statu quo. Dans un premier temps, le statu quo rencontre plus d'éléments de reddition de comptes que le modèle basé sur l'approche résultat. Également, considérant que nous sommes d'accord avec le fait que les rapports financiers du secteur public devraient être conçus pour rendre des comptes au public et à ses représentants élus, nous considérons que le statu quo procure pour ces deux utilisateurs un plus haut niveau de compréhension de l'information que le modèle hybride proposé. Les utilisateurs des rapports financiers des municipalités ayant déjà dû apprivoiser de nombreux changements aux états financiers au cours des dernières années, il serait inadéquat de changer pour un modèle dont l'articulation des états financiers entre eux ne serait pas complète, rendant davantage complexe la compréhension de l'information financière.

7. Si vous n'aimez aucun des trois modèles présentés dans le Document de consultation, y a-t-il un autre modèle de présentation des états financiers que vous préféreriez qui permettrait de s'acquitter des obligations redditionnelles identifiées? Veuillez expliquer le modèle que vous suggérez suffisamment en détail pour que le Groupe de travail puisse évaluer votre proposition.

S/O

8. Si l'on introduisait dans les états financiers les catégories de «revenus reportés» et de «charges reportées», quels éléments envisageriez-vous d'inclure dans ces catégories (par exemple, les dotations, les rentrées fiscales générales, les transferts reçus)? Avez-vous des suggestions quant aux critères à utiliser pour déterminer ce qui peut ou ce qui devrait être inclus dans ces catégories? Pensez par exemple aux critères suivants pour les revenus (et à des critères similaires pour les charges) : Pour qu'un revenu soit reporté, faudrait-il qu'il fasse l'objet d'une affectation externe imposant qu'il soit utilisé

pour défrayer des services à fournir dans des périodes futures (critère de la période d'utilisation)? Un engagement interne, mais rendu public, d'affecter de façon constante un certain type de revenu à des

services futurs serait-il suffisant pour déclencher le report?Si un engagement interne était suffisant pour déclencher le report, faudrait-il qu'une décision irrévocable

d'affecter les fonds au coût des services à fournir dans des périodes futures soit prise au moment de la réception des revenus/de la levée des impôts?

Jusqu'à quel point faudrait-il une relation directe entre un revenu et le coût des services à fournir dans des périodes futures pour que le report du revenu soit autorisé?

Faudrait-il que seuls les éléments qui ne répondent pas à la définition d'actif ou de passif puissent être candidats au report?

Considérant l'approche statu quo retenue, les revenus et les charges reportés inscrits à l'état de la situation financière devraient être ceux qui répondent à la définition d'actif ou de passif, ceci permettant de conserver la cohérence de l'ensemble du modèle.

9. Les états financiers à usage général d'une entité du secteur public devraient-ils comprendre d'autres états visant à répondre aux objectifs redditionnels identifiés? Par exemple, un état (vérifié) distinct de la dette et des autres passifs pourrait répondre à l'obligation d'informer le public sur la capacité d'endettement d'une entité du secteur public, et fournir des informations utiles pour évaluer la condition financière de cette dernière. Veuillez expliquer votre raisonnement.

Nous ne croyons pas que l'ajout d'autres états soit requis. Les notes et les tableaux complémentaires faisant partie intégrante des états financiers fournissent déjà l'information supplémentaire nécessaire aux lecteurs. Il faut éviter de noyer les lecteurs dans un excès d'information.

COMMENTAIRES GÉNÉRAUX

Je suis en accord avec les réponses proposées.

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Name: Stuart Barr, Assistant Auditor General

Organization: Office of the Auditor General of Canada



Yes, we agree with an approach focused on identified accountabilities to the public and their elected representatives. In our view, public accountability is the overriding characteristic of public sector entities and providing information to demonstrate such accountability is the primary objective of public sector reporting. Agreeing with this approach does not necessarily entail a disagreement with an approach focused on the needs of discrete user groups because both approaches would in our view likely result in similar conclusions. As articulated in this CP, “an accountability objective still requires consideration of to whom a public sector entity is accountable and for what...thus, the accountabilities remain grounded in, rather than divorced from, user needs but they are not driven solely by user needs”.


Yes, see response to Question 1 above.


Yes, we agree with this view. The public and their elected representatives are the primary users of the financial reports. While other parties may use public sector financial reports for various reasons, we believe that general purpose financial reports are intended to meet the common information needs of a potentially wide range of users. Therefore, special interest groups and their representatives would not meet this premise given each special interest group would have its own specialized information needs. Consequently, while general purpose financial reports may provide information useful to other parties, they are not prepared with their specific needs in mind.


Yes, we agree with the three proposed broad financial accountabilities expected to be demonstrated by a public sector

entity. a) the extent to which the entity performed in accordance with its financial plan Actual-to-budget reporting is important to demonstrate whether government organizations raised revenues and funds within their mandate and did not overspend authorities or enter into unauthorized transactions (debt, capital, etc). b) the extent to which current activities/results have an effect on the activities/results of future periods Affordability of additional spending measured through net debt (liabilities less financial assets) helps users understand the levels of future taxation or other revenue required to fund past transactions and events (such as spending). c) the state of the financial condition of the entity Since government capital spending may not focus on maximizing financial return, capital spending and its effect on net debt must be highlighted in the financial statements. Therefore, another indicator of a government’s financial position is its accumulated surplus / deficit (net debt plus non-financial assets). The tangible capital assets and other non-financial assets of a government form part of its financial position and are important because they are the resources available to and deployed by the government to accomplish its objectives (i.e. they represent “prepaid service potential”). Therefore both the net debt of the government and the accumulated surplus / deficit measures should be reported on the statement of financial position as they represent different perspectives of the government's financial position.


Yes, we agree with the 16 proposed financial statement accountabilities.


Given that none of the three financial statement presentation alternatives meets all the identified financial statement accountabilities and that each of the alternatives has its respective benefits and drawbacks, it is difficult to conclude that one alternative is clearly superior to another. On balance, the Office prefers the Asset and Liability model because it is logical, defensible, and it addresses qualitative characteristics of financial information that are important to users. While we support the Asset and Liability model, we are concerned by the wide variation in preparer interpretation and application of the PSAB definitions of liabilities, especially in the context of the new section on government transfers. PSAB should consider ways to address these concerns by reviewing and refining as appropriate the current liability definition, and developing application guidance for areas requiring significant judgement to assess whether liability criteria have been met. We do not support the hybrid model because we have significant concerns with the potential lack of articulation between the statements. Internal consistency between financial statements is important to make them understandable and meaningful to readers. We are also concerned by the high risk that the financial statements will become complex as additional information and reconciliations will be required to articulate relationships between the statements.


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categories?

We recognize that significant concerns have been expressed by the user community regarding volatility in annual surplus/deficit resulting from the current conceptual framework, and that a compromise may be required to satisfactorily address these concerns. Should PSAB choose to introduce deferred inflows/outflows, our preference would be the establishment of tight rules around deferred inflows and outflows to ensure rigour and consistency and minimize the risk of inappropriate usage of these categories. When establishing these rules, PSAB should consider at a minimum the work of IPSASB, which includes the following key points: • Deferral should only be limited to non-exchange transactions with stipulations on the reporting period in which they are to be used. • Multi-year grants with no substantive performance obligation or return provision would only quality for deferral if the period over which those resources can be used is documented and recorded in an agreement. Our preference would also be that only inflows externally restricted to fund costs of future periods should qualify for deferral. Endowments and government transfers could fall in this category.


We would be very cautious about adding additional statements. Additional statements may not be required to meet identified accountabilities – for example, debt capacity is currently captured in the statement of financial position and preparers are required to disclose adequate information about the nature and terms of a government's liabilities (PS 1201.046). The inclusion of additional statements is an area of judgement where different standard-setters have taken different approaches to certain accountability objectives. For example, budget to actual comparisons under PSAS are reported in the statement of operations and the statement of net debt (PS 1201.128), whereas under IPSAS entities are given a choice to report either as a separate additional financial statement or as a budget column in the financial statements (IPSAS 1.21). Another example relates to reporting unrealized valuation changes from the results of operations; PSAS currently prescribes the use of a separate statement of remeasurement gains and losses to report unrealized valuation changes (PS 1201.092) whereas IPSAS requires all resulting exchange differences be recognized as a separate component of net assets/equity (IPSAS 4.44 c)). While a model with additional statements may be manageable if a common understanding of messages and interrelationships is made, at one point too many statements may result in more complicated financial reporting process without increasing the understandability of the information.

GENERAL COMMENTS

We support the the Conceptual Framework Task Force in its efforts to review of the PSAB conceptual framework and the concepts underlying financial performance in the public sector. While this consultation paper includes a total of nine questions, the most significant ones in our view relate to identifying the preferred financial statement presentation alternative (question 6) and setting rules around accounting for deferred inflows and outflows should they be allowed (question 8). Given that none of the three financial statement presentation alternatives meets all the identified financial statement accountabilities and that each of the alternatives has its respective benefits and drawbacks, it is difficult to conclude that one alternative is clearly superior to another. On balance, for the reasons identified in our detailed response, the Office has a preference for the Asset and Liability model. Should PSAB introduce deferred inflows / outflows, the Office would support the establishment of tight rules around their use to ensure rigour and consistency and minimize the risk of inappropriate usage of these categories. When establishing these rules, PSAB should consider at a minimum the work of IPSASB.





Name: Claude D. Carter, FCA

Organization: CCC Inc.



Yes. Although I still believe that those governments owe money to (debenture holders, pension plan members, etc.) are equally relevant users of public sector financial reporting. These groups may have more of an interest in government's ability to meet its existing obligations than some in the general public and elected representatives.


Yes, but not at the exclusion of all other purposes. Valuation and the ability to meet existing obligations or to sustain levels of service should be of interest to most FS users. I suspect that such is still covered by the identified accountabilities, but maybe not as predominantly.


No. I believe those that government's have financial obligations (e.g., debenture holders, pension plan members) could also be considered primary users.


Yes, but I have a lingering discomfort about the central role that a government's financial plan or budget - something that is not necessarily developed using a generally accepted framework or set of standards/principles established after due process/diligence like PSAS - is afforded in the broad financial accountabilities. I know there is no way to get around it, but wouldn't it be great if the budget community in the Canadian public sector could at least identify and codify its key principles and practices. The reality is that government financial plans and budgets are not subject to independent assurance reporting like financial statements.


Yes


#1 - Asset and Liability


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categories?


GENERAL COMMENTS




Name: Office of the Comptroller, Province of New Brunswick

Organization: Government of New Brunswick



We agree with the approach that focuses on identified accountabilities to the public and their elected representatives. The private sector has users that are more financially sophisticated (e.g. investors and creditors) and there are both fewer and more clearly identified user needs for the information which together make it appropriate to design a framework around users and user needs. However, in the Public Sector, we agree that there are far more user groups, users that are less financially sophisticated, and user needs that are more difficult to outline. In addition, certain user groups/needs could be missed if they were the only items identified and used as the approach to a conceptual framework especially given the challenges with user needs studies.


We agree that the objective of public sector financial reports is to provide information for accountability purposes. Governance, performance, stewardship and sustainability should be the objectives of the public sector financial reports and guide the overall conceptual framework.


We agree that public sector financial reports should be designed to provide accountability information to the public and their elected representatives. Because the information is prepared for the public, we feel it is very important to ensure the statements are understandable. The current financial statements are already complex for most users, even for those with a reasonable understanding of economic activities and accounting. Therefore, we feel any changes made should clarify the statements not increase their complexity.


We agree with the three proposed broad financial accountabilities.


We need to have additional information regarding the 16 proposed financial statement accountabilities. We agree with the accountabilities but want to know what each accountability means and what the implications are on specific standards.


We prefer the Asset & Liability (A&L) Model for the following reasons: 1) it meets 14/16 of the outlined accountabilities; 2) users are familiar with the current model and we feel the hybrid model would increase the complexity of the statements; 3) the R&E model would increase volatility and subjectivity to the statements and the deferred inflows/outflows would increase complexity; 4) the A&L model reflects the true economic reality and decisions of government; 5) it would be easier to make changes to the existing A&L model as opposed to creating a new one. Therefore, would like PSAB to consider reviewing the A&L model and possibly making some changes (For example: review the definition of a liability and address the issue of volatility); 6) there may or may not be both unrealized and realized gains & losses. We feel that this is yet to be determined. 7) hybrid model introduces another statement and this would increase complexity. We felt it was very difficult to make a choice on one of the new models without numerical examples, some additional information regarding the financial statement accountabilities (and their impact on existing standards), and proposed rules and examples for the deferred inflows/outflows. The hybrid model does meet most of the outlined accountabilities, improve budget to actual comparisons and focuses on realized performance as opposed to anticipated performance. However, we don't feel we have sufficient information to choose the hybrid model and are also concerned that it would not be understandable to users. We feel the R&E model would introduce too much subjectivity to the statements and lead to inconsistent application of the standards across jurisdictions.


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categories?

We need additional information regarding deferred inflows and outflows with specific criteria that outlines how they will be used in the models with numerics attached. If deferred inflows and outflows were introduced to the financial statements, we would have to ensure that rules would be developed to prevent introducing subjectivity into the statements. For example, if inflows do not have to be externally restricted in order to be deferred, there could be very inconsistent application of the standards and a lot of subjectivity introduced. The deferred inflows/outflows would need to be restricted to certain non-exchange transactions with stipulations outlining the reporting period in which they are used.


We do not feel that this is necessary as sufficient information can be obtained from the A&L model statements to evaluate the condition of the entity. In addition, adding another statement will increase the complexity for users.

GENERAL COMMENTS





Name: Gregory MacBeth

Organization: Office of the Auditor General of Manitoba



We do not agree that the general purpose financial statements should focus on the public and elected officials at the exclusion of discreet user groups. For accountability and decision making purposes, service recipients and service providers will also need information for decisions making purposes.


Yes. However, we prefer IPSASB's accountability and decision making proposal. The CFTF already recognizes decision making as a subset of accountability. Considering both would be consistent with our answer in question #1.


Yes. However, information needs by other user groups should be considered. The focus should be on knowledgeable readers.


Yes.


Yes. However, it is not necessary to demonstrate accountability of all the characteristics in one set of financial statements. Other accountability documents could be prepared.


Of the three alternatives, we prefer the asset and liability model. The focus is on a government's ability to finance its activities, meet its financial obligations and provide service. Although the revenue and expense model has a valid objective of providing accountability information on the cost of services provided in the period and revenue applicable for the period, we have concern on the determination of how to allocate revenue to the appropriate period. We believe the hybrid model would be too confusing to the readers because there would be different conceptual frameworks for the statement of financial position and statement of operations plus a new statement introduced.


PSAB should seriously consider the adoption of IPSASB's model. International consistency is important.






categories?

The categories set up should be consistent with the IPSASB model.


General purpose financial statements could include other statements but information about specific accountabilities could also be included in notes or schedules.

GENERAL COMMENTS

I am replying on behalf of the Office of the Auditor General - Manitoba. My comments are from the perspective of the public sector within our jurisdiction.

January 31, 2013 Tim Beauchamp Director, Public Sector Accounting 277 Wellington Street West Toronto, Ontario M5V 3H2 Dear Mr. Beauchamp, RE: Consultation Paper #2 – Measuring Financial Performance in Public Sector Financial Statements Thank you for the opportunity to provide comments on the Measuring Financial Performance in Public Sector Financial Statements Consultation Paper. The Conceptual Framework project has been initiated in response to a report issued by a Joint Working Group (JWG) of select PSAB members and Deputy Ministers of Finance. Our overall impression is that the proposals in this Consultation Paper, particularly with respect to the financial statement presentation alternatives, go beyond what is required in order to deal with the concerns raised in the JWG report. We feel the seemingly simpler proposals put forward in that paper still have a large degree of merit. As a result, much of our present response revisits and re-iterates the suggestions contained in that document. One of the key issues raised in the JWG report was the disagreement with introducing fair value measurement to public sector financial reports. We are disappointed that none of the concepts in this Consultation Paper seem to address this concern. At no point does the paper discuss the appropriateness of including fair value measurement in a public sector conceptual framework. Instead, it seems to assume that the need for fair value measurement is a given. We strongly encourage the Task Force to give careful consideration to issues raised with respect to fair value measurement. Only in limited circumstances would fair value actually provide relevant information to the primary users of government financial statements. The Conceptual Framework should clearly articulate this narrow degree of applicability. In summary, we are in favor of the proposed emphasis on public accountability and the public as the primary users of financial statements. We agree with some, but not all, of the 16 proposed financial statement accountabilities. Any final list of accountabilities must be grounded in the identified needs of our primary user group. We don’t believe financial statement presentation alternatives need to be considered. Instead, we feel the needed changes can be accomplished by elaborating on certain concepts contained in the current asset-liability model.

PO Box 187 1723 Hollis Street Halifax, NS B3J 2N3 (902) 424-7021 [email protected] Department of Finance

Government Accounting

1. Do you agree with an approach to a public sector conceptual framework that focuses on identified accountabilities to the public and their elected representatives rather than an approach focused on the needs of discrete user groups? Please explain your reasoning. We agree that the framework cannot attempt to address the needs of all potential users. Discrete user groups typically have the ability to obtain the information they need through alternative means. Therefore, general purpose financial statements do not have to be designed to meet the information needs of these groups. In our view, the needs of the primary user group (public and elected representatives) should be the cornerstone on which decisions about the concepts underlying financial performance are made. We agree with an approach that focuses on identified accountabilities to the public and their elected representatives to the extent that those accountabilities are defined in response to the needs of the primary user group. It would be useful to see the degree to which the identified accountabilities align with identified user needs. More information on the results of user needs studies would allow us to provide a more thorough response to this question.

2. Do you agree with the proposal that the objective of public sector financial reports is to provide information for accountability purposes? Please explain your reasoning. Yes, we agree that the primary objective of government financial statements is to provide information for accountability purposes, specifically accountability over the management of public funds. The objective of public sector financial reports should be to meet the information needs of the primary user group. Citizens demand public accountability in two primary areas. First, they want assurance that public money is being used in a manner that reflects the priorities of the people. Second, they are concerned with the ongoing ability to receive the public services that are important to them. As such, the primary objective of public sector financial reports should be to provide the citizens with information that will help them assess the degree to which a government is meeting these accountabilities.

3. Do you agree with the proposal that public sector financial reports should be designed to provide

accountability information to the public and their elected representatives (i.e., that the public and their elected representatives are the primary users of the financial reports)? Please explain your reasoning. We agree that the public and their elected representatives are the primary users of government financial reports. As noted in the consultation paper, members of the public are often less financially sophisticated than other types of user groups. As such, the importance of understandability in a public sector conceptual framework for financial reporting cannot be under-emphasized. The conceptual framework must make it clear that understandability cannot be compromised without solid justification. The profession should not over-estimate the financial sophistication of the public and our elected officials. We must, to the extent possible, show complex matters in a simplified and understandable way. Financial accountability is a key component of the democratic process because many political platforms and promises are based on, or supported by, fiscal merit. For the public to adequately assess the degree to which the fiscal benefits are achieved, financial information must be as clear and approachable as possible.

When a proposed standard would undoubtedly impair understandability, it should proceed only if the primary user group will gain clear benefits from the information the standard intends to reveal. To provide benefits, the standard must provide a truer picture of the government’s economic reality. Standard setters must clearly demonstrate how a proposed standard will achieve this objective before incorporating it into the Public Sector Accounting (PSA) Handbook. The PSA standard on financial instruments is a case in point. We continue to argue that the public gains little benefit from seeing financial instruments, particularly derivatives, measured at fair value when there is no intention to settle these items at fair value. Derivative arrangements are designed to prevent fair value gains and losses so their substance is such that they have few to no economic consequences for the government holding them. As such, the government’s economic reality is not fairly represented by the fictitious, “moment-in-time” gains and losses that accrue at the end of a reporting period. Consequently, users are provided with complex information that is of little benefit to them and even less real financial consequence. Fair value measurement, in this context, does not provide the primary user group with the accountability information it needs.

4. Do you agree with the three proposed broad financial accountabilities expected to be

demonstrated by a public sector entity about the financial affairs of the entity? Please explain your reasoning. We agree with the three proposed broad financial accountabilities. These accountabilities appear to be a fair representation of what the public would want to know about the government’s financial matters. We further agree that financial statements can provide only a part of the information required to demonstrate the full range of these accountabilities. We continue to applaud the Task Force’s emphasis on addressing only those pieces of accountability that can reasonably be demonstrated through financial statements and the notes thereto.

5. Do you agree with the 16 proposed financial statement accountabilities? Are there any missing? Are there any that should not be included? Please explain your reasoning. We do not agree with the 16 proposed financial statement accountabilities. In particular, #6, “the separation of unrealized valuation changes from the results of operations,” should not be included. Valuation changes should only be reflected in financial statements to the extent that they represent a real economic risk to the government. When no real risk is present, these unrealized gains and losses do not provide any useful information about a government’s performance or its financial condition. When it is unlikely that items being reported at fair value will ever be settled at that value, no remeasurement to fair value should take place. If the instruments in question are likely to be settled at fair value, then changes in fair value represent a real risk to the government holding them. As a real risk, the unrealized gains or losses should flow through the statement of operations as a cost or reward of conducting business in that manner. In these circumstances, there is no need to separate unrealized from realized valuation changes. They should both be included in the Statement of Operations and used to assess government performance because they both reflect real risks the government has assumed and should be held accountable for. We are concerned that the 16 financial statement accountabilities may not be rooted in identified user needs. For example, we are not convinced that the public and their elected representatives are

interested in valuation changes that are unlikely to be realized. Before finalizing the list of financial statement accountabilities, the Task Force should confirm that these items are of true and material concern to the primary users of public sector financial reports. Information that is deemed somewhat useful, but not critical for public accountability, should be reserved for the notes to the financial statements. Finally, we would like to note that accountabilities 12 through 16 appear redundant. In our view, these concepts are already contained within accountabilities 9 through 11.

6. Which of the three financial statement presentation alternatives do you prefer? Is a hybrid model (hybrid in the sense described in this Consultation Paper) an option that the Task Force should pursue? Please explain the reasoning for your choice and indicate why the other two alternatives were not chosen. We do not believe that new financial statement presentation alternatives are necessary. Our preference is to continue with the existing model, but to address inconsistencies in the way the conceptual framework is presently interpreted. The two primary concerns relate to the liability definition in the context of non-exchange transactions and the use of fair value measurement. We believe there is room within the existing asset-liability model to deal with both of these issues. For example, the existing liability definition should be explained such that it clearly includes the moral/constructive obligation that is created when a government accepts non-exchange resources, from an external party, that are restricted for a specific purpose. In determining the degree and end to which the resources are restricted, the substance, not just the form, of the transferor’s intentions must be considered. This explanation could be contained within the conceptual framework, but would likely be a better fit within PS 3200 – Liabilities. In our view, this clarification would require a liability to be recognized when assets are received and the transferor’s intent is, in substance, for such assets to be used for a specific purpose. The liability would be settled as the assets are used as intended. Concerns raised with respect to fair value measurement can also be dealt with within the existing asset-liability model. Our present conceptual framework already acknowledges that public sector financial reports are to be “prepared primarily using the historical cost basis of measurement.” The framework could elaborate on this concept by explaining those limited situations in which fair value would be an appropriate basis of measurement. Specifically, the framework should restrict the use of fair value to those situations where the government is exposed to the real risks and benefits of fair value fluctuations. Fair value measurement should be avoided in cases where it does not represent the true economic substance of the government’s financial condition and performance. The hybrid-model is not an option that the Task Force should pursue. Financial performance and financial position are intrinsically linked and it is illogical to view them as separate, non-corresponding concepts. The introduction of a hybrid model adds complexity to financial reporting and reduces understandability for the primary user group. In our view, a new model is unnecessary because, as discussed above, the current deficiencies in PSA standards can be easily dealt with within the existing asset-liability approach.

We have not selected the revenue-expense model because we are concerned that there will be excessive subjectivity involved in assigning costs and revenues to one time period or another. We believe the existing asset-liability view, with the previously discussed amendments, will allow for more consistent reporting from one jurisdiction to the next.

7. If you do not like any of the three financial statement presentation alternatives set out in this Consultation Paper, do you have another preferred model that would meet the identified financial statement accountabilities? Please explain your suggested model in sufficient detail for the Task Force to evaluate the proposal. Our preferred approach is described in our response to question 6. It is different from the existing asset-liability alternative in that it does not meet the accountability which calls for “the separation of unrealized valuation changes from the results of operations.” However, as we’ve explained in our response to question 5, we do not believe this particular item should be included in the list of financial statement accountabilities.

8. If new financial statement categories for deferred inflows and outflows are set up, what items would you see being accounted for in these categories (for example, endowments, general tax revenue, transfers received)? Do you have any suggestions for the criteria that should be used to determine what can/should be accounted for in those categories? For example, consider the following for inflows (and similar questions for outflows):

a. Does there need to be an external restriction on an inflow, requiring it to be applied to cost of services provided in future periods (time or performance requirement) in order for the inflow to be deferred?

b. Is an internally made but publicly communicated commitment to consistently use a certain type of inflow to provide future services enough to trigger deferral?

c. If an internal commitment is allowed to trigger deferral, should an irrevocable designation for its application to the cost of service provision in future periods be made upon receipt of inflow/levying of taxation?

d. How direct should the relationship be between the inflow and the costs of services to be provided in future periods in order for deferral of the inflow to be permitted?

e. Should only items that do not meet the definitions of assets and liabilities be considered for inclusion in deferral categories?

In our view, the definitions of assets and liabilities should be used to determine if deferral is appropriate and therefore, new categories are not necessary. As described in our response to question 6, we feel that certain deferred inflows (restricted-use assets from external parties) already meet the definition of a liability. In our view, there is a claim on restricted-use assets; at minimum, a moral obligation to use them in a certain way. Once the government accepts the resources, with full knowledge of the transferor’s intentions, it has little discretion but to use the resources in the manner intended. As such that government has incurred a liability that can only be settled by using the resources in accordance with the substance of the transferor’s objectives. Deferred inflows that do not meet the liability test (e.g., resources which, in substance, have no restricted use), should be recognized as revenue. Similarly, deferred outflows that meet the definition of an asset should be recognized as such. Those that do not should be charged to expense.

9. Should a set of general purpose financial statements of a public sector entity include other statements based on the identified accountabilities? For example, a separate (audited) statement of debt and other liabilities might respond to the financial statement accountability relating to debt and other liabilities, the sub-characteristic under “public accountability” that is “debt capacity” and provide useful information to consider in an evaluation of the financial condition of a public sector entity. Please explain your reasoning. No, a set of general purpose financial statements of a public sector entity should not include other statements based on the identified accountabilities. Too much information can obscure the more important messages in a set of financial statements. It is our belief that additional statements will only serve to reduce understandability when the objective should be to improve understandability. An audited line item with required disclosures should be sufficient to meet users’ needs for accountability information with respect to debt (and other specific financial statement items). If there is reason to suspect that user needs are not adequately served by the information presently provided with respect to debt, then improved disclosures should be considered before the introduction of a new financial statement. This concludes our comments on the Measuring Financial Performance in Public Sector Financial Statements Consultation Paper. We would be pleased to discuss any questions or comments you may have with respect to this letter. To do so, please contact Jill Devanney ([email protected]), Rob Bourgeois ([email protected]), or the undersigned. Regards,

Suzanne Wile, CA Executive Director, Government Accounting Nova Scotia Department of Finance

Montréal, le 31 janvier 2013 Tim Beauchamp, directeur Comptabilité du secteur public 277, rue Wellington Ouest Toronto (Ontario) M5V 3H2 Monsieur, Vous trouverez ci-joint les commentaires du Groupe de travail technique Secteur public - Comptabilité dans le secteur public de l’Ordre des comptables professionnels agréés du Québec concernant le document de consultation « La mesure de la performance financière dans les états financiers du secteur public ». Nous vous serions reconnaissants de nous faire parvenir une copie de la traduction anglaise de nos commentaires. Veuillez prendre note que ni l’Ordre des comptables professionnels agréés du Québec, ni quelque personne que ce soit ayant participé à la préparation des commentaires ne peuvent être tenus responsables relativement à son utilisation et ils ne sont tenus à aucune garantie de quelque nature que ce soit découlant de ces commentaires, comme décrit dans le déni de responsabilité joint à la présente. Veuillez agréer, Monsieur Beauchamp, l’expression de mes sentiments distingués. Représentante du Groupe de travail technique Secteur public - Comptabilité dans le secteur public, Annie Smargiassi CPA, CA p. j. Déni de responsabilité et commentaires

DÉNI DE RESPONSABILITÉ

Les documents préparés par le Groupe de travail technique Secteur public - Comptabilité dans

le secteur public de l’Ordre des comptables professionnels agréés du Québec (Ordre) ci-après

appelés les «commentaires», sont fournis selon les conditions décrites dans la présente, pour

faire connaître leur opinion sur des énoncés de principes, des documents de consultation, des

exposés-sondages préliminaires ainsi que des exposés-sondages publiés par le Conseil des

normes comptables, le Conseil des normes d’audit et de certification, le Conseil sur la

comptabilité dans le secteur public, le Conseil sur la gestion des risques et la gouvernances et

d’autres organismes.

Les commentaires fournis par ce comité ne doivent pas être utilisés comme substitut à des

missions confiées à des professionnels spécialisés. Il est important de noter que les lois, les

normes et les règles sur lesquelles sont émis les commentaires peuvent changer en tout temps

et que, dans certains cas, les commentaires écrits peuvent être sujets à controverse.

Ni l’Ordre, ni quelque personne que ce soit ayant participé à la préparation des commentaires ne

peuvent être tenus responsables relativement à l’utilisation de ces commentaires et ils ne sont

tenus à aucune garantie de quelque nature que ce soit découlant de ces commentaires. Les

commentaires donnés ne lient pas, par ailleurs, les membres du Groupe de travail technique

Secteur public - Comptabilité dans le secteur public, l’Ordre ou, de façon plus particulière, le

Bureau du syndic de l’Ordre.

La personne qui se réfère ou utilise ces commentaires assume l’entière responsabilité de sa

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l’Ordre à l’égard de toute demande en dommages-intérêts qui pourrait être intentée par suite de

toute décision qu’elle aurait pu prendre en fonction de ces commentaires. Elle reconnaît

également avoir accepté de ne pas faire état de ces commentaires reçus via le Groupe de travail

dans les avis exprimés ou les positions prises.

COMMENTAIRES DU GROUPE DE TRAVAIL TECHNIQUE SECTEUR PUBLIC - COMPTABILITÉ DANS LE SECTEUR PUBLIC DE L’ORDRE DES COMPTABLES PROFESSIONNELS AGRÉÉS DU QUÉBEC RELATIFS AU DOCUMENT DE CONSULTATION «LA MESURE DE LA PERFORMANCE FINANCIÈRE DANS LES ÉTATS FINANCIERS DU SECTEUR PUBLIC ».

MANDAT DU GROUPE DE TRAVAIL

Le Groupe de travail technique Secteur public - Comptabilité dans le secteur public de l'Ordre des

comptables professionnels agréés du Québec a comme mandat notamment de recueillir et de

canaliser le point de vue des praticiens exerçant en cabinet et de membres œuvrant dans les affaires,

dans les services gouvernementaux, dans l'industrie et dans l'enseignement ainsi que le point de vue

d’autres personnes concernées œuvrant dans des domaines d’expertise connexes.

Pour chaque exposé-sondage ou autre document étudié, les membres du Groupe de travail

technique mettent leurs analyses en commun. Les commentaires ci-dessous reflètent les points de

vue exprimés et, sauf indication contraire, ces commentaires ont fait l'objet d'un consensus parmi les

membres du Groupe de travail ayant participés à cette analyse.

Les commentaires formulés par le Groupe de travail ne font l'objet d'aucune sanction de l'Ordre. Ils

n'engagent pas la responsabilité de celui-ci.


D’abord, les membres ont souligné le travail colossal du Groupe de travail sur le cadre conceptuel et

l’ouverture qui a été démontrée dans le document de consultation. Ils reconnaissent les efforts qui

ont été déployés dans le cadre de ce projet.

Ils suggèrent toutefois au groupe de travail de présenter des données chiffrées pour chacune des

approches. En effet, ceci permettrait de mieux comprendre les différences entre les trois approches

et de faire les liens avec les états financiers les reflétant.

Certains membres ont également précisé que le cadre conceptuel devrait être axé sur les états

financiers à vocation générale et qu’on ne devrait pas tenter de l’appliquer à des informations

requises par des utilisateurs dont les besoins sont spécifiques. Ils ont remarqué qu’il n’est pas clair si

le cadre conceptuel proposé vise un cadre plus large que les états financiers à vocation générale ou

non.

COMMENTAIRES SPÉCIFIQUES 1. Êtes-vous d’accord pour que le cadre conceptuel pour le secteur public soit axé sur des responsabilités redditionnelles identifiées envers le public et ses représentants élus, plutôt que sur les besoins de divers groupes distincts d’utilisateurs? Veuillez expliquer votre

raisonnement. 2. Êtes-vous d’accord avec la proposition voulant que l’objectif des rapports financiers du secteur public soit de fournir des informations à des fins de responsabilité redditionnelle? Veuillez expliquer votre raisonnement.

3. Êtes-vous d’accord avec la proposition que les rapports financiers du secteur public devraient être conçus pour rendre des comptes au public et à ses représentants élus (autrement dit, que le public et ses représentants élus sont les principaux utilisateurs des rapports financier)? Veuillez expliquer votre raisonnement.

Les commentaires qui suivent ont été faits par les membres concernant les 3 premières questions.

Bien qu’il ne soit pas évident de cerner tous les impacts qui découlent de la responsabilité

redditionnelle présentée dans le document de consultation, les membres ne sont pas en désaccord

avec la proposition de prioriser le public et ses représentants élus. À cet égard, certains membres ont

des difficultés à concevoir les différences que ceci apporterait dans les états financiers et les

informations à fournir.

Ils ont noté que le document de consultation fait référence aux besoins distincts des groupes

d’utilisateurs, en référant à des études, mais ils regrettent ne pas avoir eu plus d’information à cet

égard pour clarifier ces besoins et l’impact sur les états financiers.

Les membres se sont également questionnés sur la compréhension que pouvait avoir le public des

états financiers et des principes comptables du secteur public, ainsi que sur son intérêt à comprendre

et analyser ces informations. Actuellement les états financiers sont destinés principalement au

législateur et aux créanciers. En conséquence, les états financiers doivent présenter de l’information

compréhensible pour le public.

Enfin, certains membres ont soulevé des craintes concernant l’information additionnelle à fournir qui

pourrait résulter de cette proposition.

4. Êtes-vous d’accord avec les trois grands objectifs redditionnels proposés pour la reddition de comptes financière des entités du secteur public? Veuillez expliquer votre raisonnement.

Les membres se sont montrés d’accord avec la proposition, dans la mesure où la référence aux

activités ou aux résultats des périodes futures (énoncées dans le second grand objectif) n’amène pas

à fournir des informations de nature prédictive par opposition aux informations sur la situation qui

existe à la date des états financiers.

5. Êtes-vous d’accord avec les 16 éléments de reddition de comptes proposés pour les

états financiers? Y en aurait-il d’autres à ajouter? Y en aurait-il à retrancher? Veuillez expliquer votre raisonnement. Les membres soulignent que les 16 éléments répondent aux objectifs redditionnels proposés. En ce

qui concerne le 3e élément (la mesure dans laquelle les revenus de la période sont suffisants pour

couvrir le coût des services fournis au cours de la période de reddition de comptes, et les coûts des

années antérieures qui n’ont pas été couverts par les revenus des années antérieures), lequel est

jugé essentiel par les membres, ces derniers constatent qu’il n’est pas applicable à l’ensemble des 3

approches proposées.

6. Lequel des trois modèles de présentation des états financiers préférez-vous? Le Groupe de travail devrait-il continuer à explorer l’option d’un modèle hybride (au sens donné à ce terme dans le Document de consultation)? Veuillez expliquer les raisons de votre choix et indiquer pourquoi vous n’avez pas retenu les deux autres modèles.

Les membres ont expliqué que la gestion des entités du secteur public est basée sur un objectif de

redistribution de la richesse et de prestation de services plutôt que sur un objectif d’accumulation des

richesses à l’état de la situation financière. Les questions qu’ils reçoivent des utilisateurs des états

financiers sont surtout axées sur l’atteinte des résultats et le respect des budgets. Ainsi, ils ont donc

indiqués que l’approche bilancielle, soit celle utilisée actuellement, ne permet pas de répondre à ces

objectifs et ces questions jugés essentielles.

Les membres se sont questionnés sur les fondements qui ont amené l’élimination, dans l’approche

résultats, de l’état des gains et des pertes de réévaluation. Ils indiquent que cet état permet de réduire

la volatilité des résultats, qu’il a fait l’objet de débats dans le cadre du projet sur les instruments

financiers et finalement d’un consensus par l’adoption des normes concernées lors de son

introduction dans le Manuel de comptabilité dans le secteur public. Ainsi ils n’ont pas retenu

l’approche résultats, telle que présentée dans le document de consultation, laquelle introduit la

volatilité dans les états financiers.

Les membres ont préféré le modèle hybride qui permet le report de certains revenus et charges. Ils

indiquent que ceci permettrait de mieux refléter, entre autres, la gestion des sommes reçues,

contrairement au modèle actuel qui peut créer une discordance entre les ressources reçues et les

services rendus ou les biens acquis s’y rapportant. . Par contre ils ne se sont pas montrés favorables

à l’ajout d’un nouvel état, c’est-à-dire l’état des revenus et charges reportés.

7. Si vous n’aimez aucun des trois modèles présentés dans le Document de consultation, y a-t-il un autre modèle de présentation des états financiers que vous préféreriez qui permettrait de s’acquitter des obligations redditionnelles identifiées? Veuillez expliquer le modèle que vous suggérez suffisamment en détail pour que le Groupe de travail puisse évaluer votre proposition.

Les membres proposent un modèle hybride modifié, c’est-à-dire un modèle qui conserve l’état des

gains et des pertes de réévaluation, ce qu’ils considèrent comme adéquat. Toutefois, les revenus et

charges reportés seraient présentés dans une section distincte à l’état de la situation financière

(présentation semblable à l’approche résultat), et les variations s’y rapportant seraient détaillées

dans les notes aux états financiers, plutôt que dans un nouvel état financier.

8. Si l’on introduisait dans les états financiers les catégories de «revenus reportés» et de «charges reportées», quels éléments envisageriez-vous d’inclure dans ces catégories (par

exemple, les dotations, les rentrées fiscales générales, les transferts reçus)? Avez-vous des suggestions quant aux critères à utiliser pour déterminer ce qui peut ou ce qui devrait être inclus dans ces catégories? Pensez par exemple aux critères suivants pour les revenus (et à des critères similaires pour les charges) :

Pour qu’un revenu soit reporté, faudrait-il qu’il fasse l’objet d’une affectation externe imposant qu’il soit utilisé pour défrayer des services à fournir dans des périodes futures (critère de la période d’utilisation)?

Un engagement interne, mais rendu public, d’affecter de façon constante un certain type de revenu à des services futurs serait-il suffisant pour déclencher le report?

Si un engagement interne était suffisant pour déclencher le report, faudrait-il qu’une décision irrévocable d’affecter les fonds au coût des services à fournir dans des

périodes futures soit prise au moment de la réception des revenus ou de la levée des impôts?

Jusqu’à quel point faudrait-il une relation directe entre un revenu et le coût des services à fournir dans des périodes futures pour que le report du revenu soit autorisé?

Faudrait-il que seuls les éléments qui ne répondent pas à la définition d’actif ou de passif puissent être candidats au report?

Traitement des revenus reportés

Les membres sont d’avis que le traitement des dotations, qui représentent des actifs à conserver en

permanence par les entités et qui ne seront jamais utilisés, devrait être harmonisé avec le traitement

qui leur est accordé dans les Normes comptables pour les organismes sans but lucratif, soit comme

augmentation directe des actifs nets. Ils considèrent qu’une dotation ne répond pas à la définition d’un

passif, énoncée dans le cadre conceptuel et que le concept de l’équité interpériode ne permettrait pas

un report dans ces circonstances.

Les membres sont d’avis que les revenus devraient être reportés, lorsque des affectations externes

imposent une utilisation spécifique. Ils suggèrent également qu’une affectation externe puisse être

implicite, lorsqu’une relation directe est établie entre le revenu et le coût des services à fournir dans

les périodes futures. Cette mesure permettrait d’harmoniser la pratique avec celle des autres entités

dans des situations similaires tels les organismes sans but lucratif.

Les membres consultés se sont montrés en faveur du report de certains revenus pour lesquels il

existe des engagements internes et rendus publics d’affecter de façon constante aux services futurs,

dans la mesure où la relation entre le revenu et le coût des services est directe et clairement

identifiée, suivant le concept d’équité interpériode.

La majorité des membres a toutefois noté que cette approche peut créer certaines confusions en

pratique, en ce sens que certains revenus reportés pourraient également répondre à la définition d’un

passif. Des précisions devront être apportés afin d’établir dans quelles circonstances des sommes

reçues devraient être comptabilisées à titre de revenu reporté ou de passif, cette distinction ayant une

incidence sur le calcul de la dette nette à l’état de la situation financière.

Traitement des charges reportées

Les membres ont conclu que les charges à reporter devraient se limiter uniquement aux éléments qui

répondent à la définition d’un actif selon les normes existantes et qu’en conséquence, celles-ci

seraient reportées à l’actif en vertu d’une norme spécifique (par ex. les immobilisations corporelles)

plutôt qu’en vertu d’une nouvelle « notion » de charges reportées.

Ils sont d’avis que les charges ne devraient pas être reportées sur la base du concept de l’équité

interpériode.

Les membres ont toutefois noté que les Normes comptables du secteur public ne permettent pas la

capitalisation des actifs incorporels, à l’exception des logiciels. Ils sont d’avis que les actifs incorporels

existent dans les entités qui utilisent les normes du secteur public autant que dans les entités qui

utilisent les référentiels comptables du secteur privé. En conséquence, des critères de capitalisation

devraient être élaborés concernant les actifs incorporels dans le secteur public également. À défaut

d’élaborer une norme spécifique à l’égard des actifs incorporels, il pourrait être approprié de

comptabiliser à titre de charges reportés les éléments d’actifs incorporels pour lesquels des critères

de capitalisation stricts seraient respectés, de manière comparable par exemple aux

recommandations du chapitre 3064, « Écarts d'acquisition et actifs incorporels », des Normes

comptables canadiennes pour les entreprises à capital fermé.

9. Les états financiers à usage général d’une entité du secteur public devraient-ils comprendre d’autres états visant à répondre aux objectifs redditionnels identifiés? Par exemple, un état (vérifié) distinct de la dette et des autres passifs pourrait répondre à l’obligation d’informer le public sur la capacité d’endettement d’une entité du secteur public, et fournir des informations utiles pour évaluer la condition financière de cette dernière. Veuillez expliquer votre raisonnement.

Les membres ont conclu que les états financiers qu’ils proposent à la question 7 sont suffisamment

complets et utiles pour répondre aux obligations d’information et aux objectifs redditionnels identifiés.

1 | P a g e

PSAB Consultation Paper 2: Measuring Financial Performance in Public Sector Financial Statements

Response by the Ministry of Advanced Education, Innovation and Technology

Date: January 31, 2013

Prepared by: Donna Friedlander, CMA, Manager, Financial Performance

[email protected], 250-356-7742

Stefanie Singer, CA, Senior Financial Performance Analyst

[email protected], 250-387-9571

Executive Summary The PSAB Consultation Paper 2: Measuring Financial Performance in Public Sector Financial Statements (the Consultation Paper), has posed thoughtful enquires into the issue of financial accountability for public sector entities. In our review of the Concept Paper, we considered accountability from two angles: how should the Ministry of Advanced Education, Innovation and Technology (the Ministry) demonstrate financial accountability to the public; and how should BC’s public post-secondary institutions demonstrate financial accountability to the Ministry, their boards, students and investors.

In our view, public sector financial accountabilities must be broad enough to be applicable to the myriad public sector entities and activities – ranging from revenue-generating organizations, to not-for-profit entities focussed on service delivery to the public, to entities primarily responsible for long-term capital infrastructure projects. Most importantly, a financial accountability framework must focus on ensuring users can easily interpret results.

With this foundation, we have responded to the questions posed in the Concept Paper and have included a few suggestions and/or changes for consideration.

A large portion of the Concept Paper focused on how to best present (or model) financial results. In our view, the Revenue and Expense model is an excellent fit with the public sector operating environment in BC, as it aligns well with the existing balanced budget legislation, considers limitations on debt issuance, and correctly emphasises that decisions made today by public entities should not push unreasonable financial burdens onto future generations.

We would like to thank the Conceptual Framework Task Force for the significant work behind this paper and look forward to further developments in this area.

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Question 1: Do you agree with an approach to a public sector conceptual framework that focuses on identified accountabilities to the public and their elected representatives rather than an approach focused on the needs of discrete user groups? Please explain your reasoning.

Agree. Accountabilities of any public sector entity should be based on many factors, but should consider both discrete and general user needs as part of their development. However, caution must be used as too heavy a focus on discrete user needs may not promote any consensus of needs and prove difficult to administer. Notably, some users of financial statements with discrete needs augment their needs with information obtained from other sources (they do not rely solely on the financial statements). See Question 9 for an example of additional reporting for the post-secondary sector, required under the Financial Information Act. The Ministry of Advanced Education, Innovation and Technology also has the ability to request additional financial information/reports from public post-secondary institutions under the authorities of the University Act and Colleges and Institutes Act.

A balance between general and specific user needs should be considered when determining the level of detail that is to be presented.

Question 2: Do you agree with the proposal that the objective of public sector financial reports is to provide information for accountability purposes? Please explain your reasoning.

Agree. Accountability for effective and efficient use of public funds is a key objective of public sector financial reporting.

Question 3: Do you agree with the proposal that public sector financial reports should be designed to provide accountability information to the public and their elected representatives (i.e., that the public and their elected representatives are the primary users of the financial reports)? Please explain your reasoning.

The terms ‘public’ and ‘elected representatives’ may be too broad to describe users of public sector financial reports as it implies singular points of view and/or use. There are instances where the public uses public sector financial reports to inform personal decisions, ranging from investing in public entities to determining where to go for public services.

For example, public post-secondary institutions' financial statements are used by private donors/philanthropists who would view the statements to determine if the institution was a sound investment – does it have a track record of managing its operations and projects well, is it financially sustainable, does it compare well to peer institutions nationally and potentially internationally, etc.

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The level of detail included in General Purpose Financial Statements must be considered. Is it sufficient to prepare statements using a level of detail that would be required by the Ministry (elected official), or is it more appropriate to include details that the general public may want access to? However, as noted in the Consultation Paper, publicly accountable entities are unique in that members of the general “public may be less financially sophisticated than users of other types of financial reports”. Because of the potentially limited capacity to interpret financial results, consideration must be made regarding the level of detail that is included so that results are not misconstrued or inaccurately interpreted.

For example, comparing the financial results of a large university (e.g., University of British Columbia) to a smaller community college (e.g., Vancouver Community College) would not provide an apples to apples comparison on the use (efficiency or effectiveness) of public funds.

Summary: The statements should be designed to provide accountability information considering a balance between the needs of the general public and their elected representative. Where users have specific, discrete needs, these can be satisfied through additional or supplementary reporting requirements outside of the General Purpose Financial Statements.

Question 4: Do you agree with the three proposed broad financial accountabilities expected to be demonstrated by a public sector entity about the financial affairs of the entity? Please explain your reasoning.

Agree, with one revision.

Reasoning: The accountabilities are broad enough to be applicable in many settings. However, consideration must also be given to the limitations and restrictions that are imposed on public sector entities – it is important for readers to understand that there may be (and likely are) government-imposed limitations that would restrict an entity’s ability to meet set accountabilities.

For example, in the post-secondary sector, institutions are limited by the following factors that may reduce their flexibility to adapt in a timely manner, therefore influencing their ability to meet their accountabilities: o Requirement for annual surplus or balanced net results; o Limit on tuition fee increases (historically 2% per year); o Economy – the nature of the Post-Secondary sector is that enrolments are high when

the economy is poor and vice versa. Therefore, when budgets are tight there are fewer funds available to fund the increase in student demand. In an environment where students pay less than a third of total cost of their Post-Secondary education, this puts additional pressure on both institutions and the Ministry during economic contractions; and

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o Limitations on debt – Institutions are required to obtain Ministerial approval to obtain debt. Based on cumulative Provincial performance there are limitations on how much debt (if any) an individual entity may be able to obtain. Inability to obtain debt may limit an institution’s ability to its accountability as described in point (b) – the extent to which current activities/results have an effect on the activities/results of future periods.

Revision: In its response to the PSAB Concept Paper, the Research Universities Council of British Columbia (RUCBC) suggested a revision to current accountability (b), to include the concepts of sustainability, inter-generationally equality, and financial equilibrium. We agree with this suggestion.

Question 5: Do you agree with the 16 proposed financial statement accountabilities? Are there any missing? Are there any that should not be included? Please explain your reasoning.

Agree, with some comments and proposed addition.

The public would be looking at the financial statements of a public post-secondary institution under a service delivery lens – did the institution provide quality programming to improve BC’s knowledge economy, and in doing this, did it manage its resources – both physical and operational – effectively and efficiently?

Accountability 1 – The term “compliance” conveys a static environment however in practice budgets should be relatively flexible so as to allow organizations to adjust to the environment within which they operate.

Suggest using the wording “actual-to-budget financial performance comparison”, and not use the term “compliance”.

Accountability 6 – Separately reporting on unrealized valuation changes may ensure that users can clearly understand that the entity may have investment gains/losses based on market conditions at the financial statement date; however, in the post-secondary sector a very high proportion of these values are linked to endowment investments. As such, the institutions are obligated to use endowment returns as specified in the original donation – often for student scholarships, bursaries, or research. Therefore, they spend against unrealized gains/losses as a normal part of their operations (a set spend rate is established [e.g. 4%] even though gains/losses fluctuate). In BC’s balanced budget environment, the inability to account for these revenues can impede institutions’ abilities to meet their no-deficit accountability. Furthermore, it creates a scenario where accounting policy and the need to maintain balanced financial statement results may drive investment decisions.

Suggested change: Unrealized gains/losses should be reported as a separate line item on the Statement of Operations. This provides disclosure to the financial statement user that

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these amounts are not crystalized; however this also enables the reporting entity to retain the management responsibility to administer expenditures against these revenues appropriately.

New Accountability – Net equity by major category (unrestricted operating, restricted operating, capital and endowment), including opening balances, changes in the period and closing balances. (This idea was also put forward in the RUCBC response to the PSAB Concept Paper.)

Discussion:

Each institution is under ever-increasing pressure to invest in new facilities or renew existing tangible capital assets. This becomes an important accountability as Budget 2012 provides $460 million over the next three years for capital investments at BC’s post-secondary campuses. These assets are an integral component of the educational service delivery for students and can greatly influence B.C.’s ability to attract and retain students (whose decisions on where to study are influenced, for example, by campus maintenance and the availability of state of the art technologies/equipment). Therefore, as part of an institutions’ accountability, it should be able to demonstrate the extent to which its equity resources are available to meet ongoing capital asset needs vs. future program/service delivery.

Specifically, the accumulated and current year changes to investments in property, plant and equipment should be a key accountability measure and should be reported separately as a component piece of the Net Accumulated Surplus/Deficit.

Furthermore, many institutions have significant values of restricted net assets that are not available to meet the ongoing obligations of the institutions (e.g. endowment net assets were over $1.1 billion in BC’s post-secondary sector in 2009/10). As these assets do not contribute to an institution’s ability to meet future obligations or adjust to changes in operating environments, it becomes important to separate them from resources an institution does have access to for future use.

Restricted and unrestricted net assets should be reported separately as component pieces of the Net Accumulated Surplus/Deficit.

Question 6: Which of the three financial statement presentation alternatives do you prefer? Is a hybrid model (hybrid in the sense described in this Consultation Paper) an option that the Task Force should pursue? Please explain the reasoning for your choice and indicate why the other two alternatives were not chosen.

Preference is given to a revenue and expense model.

As the Concept Paper states, the idea of inter-period equity directly supports the operating and legislative environment in BC, where budgets are required to be balanced and debt issuance is

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under very tight limitations. A key overarching goal of public accountability is the idea that the burden of financial responsibility for decisions made today is not being pushed onto future generations, and this is also supported by this model.

Further rationale for choice:

Improved user understanding. Annual volatility in public financial statements may create false optimism and/or pessimism over the province’s financial state, which could lead users to draw inappropriate conclusions or make decisions based on short-term results.

Ability to smooth reported results. The revenue/expense swings that could be caused under current PSAS pose a particular problem for BC post-secondary institutions looking to attract donors/ philanthropists: any large swings in annual results (volatility) under current PSAS could significantly influence investor perspectives on the financial health and viability of the organization - particularly when BC universities are compared to, for example, Ontario universities that report under not-for-profit accounting rules and would have ‘smoothed’ annual results that would be potentially more ‘understandable’ or ‘expected’ to an unsophisticated user.

Improved long-term budgeting and planning. Internal restrictions of revenues may enable better long-term budgeting and planning within the province (contributions may not lapse at March 31 each year). For instance, BC operates under balanced budget legislation which can impede entities’ ability to accumulate funds for multi-year projects (once surpluses are closed to equity, they become inaccessible in future years under no-deficit policies). For example, in years where an institution retains resources for use on a future

project (new program development, new capital assets, etc.), the internal restriction of funds received would enable the institution to access the funds in future years to offset related costs, thereby improving effectiveness and efficiency of public funding.

Improved cash management. By providing an introduction of internal deferrals to remove volatility of annual financial results, government entities may be able to improve cash management practices and reduce borrowing costs. For example, for a post-secondary program that runs from March to June, the Ministry may choose, at year end, to internally restrict (defer) a portion of the funding for that program until it is required at the institution – in this simplistic example, government would hold onto 75 percent of the cash until the associated expenditures at the institution would be incurred (i.e., April to June). Currently, 100 percent of this funding would be expended on the Province’s books prior to the March 31 year end, with stipulations attached that would enable the institution to defer the revenues (liability).

Improved access to cash: Currently, PSAS requires that externally restricted contributions include stipulations that are rigorous enough to meet all liability criteria described in PS 3200. Where these criteria cannot be met institutions must include any contributions

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received during the given year into revenue regardless of whether the associated service delivery expense had been incurred. This results in a mis-match of revenues and expenses over time which is exacerbated under balanced budget legislation as it traps cash received in year one into net assets, which have limited accessibility in future years.

A key issue for consideration under the Revenue and Expense model is the concept of deferred inflows and deferred outflows. It would be imperative that the use of internal restrictions be well defined. Oversight and accountability of internal restrictions would need to be established in order to ensure the risk of non-objectivity was minimized. Any resultant accounting standards should also be prescriptive enough to minimize the degree of professional judgement required on internal restrictions.

The hybrid model should not be pursued.

A key consideration for not pursuing the hybrid model is the lack of articulation, which we view as a key element of financial statement user understandability. As noted on page 12 of the Consultation Paper, “as primary users of the public sector financial reports, members of the public may be less financially sophisticated than users of other types of financial reports”. Therefore, utilizing a model that diverges from complete articulation could result in limitations on the usefulness of the General Purpose Financial Statements for the public. When considering “Understandability”, one of the Qualitative Characteristics of Financial Statement concepts, how would the introduction of an additional statement (from five to six) enhance/impact understandability? Financial statement users have traditionally expected to be able to identify trends, events and significant transactions by considering changes in inter-related accounts (articulation) that currently exists in the asset/liability model. It was noted that a hybrid view would not require complete articulation of the financial statements and therefore this model could impose increased complexity therefore limiting the number of users/user groups who will find the statements to be useful.

If statements did not fully articulate under the Hybrid model, there is a risk that unsophisticated users of the financial statements may interpret this disconnect as government(s) trying to improve bottom lines (“cooking the books”). Communication of changes and reasoning, in layman terms, would be essential.

In addition to the extra statement that would be required in the Hybrid model, there is the potential for extra notes and disclosures to be required as well as supplementary schedules. This could prove to be onerous for not only the financial statement preparers but users.

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Question 7: If you do not like any of the three financial statement presentation alternatives set out in this Consultation Paper, do you have another preferred model that would meet the identified financial statement accountabilities? Please explain your suggested model in sufficient detail for the Task Force to evaluate the proposal.

N/A: Prefer revenue and expense model.

Question 8: If new financial statement categories for deferred inflows and outflows are set up, what items would you see being accounted for in these categories (for example, endowments, general tax revenue, transfers received)? Do you have any suggestions for the criteria that should be used to determine what can/should be accounted for in those categories? For example, consider the following for inflows (and similar questions for outflows):

Does there need to be an external restriction on an inflow, requiring it to be applied to cost of services provided in future periods (time or performance requirement) in order for the inflow to be deferred?

Is an internally made but publicly communicated commitment to consistently use a certain type of inflow to provide future services enough to trigger deferral?

If an internal commitment is allowed to trigger deferral, should an irrevocable designation for its application to the cost of service provision in future periods be made upon receipt of inflow/levying of taxation?

How direct should the relationship be between the inflow and the costs of services to be provided in future periods in order for deferral of the inflow to be permitted?

Should only items that do not meet the definitions of assets and liabilities be considered for inclusion in deferral categories?

For the new financial statement categories of deferred inflows and outflows to add value and provide added benefit for the post-secondary sector suggested criteria should be more general than criteria in 3200 required for deferred contributions; however, criteria must continue to support “reliability” required by PS 1000.

Inflows with external restrictions requiring them to be applied to cost of services provided in future periods will typically meet criteria defined in PS3200. As such, many of these contributions are assumed to already be reflected in the Statement of Financial Position (deferred revenues). Where the external restriction is not rigorous enough to meet all liability criteria defined in PS3200, it should be considered for a deferred inflow.

Agree that an internally made, publicly communicated commitment should be a factor for consideration in triggering an internal deferral (public communication of the intention of the use of funds does bind the entity to make good on its promise). This would put the onus on the receiving entity rather than transferring government, as currently required

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by current deferral criteria rules. However, this should not be the only consideration and further consultation and thought is required.

Yes, there should be an irrevocable designation for internally determined deferred inflows. This would help mitigate the underlying risk of an entity using this category to inappropriately “income smooth”. Would penalties/reclassification limitations be imposed similar to those that exist for the classification of Held to Maturity investments under International Financial Reporting Standards (and pre-changeover private standards)? If there was an irrevocable designation how specific would internal commitments need to be? For instance, would an institution be required to state what specific program funds are to be used for in the future? Or as an example, would it be enough to state that funds will be deferred to support Trades program development? The preferred model for the post-secondary sector would be to provide specific guidance but also allow some flexibility for the recipient to ensure the most effective and efficient use of funds (this would align with the Trades program development example provided).

The relationship between the inflow and costs of services to be provided in future periods should be general enough to cover costs that are allocated (i.e. general overhead and administration costs that are incurred as a cost of providing the direct service).

No, it would be useful to have this new statement show items that meet the definition of financial elements (asset and liability) as well as those that do not. Ideally, these two categories would each have their own sections within either of inflows and outflows. One section would show the increases and decreases of items that meet the definition of assets and liabilities, while the other section would show the activity for items that do not meet the above definitions.

The post-secondary sector is quite unique in that institutions may receive endowment contributions from donors/philanthropists. Consideration should be given to these unique assets and the income and expenses associated with them. As noted in RUCBC’s response, these elements should be considered on their own merit, either under PSAS PS4200 or an alternative, without attempting to coerce them into a pre-existing category.

Question 9: Should a set of general purpose financial statements of a public sector entity include other statements based on the identified accountabilities? For example, a separate (audited) statement of debt and other liabilities might respond to the financial statement accountability relating to debt and other liabilities, the sub-characteristic under “public accountability” that is “debt capacity” and provide useful information to consider in an evaluation of the financial condition of a public sector entity. Please explain your reasoning.

Yes, a set of General Purpose Financial Statements should include a Statement of Net Assets, which would support the new Accountability suggested under Question 4.

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However, caution must be used in creating new statements that do not add direct value to a general user. As stated in the response to Question 1, many discrete user groups have access to additional financial information via other pieces of legislation, or through direct contact with the reporting entity. As a further example of this, under the Financial Information Act, Public body entities are required to prepare and submit an annual Statement of Financial Information (SOFI) within seven months of the entity’s fiscal year end. The information contained in this submission is made available for public viewing at the Provincial Legislative Library and is available by request to any submitting entity. The SOFI contains a copy of the entity’s audited financial statements, in addition to the following schedules and related information (which are unaudited): schedule of debts; schedule of guarantee and indemnity agreements; schedule of employee remuneration and expenses; and schedule of suppliers of goods and services.

If additional statements were to be included in general purpose financial statements, based on the identified accountabilities consideration should be given to whether this information is audited or provided as unaudited supplementary schedules. Imposing a requirement to have additional schedules/statements audited would increase audit costs to the public entity and potentially not support entity’s ability to meet legislated timelines for publication of audited results. There is a potential for the additional costs to outweigh any benefits received by the users of this additional information.

As noted in RUCBC’s response, encouragement should be made to include more extensive Management Discussion and Analysis (MD &A). MD & A complements the financial statements by providing the “story”. This could assist the general public (whom have been identified as primary users) in overcoming their limited sophistication level by explaining the material activities that occurred during the year.



Nom : Berthiaume Guylaine

Organisation : SOCIÉTÉ DES ÉTABLISSEMNTS DE PLEIN AIR DU QUÉBEC




Partiellement en accord, car les entités du périmètre comptable du gouvernement dont les revenus proviennent de ventes de biens et services de type commercial donc offert en libre marché, ne devrait pas produire des états financiers pour les élus car la divulgation d'éléments tel que le budget revêt des enjeux pouvant mettre en péril les stratégies de croissance de l'organisation.


En partie, si l'organisation est de nature commerciale , non , les états financiers doivent refléter la réalité des activités commerciales et ne pas référer à des termes relatifs à la gestion des deniers publics . À titre d'exemple la notion de dette nette est totalement inappropriée pour une organisation à caractère commercial. Je trouve que l'application de ces normes ne prennent pas en compte la réalité de certains type d'organisme et ne laisse pas de place au jugement professionnel.


Lorsqu'un organisme ayant un conseil d'administration responsable de la gouvernance et ce dans un cadre d'activités commerciales , les rapports financiers sont d'abord pour le C.A. et par la suite aux lecteurs grand public qui ont des intérêts à l'égard de cet organisation. Lorsque que la contribution du gouvernement est peu représentative des revenus totaux la notion de reddition de compte aux élus n'est pas appropriée car les revenus ne sont pas la résultante de choix de politiques fiscales ou de taxation du parlement ou de l'assemblée nationale via notamment l'adoption du budget,


Les objectifs sont louables pour les entités dont les revenus principaux proviennent du gouvernement, pour les organismes à vocation commerciale c'est inapproprié compte tenu des arguments cités précédemment. Le budget ou plan financier dans un contexte d'affaires commerciales n'est pas à publier car implique trop de risque.


Tel qu'expliqué précédemment, les 16 éléments sont adaptés à des organismes dont le budget ou plan financier dépend du Gouvernement, pour entités à vocation commerciale ces critères et notamment les numéros : 1-3-4-5-7-10-11 ne sont pas applicables, car ils réfèrent à des termes et des réalités de gestion de la dette publique qui ne collent pas au contexte commercial.


Aucun commentaire, car je formule mes commentaires à l'égard du contexte commercial.








Les sommes allouées pour des projets d'immobilisations qui sont subventionnés par le gouvernement.


Pour les organisations à vocation commerciale les états financiers devraient comprendre un bilan traditionnel et exclure l'état de la situation financière, l'état de la dette nette , réintroduire les notions de court et de long terme de même que

l'avoir lorsque l'organisme peut émettre du capital-actions.


Avec ces nouvelles exigences, les organismes relevant du gouvernement et qui sont à caractère commerciale n'auront d'autre choix que de passer aux IFRS et ainsi de défrayer des coûts importants, les conventions comptables ne laissant aucune place pour ce type d'organisation rare mais qui existe malgré tout. Je demeure disponible pour tout autre information et merci pour l'intérêt que vous porterez à mes commentaires.


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Wayne Morgan Office of the Auditor General of Alberta Edmonton, Alberta January 30, 2013 Tim Beauchamp, Director Public Sector Accounting 277 Wellington Street West Toronto, Ontario Dear Mr. Beauchamp, Our response to PSAB Measuring Financial Performance in Public Sector Financial Statements – Consultation Paper 2 is below. Do you agree with an approach to a public sector conceptual framework that focuses on identified accountabilities to the public and their elected representatives rather than an approach focused on the needs of discrete user groups?

Yes, we agree. The accountabilities of public sector entities arise from the public and their elected representatives, so a focus on the public and their elected representatives is appropriate. Public sector entities can report other information that meets the needs of discrete user groups separately, or in special purpose reports.

Do you agree with the proposal that the objective of public sector financial reports is to provide information for accountability purposes?

We agree. The broad accountability objectives noted in the paper (governance; financial and non-financial performance; stewardship and sustainability) are useful. We agree that accountability and decision making (in terms of the decisions to be made by the public or elected officials) are not mutually exclusive and a framework can have both objectives. However, it is less likely a framework can have an objective for valuation purposes for investors or creditors and also an accountability framework and successfully meet the needs of both sets of users, and therefore the Consultation Paper’s focus on the public and elected officials rather than valuation by investors and creditors is appropriate.

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Do you agree with the proposal that public sector financial reports should be designed to provide accountability information to the public and their elected representatives (i.e. that the public and their elected representatives are the primary users of the financial reports)?

We agree, as explained above. We agree understandability is important. As noted in the paper, there are several information intermediaries that may assist in interpreting information – the media, policy analysts, think tanks, etc. While members of the public may have direct access to their elected representatives, they still need general accountability information to make effective use of this access.

Do you agree with the three proposed broad financial accountabilities expected to be demonstrated by a public sector entity about the financial affairs of the entity?

The three proposed broad financial accountabilities may be too detailed. The issue may be that they are described as “financial” accountabilities when it may be more useful to consider accountabilities and then which specific kinds of accountabilities matter. Notwithstanding that the paper’s purpose is “measuring financial performance,” there needs to be clear logic or explanation of why financial accountabilities matter. One approach is to derive these from more general accountabilities.

Laughlin (2008, “A Conceptual Framework for Public Benefit Entities”, Public Money and Management) offers one example, drawing upon Stewart, explaining four different levels of accountabilities:

probity and legality (an account of receipt and use of money and demonstrating that it satisfied a range of requirements, including compliance with the law)

process accountability (information on internal processes through which inputs are converted into outputs and outcomes)

performance accountability (making transparent expected and actual performance related to objectives about outcomes)

policy and programme accountability (information on broader policy issues that drive the reporting entity and programmes it is pursuing)

Stewart (1984, “The Role of Information in Public Accountability,” Issues in Public Sector Accounting, Hopwood and Tompkins (eds.)) explains that as different levels of accountability are reported on, it may be challenging for accountants to expand in these directions, but accountants need to engage with and incorporate more non-financial information with the accounts to make the information meaningful and promote accountability. For example, he notes (p. 31) that both performance and programme accounts should relate financial inputs to achieved outputs (i.e. goods or services provided) or outcomes (i.e. effect or impact of goods or services provided).

While many other types of reporting, such as non-financial reporting, contribute to reporting on accountabilities in these various levels, it seems that the Consultation Paper emphasizes the first

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(probity and legality concerns) to great extent but provides little on the remaining. Yet it may be that information in any of the levels is only meaningful in the context of the other levels. Perhaps the public doesn’t care about cash on hand balances or deficits, but cares very much if service delivery outcomes in the present or the future are impacted, or if the cash on hand or deficits signal policy or programme shifts. The Conceptual Framework Task Force has an opportunity to more tightly and meaningfully integrate financial and non-financial (or reporting on the various levels above), simply by recognizing that reporting financial performance itself without other information cannot fully serve accountability needs (other than probity and legality as noted).

Do you agree with the 16 proposed financial statement accountabilities? Are there any missing? Are there any that should be included?

There are too many, and some subsume into others (for example #12 cash and cash equivalents are also part of #9 all assets of the entity). Missing are intangibles, assets in right of the public sector entity, collections, etc. – these are of course well known exceptions to PSAB’s current framework, but it is unclear why they should be excluded. While it may be that they cannot be easily measured, and therefore cannot be included in the accounting math needed to arrive at a total of assets, perhaps part of the broad financial accountability would include a list of such items, or a disclosure of why these are valuable (in terms of outcomes or even at the policy/programme accountability level).

Similarly, tangible capital assets are included, but their relation to financial condition is not explained. Perhaps they matter to financial condition if they are available to be sold if necessary, but adding together the money values of land, roads, buildings, bridges etc. in terms of accountabilities to the public is more a concept of service potential maintained or increased, or is simply included to support the accounting mechanics of enabling amortization (a useful component of cost of service as accountability #5 describes) to be calculated. Furthermore, it is not clear why tangible capital assets are excluded from the net debt calculation, if they are part of financial condition.

The purpose of accountability #6 is likewise unclear. Separation of unrealized valuation changes from the results of operations may be accomplished by any of the models in the paper by simply including the relevant presentation or disclosure. More generally, there are likely more than just three models, if one considers the fundamental accounting issues are both recognition and measurement, because measurement requires a decision on whether historical cost, or inflation-adjusted current prices, or fair values, are the appropriate measurement basis. For example, there is no particular reason why the asset-liability model is historical cost, or fair value, or some combination as is presently the case under PSAB. The Consultation Paper could explore this issue in more detail with respect to which measurement basis best meets accountabilities.

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Our main point is that each of these detailed accountabilities (or financial statement elements) need to be better mapped, beyond Appendix B, to accountabilities.

Which of the three financial statement presentation alternatives do you prefer? Is a hybrid model an option that the Task Force should pursue? Do you have another preferred model?

We prefer an asset and liability model if necessary, but not necessarily an asset and liability model. The paper suggests the asset and liability approach is superior, anchored to the definition of an asset. But as Bromwich, Macve and Sunder (2010, “Hicksian Income in the Conceptual Framework”, SSRN) explain, the asset and liability view may not be superior. Accounting conventions become necessary under both approaches and the important questions to ask are which conventions are useful, and which ones need to be modified. In other words, sometimes accountabilities will require that something appears in the framework that leads to a more refined or new understanding of the definition of asset or liability, as may be the case with transfers, but this should be considered simply a useful advance on the conventions employed, rather than somehow representing a theoretical shift or movement away from what was some imaginary or theoretical pure model.

It may be useful to point out that the current PSAB model is not a pure asset/liability one – for example, pension accounting, fair value accounting for some but not all items, deferral of gains and losses of fair value adjustments. So it is unclear whether the Consultation Paper is suggesting that if a “purer” asset/liability model is adopted, whether for example unrealized gains and losses would now be part of surplus, or even whether changes in fair values of tangible capital assets would also be part of surplus. It may not be sufficient to say these are merely distinguishing between different types of performance if they relate fundamentally to not only recognition but measurement of assets and liabilities.

The Consultation Paper usefully explains that neither of the models (Asset/liability or revenue/expense) meet all financial statement accountabilities, but as noted above we are concerned these are simply a list of existing financial statement elements not closely enough tied to a more integrated and rich set of accountabilities.

The hybrid model is the least understandable. While interesting, it runs a greater risk of impeding accountability because of its complexity and lack of articulation.

If new financial statement categories for deferred inflows and outflows are set up, what items would you see being accounted for in these categories?

We have no suggestion for these items.

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Should a set of general purpose financial statements of a public sector entity include other statements based on the identified accountabilities?

As noted above, we think there are significant opportunities to more tightly integrate the financial information with other information necessary to evaluate other accountabilities. Some of these may be done in separate schedules.

Thank you for the opportunity to comment. Sincerely, Wayne Morgan, PhD, CA, CISA




Name: Dee Danallanko

Organization: Regional District of North Okanagan



Yes. Government at any level is first and foremost accountable to the public and to those chosen by the public to represent them. To focus on the particular needs of certain groups would undermine this concept as the focus would no longer be on the needs of the public.


Yes. The primary objective of a government's financial reporting is accountability through transparency. That being said, in order to be transparent, the information must be clear, understandable and presented with the least amount of complexity possible.


Yes. As governments are accountable to the public and financial reporting is a tool to achieve that accountability, then it follows that public sector financial reporting should hold a government accountable to the public.


Yes. I agree with the three proposed broad financial accountabilities as follows: 1. The extent to which the entity performed in accordance with its financial plan: the general public, including the media, rely on the published annual budget in order to measure the performance of a government. Therefore, this metric is the most useful of the three as it is the most widely utilized and understood. Even the most unsophisticated user can understand the concept of comparing actual expenses to budgeted expenses. 2. The extent to which current activities/results have an effect on the activities/results of future periods: this metric is important, but also the most underutilized. The general public seems to focus on the current year’s results and not a lot of attention is paid to how the current year's surplus or deficit will impact future years. More emphasis should be placed on

this. 3. The state of the financial condition of the entity: this is important but can be easily misread by users. For example, if a financial statement reader was to focus on a government’s net liabilities without consulting other indicators or examining individual balances such as cash and long term debt, he or she would undoubtedly come to the wrong conclusion about the financial health of the entity.









categories?

I do not agree with new financial statement categories being established for deferred inflows and outflows. These categories, unless very specifically defined, would allow way too much discretion on the part of financial statement preparers to defer items that are deemed to belong to a future period rather than the current period.


No. As more statements are added to the required financial reporting over time, it undermines many of the core principles of financial reporting, such as relevance, cost vs benefit, timeliness, and understandability and clear presentation. We are asking too much of general purpose financial statements.

GENERAL COMMENTS





Name: Morina Rennie

Organization: University of Regina



Yes. This approach acknowledges that public sector financial reporting an important aspect of demonstrating accountability.


Yes. The public sector's need to provide information to demonstrate accountability through its public accounts (or other financial reports) is one important difference between the public sector and the private sector (where financial statements exist primarily to provide information for economic resource allocation decisions).


Yes. But in the case of governments, specifically, I wonder if Parliament/Legislatures should be set apart somehow as a separate category. Because financial transactions occur on the basis of parliamentary/legislative authority, the public accounts provide a very specific sort of accountability to the Parliament/Legislature that goes beyond its general accountability to the electorate. Also, I imagine lenders may have an interest in public sector financial statements as well. This could still be framed as accountability, but again in a more specific sense than accountability to the general public.


Yes, they seem reasonable. My only qualifier is that the second accountability, in its current form, may be a bit too broad. The way it is written could suggest that a set of financial statements could tell us more about the future than is feasible. I think really what the second accountability is getting at is about constraints on the future imposed by current activities (such as increasing net debt, increasing accumulated deficit and the like).


These seem reasonable.


Of the three financial presentation alternatives presented, I prefer the asset-liability model. However, it is possible that there are models not presented here that I would like better than the status quo. A transparent financial statement articulation is an important aspect of accountability, including the ease of tracking the surplus/deficit items through time. I believe the hybrid option, as presented, is not very transparent. Part of the difficulty is in the statement of deferred inflows and outflows. The inflow/outflow items relate to aspects of the statement of annual operating surplus/deficit but the financial statement user is not provided with a way of tracking this. Also, it does not seem conceptually correct to include accumulated deferred inflows and outflows as a component of net assets/liabilities and I think it would be very difficult for many financial statement users to interpret. It also gives the impression of being some sort of "slush" account that can be drawn upon to manipulate the annual surplus/deficit. The concept of net assets/liabilities that appears in the 2nd and 3rd presentation options is likely going to be confusing to financial statement users (for example, they might wonder why net debt is not the same thing as net liabilities or they might wonder how a public sector organization could be in a net asset position and a net debt position at the same time.) It would be best if you can avoid net asset terminology all together.


Maybe a fourth option that could be considered is to loosen up the definition of asset and liability to incorporate some deferred inflow/outflow type items. The current asset and liability definitions are largely drawn from private sector gaap and it is possible that in the public sector a broader view could be appropriate. (If this would require the division of liabilities into financial liabilities and non-financial liabilities then a different style of Statement of financial position might be desirable.) No matter what presentation system is selected, it might be easier to implement if a balancing style of Statement of financial position were used that would allow a listing of the components of the accumulated surplus/deficit (and that would come to the total accumulated surplus/deficit). I realize that this could make it difficult to portray net debt directly on the Statement of financial position and that would be unfortunate because net debt is such an important item. But net debt is a modified accrual based concept (and has also been used in conjunction with the modified cash basis in even earlier times), and it is not a natural fit with the full accrual accounting model. (But net debt it could be included in a note or schedule if it isn't on the statement of financial position.)






categories?

I don't think there should be separate categories for deferred inflows and outflows.


No, I can't think of any. And I think the presentation of liabilities on the Statement of financial position is sufficient.

GENERAL COMMENTS

This consultation paper is excellent. The task force has done a great job.


Finance Comptroller’s Division Comptroller’s Office 715 – 401 York Avenue Winnipeg, Manitoba R3C 0P8 Phone: (204) 945-4919 Fax: (204) 948-3539 E-mail: [email protected] January 31st, 2013 Mr. Tim Beauchamp, Director Public Sector Accounting 277 Wellington Street West Toronto, Ontario M5V 3H2 Dear Mr. Beauchamp:

Re: Consultation Paper 2 – Measuring Financial Performance In Public Sector Financial Statements

Thank you for providing the Province of Manitoba (the Province) the opportunity to comment on the Consultation Paper (CP) on the “Measuring Financial Performance in Public Sector Financial Statements”. The CP is the second document issued for comment by the Conceptual Framework Task Force. The Province appreciates this opportunity and agrees that the development of a conceptual framework is one of the most important projects to the Public Sector Accounting Board and its stakeholders. The Province is supportive of the overall general approach taken by PSAB and the Conceptual Framework Task Force. The Province is pleased that the proposed scope of the conceptual framework will continue to only focus on general purpose financial statements. The Province’s expectation is that the development of the conceptual framework will improve the information provided to the users of general purpose financial statements for public sector entities. The Province sees the primary users as being the public and their elected representatives. The Province firmly believes that public accountability is the overriding characteristic of public sector entities and the principle objective of financial statements is to provide information for accountability purposes. As requested, the Province has responded to your specific questions in the CP. We appreciate the opportunity to comment on this CP and documents on the conceptual framework. If you have any questions or concerns related to this comments please contact the undersigned. Yours truly, “Original Signed by’ Betty-Anne Pratt, CA Provincial Comptroller On Behalf of the Province of Manitoba

1) Do you agree with an approach to a public sector conceptual framework that focuses on identified

accountabilities to the public and their elected representatives rather than an approach focused on the needs of discrete user groups? Please explain your reasoning.

Yes, the Province agrees that a public sector conceptual framework should focus on the accountabilities to the public. The objectives for financial reporting for discrete users are different from the general public. Discrete or specified users often require information for the purpose of making decisions. The objectives of financial reports for specified users are often for the purposes of compliance, performance and sustainability reporting which goes well beyond the information normally available to the general public. Discrete users usually have the access to or authority to obtain the information they require.

2) Do you agree with the proposal that the objective of public sector financial reports is to provide

information for accountability purposes? Please explain your reasoning.

Yes the Province agrees that the objective of public sector financial reports is to provide information on accountability. The Province views the budget and the reporting of the results against the budget as the key accountability documents.

3) Do you agree with the proposal that public sector financial reports should be designed to provide accountability information to the public and their elected representatives (i.e., that the public and their elected representatives are the primary users of the financial reports)? Please explain your reasoning.

Yes the Province agrees that the general public and their elected representatives are the primary users of public sector entity financial statements. The general public includes both resource providers and service recipients of government services. The general public and the elected representatives require the financial statements to evaluate whether the government has used the resources provided in accordance with the financial plan.

4) Do you agree with the three proposed broad financial accountabilities expected to be demonstrated by a public sector entity about the financial affairs of the entity? Please explain your reasoning.

The Province agrees with the broad accountabilities developed by the Task Force. The key accountability is the extent that the entity has complied with its financial plan. The second broad accountability is related to the first broad accountability. The second broad accountability is the effect of the deficit and surplus for entity’s current activities on the resources available for future activities. The third broad accountability provides information on the overall financial condition of the public sector entity by presenting the results for the current year with the accumulated surpluses and deficits from prior years.

5) Do you agree with the 16 proposed financial statement accountabilities? Are there any missing? Are there any that should not be included? Please explain your reasoning.

The Province agrees with the Task Force’s proposed list of 16 financial statement accountabilities and views the list as being comprehensive and complete. However the Province views certain proposed financial statement accountabilities to be more significant than others. The Task Force should consider weighing the significance of the financial statement accountabilities when scoring the various models presented in the CP. The Province views the following financial statement accountabilities as being the most significant to the users:

i) budget compliance (i.e., actual-to-budget financial performance comparison);

ii) annual surplus/deficit; and

iii) the extent to which revenue of the period is sufficient to cover the cost of providing services in the period (plus any costs related to previous years that were not covered by revenue in previous years);

6) Which of the three financial statement presentation alternatives do you prefer? Is a hybrid model

(hybrid in the sense described in this Consultation Paper) an option that the Task Force should pursue? Please explain the reasoning for your choice and indicate why the other two alternatives were not chosen.

The hybrid model gives equal importance to the statement of financial position and the statement of operations. The hybrid model would appear to be the logical compromise between the asset/liability model and the revenue/expense model. Since the public and their elected representatives are the primary users, public sector financial statements must present information that understandable to the public. The hybrid model is far too complex because the articulation between the various statements is too complicated. Out of the three models presented in the CP, the Province prefers the revenue/expense model because it provides information as to whether the cost of current year services is being provided by past, current or future taxpayers. The concept of “inter-period equity” is important for all public sector entities but especially significant for local governments. Local governments receive significant levels of transfers from senior governments for infrastructure projects. But the level of taxation is primarily determined by the amount of required expenditures for the current year. Under the status quo, local taxpayers find it difficult to understand why taxes have to be increased for fiscal years when the local government is anticipating a large surplus. The Province views the actual to budget comparison as the key accountability objective of public sector entity financial statements. A conceptual model that concentrates on the flow of resources that are applicable to a particular period is better suited in the public sector environment than the current status quo model. For the most part, the Province is satisfied with the status quo or asset/liability model. However the current definition of liabilities does not adequately address revenue from government transfers. Inflows that relate to future years should be recognized in the years to which the inflow relates. The asset/liability model would be an acceptable second choice to the Province provided the definition of liabilities is changed to satisfactorily address the issue of revenue from government transfers.

7) If you do not like any of the three financial statement presentation alternatives set out in this Consultation Paper, do you have another preferred model that would meet the identified financial statement accountabilities? Please explain your suggested model in sufficient detail for the Task Force to evaluate the proposal.

Out of the 3 models presented in the CP, the Province prefers the revenue/expense model. However the Province feels the model as presented in the CP should be modified. The model presented includes re-measurement gains and losses as part of the revenues and expenses of the period. Government cannot budget for the volatility created by re-measurement gains and losses, and defeats the key financial statement accountability of budget compliance. The key objective of public sector financial statements is the comparison of actual result against the financial plan. Under the revenue/expense model, re-measurement gains and losses should be included on a separate statement. Unrealized market adjustments should be reflected as adjustments to the accumulated surplus or deficit and not included as part of the revenues and expenses that relate to the period.

8) If new financial statement categories for deferred inflows and outflows are set up, what items would you see being accounted for in these categories (for example, endowments, general tax revenue, transfers received)? Do you have any suggestions for the criteria that should be used to determine what can/should be accounted for in those categories? For example, consider the following for inflows (and similar questions for outflows):


Is an internally made but publicly communicated commitment to consistently use a certain

type of inflow to provide future services enough to trigger deferral? If an internal commitment is allowed to trigger deferral, should an irrevocable designation for

its application to the cost of service provision in future periods be made upon receipt of inflow/levying of taxation?

How direct should the relationship be between the inflow and the costs of services to be

provided in future periods in order for deferral of the inflow to be permitted? Should only items that do not meet the definitions of assets and liabilities be considered for

inclusion in deferral categories?

The key financial statement category that would be included in deferred inflows would be transfers received, especially transfers received for major infrastructure projects with long useful lives. The inflow should be deferred over the useful life of the related asset. External restrictions on inflows (time and performance) should also be included in the deferred category. Internal restrictions should not trigger deferrals. Governments can modify their own internal restrictions. Criteria for determining deferrals should not be subject to the control of the preparers. Publicly communicated commitments should also not be criteria for deferral. Governments would then possibly be required to accrue for the provision of future services such as health care and social programs. Inflows should be brought into revenue in the period that the public sector entity incurs the related expenses. If an item meets the definition of an asset and liability it should not be included as a deferred inflow or outflow.

9) Should a set of general purpose financial statements of a public sector entity include other statements based on the identified accountabilities? For example, a separate (audited) statement of debt and other liabilities might respond to the financial statement accountability relating to debt and other liabilities, the sub-characteristic under “public accountability” that is “debt capacity” and provide useful information to consider in an evaluation of the financial condition of a public sector entity. Please explain your reasoning.

The Province does not believe that additional statements are required to provide further information on the identified accountabilities for general purpose financial statements. Further information on identified accountabilities can be disclosed in the notes and schedules. Information on items, such as the evaluation of the financial condition of a public sector entity, can be presented in a financial statement discussion and analysis.

Office of the Controller 4th Floor, Oxbridge Place 9820 - 1 06 Street

Treasury Board and Finance

Edmonton, Alberta, Canada T5K 2J6 Telephone: 780-427-3076

Mr. Tim Beauchamp, Director Public Sector Accounting Canadian Institute of Chartered Accountants 277 Wellington Street West Toronto Ontario MSV 3H2

Dear Mr. Beauchamp:

Fax: 780-422-2164 www.finance.alberta.ca

AR 37928

January 31, 2013

Thank you for the opportunity to comment on the consultation paper.

We believe the task force has done a remarkable job in describing the current state of affairs, governments' concerns and proposing alternatives for the presentation of financial statements of public sector entities. We recommend that the task force proceed slowly so that stakeholders can have a full discussion around implications of any change and do not have to move quickly for a decision. We are, presently, of mixed view of whether the revenue/expense model of the asset/liability model (with modifications) best meets the accountability objective.

We have reviewed the proposed alternatives for reporting financial performance in the general purpose financial statements of public sector entities. In terms of meeting the accountability objectives, our initial preference was for the hybrid model. However, upon further review, we noted that the complexity of the resulting financial statements would be a major drawback of the hybrid model. Therefore, in our view, the proposed revenue/expense model may be more appropriate for presentation of financial statements of public sector entities.

This view is based on the revenue/expense modefs score in terms of meeting the proposed accountability objectives, understandability, notion of inter-period equity and addressing volatility concerns. It appears that in an era of sovereign debt crisis, fiscal restraints and balanced budget legislation, the concept of inter-period equity which is inextricably linked with accountability in governments, is gaining increasing support around the world; a trend that has been identified also by the US Government Accounting Standard Board and the International Public Sector Accounting Standards Board. The current PSAB asset/liability model is not

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particularly effective at permitting users to evaluate issues relating to inter-period equity. While supporting a "made in Canada" solution, in our view, the proposed conceptual framework should not be substantially different from other advanced economies, unless it can be justified on valid reasons.

However, the present asseVIiability model may best meet the objectives given the provision that when setting standards, it is acceptable, in certain circumstances, to detour from the strict application of the model as was done for government transfers and financial instruments.

We also note that central to definitions of inflows and outflows in revenue/expense and hybrid models is the term resource which has not yet been defined. Possibly more time, discussion and definitions of inflows and outflows needs to be determined before a choice of the preferred model can be made. At this stage, it is difficult to understand exactly what the consequences are of choosing the revenue/expense model. As a result, it may be easier to choose the asseVIiability model with its adaptations (government transfers and financial instruments) as that is what we understand and we know the resulting accounting treatment. It is imperative that the discussions around the choice of model are carried out and a quick decision is not made, but rather a well informed decision.

Notwithstanding our comments above, our responses to matters on which specific comments are requested are included in Appendix I.

Thank you again for the opportunity to comment. We will follow developments in this area with keen interest.

BNGS/Idl

cc: Mr. Merwan Saher, FCA Auditor General of Alberta

Sincerely,

Darwin Bozek Controller

Appendix 1

I. Do you agree with an approach to a public sector conceptual framework that focuses on identified accountabilities to the public and their elected representatives rather than an approach focused on the needs of discrete user groups? Please explain your reasoning.

Yes. As also stated in our response to Consultation Paper 1, the main driver for the conceptual framework and the contents of financial reports should be public accountability of the government for the powers, rights and responsibilities granted to it. We also agree that in contrast with the owners and creditors of a private sector entity, the users of a government's financial statements have a much broader interest in accountability while at the same time lacking the sophisticated knowledge of their private sector counterparts. For this reason, in order to be accountable a government should issue financial reports that can be understood by those who may not have detailed knowledge of accounting principles. The financial statements should include explanations and interpretations that help users understand the information provided. However, in our view, financial statements should not exclude information merely because it is difficult to understand or because some users choose not to use it.


Yes. Governments' revenues are primarily based on power to tax or revenue generated from publicly owned assets. Therefore, the citizenry are entitled to hold governments to a standard of accountability that is broader than for business enterprises.

Also, in our view a critical piece of information in assessing the finances of a government is the sustainability of its operations and programs. Stakeholders need to assess how the government acquired and used public resources and whether current resources were sufficient to meet current service costs. They are also interested to know if some of these costs were shifted to future taxpayers- or alternatively used prior periods' resources- and generally if government's ability to provide services improved or deteriorated from the previous year and why.


Yes. As also stated in our response to the Consultation Paper 1, one of the main characteristics of governments is that the public and legislators are the primary users of their financial statements. Therefore, the information reflected in governments' financial statements should be primarily designed to cater for their requirements. Also, the public and their elected representatives have the right to know whether the government used funds and resources in accordance with the

approved budget. Demonstrating accountability for compliance with budget authority is a distinguishing feature of government financial reporting. The main challenge for governments would, therefore, be translating their often complex operations into understandable format for their stakeholders.


Yes. It is fair to maintain that the public and legislators are interested to find out: • how the government fared against its legally authorized spending authority, • what was the cost of its operations and its impact on future resources

requirements, and • what is the general financial position of the government.

Understandably, stakeholders are interested in assessing other aspects of the government's financial condition and non-financial performance which is beyond the scope of financial statements.


Yes. We note, however, that some of the proposed financial statements accountabilities are still grounded in asset/liability model. For example, if revenue/expense model is adopted, the concept of net position (i.e. the residual of elements including deferred inflows and deferred outflows) may be a more relevant indicator of accountability. It is not clear why contingent liabilities and contractual obligation should not be included in the list. As also stated in the Consultation Paper, notes to the financial statements, have the same significance as information or explanation set forth in the body of the financial statements themselves.

It is also not clear if accountability item 16 also includes the balance of remeasurement gains/losses. Other liabilities (subject of item 13) could consist of financial liabilities and non-financial liabilities; for example, when government transfers are treated as liabilities because of the stipulations imposed by the transferring government, the resulting liabilities are not considered financial liabilities.


As also stated in our covering memo, in terms of meeting the financial statements accountabilities, the hybrid model appears to be the best candidate. However, the presentation format appears to be quite complex, unconventional and difficult to understand. As indicated previously, understandability of

government financial statements is critical especially considering that most users are not be familiar with the relevant intricacies.

For the above reasons, the revenue and expense model may be the preferred option. This model appears to address the main concern of JWG on volatility of result of operations produced by current asset/liability model.


N/A

8. If new financial statement categories for deferred inflows and outflows are set up, what items would you see being accounted for in these categories (for example, endowments, general tax revenue, transfers received)? Do you have any suggestions for the criteria that should be used to determine what can/should be accounted for in those categories? For example, consider the following for inflows (and similar questions for outflows):

The main concern with the deferral issue is that it introduces some element of judgment in the process. In some cases, allocation of inflows and outflows to future periods also requires an evaluation of the underlying uncertainties. For example, some assumptions may not materialize as predicted. Therefore, for both revenue/expense and hybrid approaches it is essential to introduce some principles for inter-period allocation of inflows and outflows. Alternatively, in order to ensure consistency, PSAB may decide to develop standards and other guidance to deal with deferral of various inflows and outflows. Transferor stipulations and internal commitments externally communicated may be valid bases for deferral of inflows and outflows respectively.

As can be concluded from the following questions, if either the revenue/expense model or hybrid model is adopted, to ensure consistency, PSAB may have to issue guidance to either (a) properly classify certain items that were previously reported as assets and liabilities as deferred outflows of resources or deferred inflows of resources or (b) recognize certain items that were previously reported as assets and liabilities as outflows of resources or inflows of resources.

• Does there need to be an external restriction on an inflow, requiring it to be applied to cost of services provided in future periods (time or performance requirement) in order for the inflow to be deferred?

External restriction could be a valid and objective basis for deferral of inflows. Application of the same approach to outflows implies a fundamental change to PS 3410 - Government Transfers.

Externally imposed performance requirements (for example multi-year grants) can also be a valid basis for deferral of inflows. However, extension of the same principle to outflows again will imply a major departure from PS 3410.

• Is an internally made but publicly communicated commitment to consistently use a certain type of inflow to provide future services enough to trigger deferral?

This type of publicly communicated commitment may also be a valid and objective basis for deferral of inflows.

• If an internal commitment is allowed to trigger deferral, should an irrevocable designation for its application to the cost of service provision in future periods be made upon receipt of inflow/levying of taxation?

Assuming that an irrevocable designation of this type can be made by a sovereign government, the proposed scenario can also be a valid basis for deferral of related inflows.

• How direct should the relationship be between the inflow and the costs of services to be provided in future periods in order for deferral of the inflow to be permitted?

A direct relationship can be a valid and objective basis for deferral. An indirect relationship may be vague, subjective and difficult to define. Having said that, tracking each inflow and tying it to cost of services may be a very cumbersome exercise and it's not certain it provides any more accuracy. It's uncertain a direct relationship is really necessary.

• Should only items that do not meet the definitions of assets and liabilities be considered for inclusion in deferral categories?

Items meeting the definition of assets and liabilities should logically be included in the relevant categories. Obviously, not meeting the definitions of assets and liabilities should not also be the only reason for inclusion in deferral categories.

9. Should a set of general purpose financial statements of a public sector entity include other statements based on the identified accountabilities? For example, a separate (audited) statement of debt and other liabilities might respond to the financial statement accountability relating to debt and other liabilities, the subcharacteristic under "public accountability'' that is "debt capacity" and provide useful information to consider in an evaluation of the financial condition of a public sector entity. Please explain your reasoning.

As has been discussed, financial statements cannot address all aspects of a government's accountability. Therefore, extension of the scope of general purpose financial statements to other aspects of accountability may be confusing, diminish understandability and may not be in accordance with the project's terms of reference.

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General response to Consultation Paper 2. – Sam Weller CA MBA I am responding to PSAB from the point of view of a finance professional who has worked in the local government sector for 35 years. I am opposed to changes in the conceptual framework at this time, particularly; when we have just implemented tangible capital asset accounting under PSAB 3150, three years ago.

The current proposal seems to be driven by the view that the major purpose of financial statements is to provide a comparison of budgets to actual results. While this is important for all governments, local governments are generally much more concerned about ongoing financial sustainability, than they are about focusing on one year’s annual surplus or deficit.

In a typical local government, 20% to 30% of expenditures are of a capital nature. The politicians and the public understand that taxes must be levied to generate funds for the acquisition of these assets. These are valid budgeted expenditures; but they do not show up on the PSAB statement of operations. This results in most municipalities showing large operating surpluses in their statements of operation. These surpluses are needed to provide funding for capital replacement programs. We explain this to the public every year and I not subscribe to a system which puts overdue emphasis on the annual surplus number.

Municipalities in BC already operate under “balanced budget” legislation and are also required to report using PSAB rules. However, the budget legislation is based on cash flows. Prior year’s surpluses can be used to balance their budgets – a necessary tool when small entities are faced with varying levels of capital expenditures each year. This fosters a system more focused on debt management than controlling annual surpluses - an approach, I feel, is more appropriate in the local government field.

I see few advantages in the proposed hybrid model, which could: 1. Create more work 2. Be more difficult to explain 3. Put unnecessary emphasis on short term thinking

While I recognize that there is an issue for provincial and territorial governments and the entities they control, changes that would resolve issues for them, would create many more problems for the thousands of municipalities and Indian bands that are also reporting using the same standards. While the current Assets and Liability based framework has limitations, I think that it is better than the alternatives explored here. Note: I have chosen not to answer the questions attached to the consultation paper. They did not seem to be designed to explore how financial statements can best serve the public; but rather to explain how the task force has logically reached their conclusion - that a hybrid model was the best solution to the problems they identified.

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Consultation Paper #2:

Measuring Financial Performance in Public Sector Financial Statements Halton Region Draft Response

Responses are framed within the context of a regional municipal government. Questions:


We agree that a public sector entity is accountable to the public and an accountability approach is reasonable however, as stated in the paper the accountabilities should be grounded in the consideration of user needs as the expected audience is an important factor when evaluating financial statement presentation and disclosure. It should also be noted that although the elected representatives are a part of the broader user group, the financial statements are a part of the report on the elected representatives’ performance as they are responsible for setting the strategic direction of the organization and approving key financial decisions.

2. Do you agree with the proposal that the objective of public sector financial reports is to

provide information for accountability purposes? Please explain your reasoning.

We agree with the statement, however, we note that the financial statements are based on objective and verifiable data and the purpose of the financial statements is also to provide accountability for appropriate accounting practices. This consideration will limit the type of information that should be included in the general purpose financial statements. The financial statements also provide accountability in part through the inclusion of an auditor’s report. In addition, as stated in the paper, since the accountabilities to the public are broad, the importance of other reports, including financial reports, must be emphasized and the broader reporting framework can be leveraged. As stated in the response to question #6, it may be possible to reference these supplementary reports within the general purpose financial statements to educate the reader about the information available to better demonstrate accountability.

3. Do you agree with the proposal that public sector financial reports should be designed to

provide accountability information to the public and their elected representatives (i.e., that the public and their elected representatives are the primary users of the financial reports)? Please explain your reasoning.

Overall, we disagree with the statement. As stated above, the financial statements are a part of the report on the elected

representatives’ performance as they are responsible for setting the strategic direction of the organization and approving key financial decisions. Although they are a key user, they also take responsibility for the results and approve them.

Although accountability is the primary objective, we should also consider the investment perspective. Public sector entities often issue debt and are rated by

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agencies such as Moody’s therefore there is also a focus on the quantity and quality of debt and the organization’s ability to sustain payments.

When considering the users of public sector financial statements, it should be noted that in many cases the financial results are interpreted for the public by the media and researchers. It is important not to unnecessarily complicate the reported results to avoid misinterpretation while providing useful and complete information.

In addition, when reviewing the key users identified in the paper, although broad, it is imperative to understand what is important to these users. As stated in the paper, the public looks at the performance of a public sector entity from two perspectives: as a resource provider and a service recipient. As a result, it can be argued that the key performance/accountability indicators most relevant to the public relate to tax rates and the value/quality of services and programs provided for those paid taxes. These objectives are best demonstrated through the annual budget document and actual daily performance of services the results of which are measured by non-financial indicators. These non-financial indicators go beyond cost measurement found in the financial statements. The public also cares about the financial position of the organization and how it will impact the tax rate. This again is mainly shown in the budget document forecasts for both the operating and capital portion for many municipalities and other public sector entities as the budget forms the basis for taxation. From a financial statement perspective, the user is likely looking to confirm that the organization’s accounting practices are sound which provides comfort that the funds provided are spent appropriately, that there is good stewardship of assets and that the fraud risk is addressed by management through internal controls. A comparison of actual to budgeted results is also important, but is difficult to understand and tie to the budget due to the complexities and differences between financial planning and reporting and this item is not best addressed in the financial statements. This issue should be considered in greater depth.

4. Do you agree with the three proposed broad financial accountabilities expected to be

demonstrated by a public sector entity about the financial affairs of the entity? Please explain your reasoning.

We agree with the three accountabilities and offer additional comments. 1. the extent to which the entity performed in accordance with its financial plan; 2. the extent to which current activities/results have an effect on the

activities/results of future periods; and 3. the state of the financial condition of the entity

Accountability #1 – This accountability is very important and the relating reporting is currently addressed through actual to budget variance reports to Council on a periodic basis. The basis of budgeting and audited financial statement reporting for most municipalities differ for various reasons and the comparison of actual to budgeted results in financial statements requires further discussion. Although there is a requirement to present this information in the financial statements, this information is at a high level and is difficult to understand for most readers. Reconciliations are required and the budgeted figures are adjusted to conform to accounting standards therefore they cannot be easily tied to the original budget document. The difficulty in budgeting for gains and losses on investments is not the only issue. Capital asset planning is also very complex due to its long term nature and different financing sources. It should

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also be noted that some of the complexities relating to this accountability relate to legislation. Specifically, as per the Municipal Act, municipalities cannot budget an operating deficit and can only use debt to finance capital therefore budgets are prepared based on cash requirements to fund current operations and future capital needs which are financed from different sources. The use of accrual accounting as a basis for budgeting would not allow municipalities to meet the objectives required by legislation.

Accountability #2 – This accountability is complex and includes an assessment of current investment strategies and their effects on the future which can be difficult to estimate. As stated in the paper, this accountability is largely outside the scope of the financial statements because they are based on historical information. The best way to demonstrate this accountability in a financial sense is through budget projections. Statistical information provided in annual reports as well as infrastructure reports showing the current state of capital assets are also useful in this assessment of current and forward looking information. In addition, information regarding the reserves set aside for future operations can be presented in the financial statements as they are an indicator of financial burden borne by the current taxpayer for future expenditures (however, some reserves relate to current use of resources that have to be replaced as in the case of tangible capital assets).

Accountability #3 – This accountability can be demonstrated by reviewing financial statement items at a high level in conjunction with budget projections due to certain relevant items that are beyond the scope of the financial statements.

5. Do you agree with the 16 proposed financial statement accountabilities? Are there any

missing? Are there any that should not be included? Please explain your reasoning. (refer to Appendix A)

We agree with most of the accountabilities and offer additional comments as follows:

Accountability #1 – We disagree that this accountability is best reflected in the financial statements. As noted above, budget compliance and actual to budgeted comparisons in the financial statements are challenging and this issue requires additional consideration. Currently, actual to budget variance reports to Council (which are also available to the public) address this accountability in more detail than is possible in the financial statements.

Accountability #3 – Inter-period equity is a complex issue tied to the above. The paper suggests that the Revenue/Expense model is a simple measure of inter-period equity but it should be considered that the revenue and expenses in this model do not tie to the taxation for the year because they are partially based on allocations. Therefore the budget document provides better information by showing the amounts collected for current and future expenditures. In terms of financial statements, the use of reserve disclosures could be considered as another simple measure to meet this accountability without significant changes to the reporting framework.

Accountability #5 – We agree with this accountability but there are several issues to consider when evaluating the measurements basis for this item. The use of historical costs to measure consumption of capital is objective and less costly than the use of replacement cost but it does not represent the full current cost of

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using the asset. Disclosures for capital related reserves may assist in the determination of the full cost taking into consideration inflation and technological advancements. There are less issues relating to operating costs of the assets as they are usually paid for and expensed in the period of the service.

Accountability #5 - Tangible capital assets are the largest component on the Statement of Financial Position for local governments. As these assets represent a substantial investment and involve significant planning, much of the relating financial information is provided in the budget document. These assets are held to provide services to the public and the relating performance measures are best reflected by non-financial information (i.e. infrastructure report cards, service related performance indicators).

6. Which of the three financial statement presentation alternatives do you prefer? Is a hybrid

model (hybrid in the sense described in this Consultation Paper) an option that the Task Force should pursue? Please explain the reasoning for your choice and indicate why the other two alternatives were not chosen. We have examined the alternatives considering the following key points:

The financial statements are based on historical information. The financial statements should contain information that is comparable,

understandable, reliable, objective, verifiable and relevant. The financial statements are used to report the financial position and financial

performance with an overall purpose of confirming that the organization’s accounting practices are sound which provides comfort that the funds provided are spent appropriately, that there is good stewardship of assets and that the fraud is addressed by management through internal controls.

The financial statements are a part of a multi-faceted reporting framework which is required due to the many accountabilities of the public sector (or in our case, the municipal sector).

The Asset/Liability model is widely used and understood in all sectors

Preferred model: Asset/Liability We suggest building on the current model focusing on key issues identified:

reducing volatility, improving understandability and to simplify actual to budget comparisons (initial issues identified by the senior finance community). Additional objectives as listed on page 16 include increased accountability by meeting the specific accountabilities identified in the paper and improve clarity of presentation and understanding of the financial performance and financial position.

The consultation paper states that the notes to the financial statements are an integral part of the financial statements but the focus of the paper is the face of the financial statements. We understand that these considerations may be included in greater detail in a Statement of Principles. We believe that disclosures in the notes to the financial statements can be used to address many of the issues identified. Increased audit and staff costs must be considered when evaluating additional information to be provided.

Reduce Volatility 1. Our understanding of this item is that it mainly relates to the recognition

of revenue in the current period when the related expenses are recognized in a different period. In the municipal sector, most general

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taxation revenue and funding is collected to cover current period expenses. The main exceptions are taxes collected to finance reserves, development charges and grants received for multiyear capital projects (discussed below). Taxes collected for reserves can be addressed through note disclosures. Information regarding the use of surplus funds which are usually used to finance reserves can be provided in the notes to the financial statements. Many municipalities already provide some degree of disclosure relating to reserves.

2. The issues surrounding capital funds require additional consideration due to the complexities involved. Capital assets can be funded from different sources including reserves and debt, and amortization which is a current period expense is not a good measure of the cost of the services provided in the current period as it is based on prior period costs (historical costs). As stated above, reserve disclosures can provide additional information relating to capital assets as it can be argued that reserves set aside to replace these assets are a part of the cost of the services provided in the current period. One alternative to increase inter-period equity and reduce volatility would be to adopt a practice of deferring capital related revenue and amortizing it in line with the relating assets. In the recently revised section PS 3410 Government Transfers this is only required if there is a specific stipulation that would require this treatment if a relating liability is created. This is not a preferred approach as this treatment poses a significant administrative burden of tracking revenues and it further increases the gap between the financial statements and the budget document. The treatment of deferrals was discussed in detail as part of the consultation process for PS 3410 Government Transfers and this option was not well received. If this option was to be adopted, it should be noted that inter-period equity would not be fully achieved due to reserves used as financing (revenue recognized in prior periods allocated to reserves –assuming this is not treated as a deferred inflow) and the relating debt financing for capital projects (interest cost), where the financing period may not be the same as the period of utility and amortization for the asset (again assuming that recognition criteria would remain the same). Another consideration is that funding for capital is a relatively small portion of the overall revenue for local governments therefore, the relating volatility is insignificant when considering all revenue sources. Overall, we feel that reserve disclosures for the current year are more informative and show improved accountability to the key users rather than the allocation of inflows and outflows to periods which will not match the cash flow and taxes levied in a municipal setting.

3. In terms of general expenses, most expenditures that are made in advance are recorded as prepaid assets which provide a measure of the current/prior period expenditure incurred for services to be consumed in future periods. The net change in this item can be seen in the cash flow statement. Services and goods consumed before payment is made are accrued in the period they relate to, therefore general expenses do not appear to be creating much volatility in the Statement of Operations.

Improve Understandability 1. The current model is articulated which allows the users to trace the

changes in the various financial statement components therefore promoting understandability.

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2. When considering that, as stated in the paper, the general public and elected officials are key users, we can examine how the current financial statements can be improved. Items to consider could be the improvements to notes for budget to actual comparisons which would arguably be the item these users are most concerned about and would want to understand. Additional disclosures relating to other items could also be considered. For example, additional information about surplus and budgeted funds being put towards reserves would improve understandability. Other sections in the PSA Handbook may be affected to make certain disclosures mandatory or to clarify the information required. As stated above, the scope of the financial statements with respect to this item is limited to high level information.

3. References in the financial statement notes to the budget document, annual report, variance reports, Ontario Municipal CAO’s Benchmarking Initiative (OMBI) and Municipal Performance Measurement Program (MPMP) reports could also be used to supplement the financial statements and highlight the broader reporting framework in the public sector which reflects the broad user base and multiple objectives as well as the broad accountabilities of the public sector.

Simplify budget to actual comparison 1. Most public sector entities do not budget on the same basis as financial

reporting for various reasons including legislative requirements and financial management objectives, therefore this item will remain an issue (this is also an issue for the other two proposed approaches). As stated above, additional information relating to the differences can be included in the financial statement notes but the information has to remain at a high level because the adjustments are complex. As also stated above, capital items remain the key drivers of the differences due to the relating complexities in funding sources and accounting recognition therefore this issue appears to be one that requires further consideration.

Not recommended: Revenue/Expense Model

This model appears to focus on inter-period equity which is a subcomponent of the second broad accountability (the extent to which activities/results have an effect on the activities/results of the future periods).

The revenue and expenses are partially based on allocations of inflows and outflows to the accounting period. Although this is argued to be a simple way to illustrate inter-period equity, it may not be the best measure as the allocations are not tied to the budget which dictates the amounts collected from the public which is the real measure of the financial burden.

The addition of new deferred inflow and outflow elements can create confusion in relation to current deferred revenue categories.

The tracking of new deferred items would require a considerable effort. Budget to actual comparisons would still likely require reconciliations – this is

one of the key concerns that gave rise to the project. As stated in the paper, this model may lead to variations in revenue recognition

between organizations based on the interpretation of the relationship of the funding to the expense

Overall, due to additional reconciliations required and the additional deferred financial statement elements this approach would impair understandability,

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another key concern giving rise to the project. Impaired understandability may also impair the trust of the public as they may view complexity as an opportunity to hide or manipulate information.

Not recommended: Hybrid Model

This model also appears to focus on inter-period equity which is a subcomponent of the second broad accountability (the extent to which activities/results have an effect on the activities/results of the future periods).

As stated above, the revenue and expenses are partially based on allocations of inflows and outflows to the accounting period. Although this is argued to be a simple way to illustrate inter-period equity, it may not be the best measure as the allocations are not tied to the budget which dictates the amounts collected from the public which is the real measure of the financial burden.

The model is not articulated which impairs understandability. Reconciliations may be difficult to perform and understand, especially by the general public. Impaired understandability may also impair the trust of the public as they may view complexity as an opportunity to hide or manipulate information.

A new flow statement of Deferred Inflows and Outflows may cause confusion compared to current deferred revenue categories on the Statement of Financial Position.

Budget to actual comparisons would still likely require reconciliations – this is one of the key concerns that gave rise to the project.

This model may also lead to variations in revenue recognition between organizations based on the interpretation of the relationship of the funding to the expense.

7. If you do not like any of the three financial statement presentation alternatives set out in

this Consultation Paper, do you have another preferred model that would meet the identified financial statement accountabilities? Please explain your suggested model in sufficient detail for the Task Force to evaluate the proposal.

Please see the response above. Our preferred approach is to continue with the Asset/Liability Model taking into consideration the multi-faceted reporting framework within the public sector.

8. If new financial statement categories for deferred inflows and outflows are set up, what

items would you see being accounted for in these categories (for example, endowments, general tax revenue, transfers received)? Do you have any suggestions for the criteria that should be used to determine what can/should be accounted for in those categories? For example, consider the following for inflows (and similar questions for outflows): We do not agree with the proposed added financial statement categories for deferred inflows and outflows. We believe that these items will add complexity, impair understandability and reduce public confidence in the reliability of the financial statements of public sector entities. Examples of items:

Revenue for multiyear initiatives without specific obligations to use the funds which would not meet the definition of a liability

Revenue collected to fund reserves

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Does there need to be an external restriction on an inflow, requiring it to be applied to

cost of services provided in future periods (time or performance requirement) in order for the inflow to be deferred?

This is predominantly the current practice and it allows for consistency in

application. Consideration could be given to internally restricted inflows via by-law or

Council direction. Currently, some similar disclosures are made but they are not mandatory. As per PS 3100 Restricted Assets and Revenues, disclosures relating to designated assets are voluntary so they could become a requirement. PSG-4 Funds and Reserves also addresses disclosures that organizations may make.

Is an internally made but publicly communicated commitment to consistently use a

certain type of inflow to provide future services enough to trigger deferral?

This is a difficult question. It would depend on the situation and whether there is authority to reverse the commitment but if the focus is on accountability to the public, it could be argued that yes. Consideration of an internally made commitment definition would be necessary – for example, is Council direction considered internal?

Currently, restrictions imposed by Council are communicated to the public through Council reports and the budget document

If an internal commitment is allowed to trigger deferral, should an irrevocable

designation for its application to the cost of service provision in future periods be made upon receipt of inflow/levying of taxation?

No. There may be a change in direction from Council to redirect funds. Also,

economic circumstances and strategic directives change so this would likely be too inflexible especially if the commitment is made without an end date.

How direct should the relationship be between the inflow and the costs of services to

be provided in future periods in order for deferral of the inflow to be permitted?

Unless the funds are to be used for a very specific initiative or project, inflows should be recognized in the current period. Not having a direct relationship would possibly allow for some revenue manipulation if the criteria are not specific which would not make the statements more useful or comparative.

Should only items that do not meet the definitions of assets and liabilities be

considered for inclusion in deferral categories?

Yes, however any items that do not meet the definitions would be very confusing to most readers. As stated above, this would not be a beneficial addition to the financial statements because they would be less understandable. If included, there would have to be a distinction between the assets and liabilities and the new items included. Any overlap would create additional confusion and difficulties in analysis. On the other hand, some items such as inflows for future expenditures will meet the definition of an asset (cash) so overlap may be necessary.

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9. Should a set of general purpose financial statements of a public sector entity include other

statements based on the identified accountabilities? For example, a separate (audited) statement of debt and other liabilities might respond to the financial statement accountability relating to debt and other liabilities, the sub-characteristic under “public accountability” that is “debt capacity” and provide useful information to consider in an evaluation of the financial condition of a public sector entity. Please explain your reasoning. Other possible indicators of financial condition that could require mandatory presentation as part of note disclosure or statistics:

Debt as a % of current year surplus (based on audited figures) Debt as a % of reserves – total or annual (based on audited figures) Debt as a % of current year taxes levied or total budget (budgeted figures are not

audited) Include information on how the debt will be repaid – summary of policy (2-3

sentences). This is already done by many municipalities. Most municipalities and public entities in general are straightforward with their financial situation because they have to justify necessary tax and fund increases. External agencies also provide an indicator of financial condition through their ratings. The usefulness of any additional disclosures would have to be discussed.

General Comments

The above responses are framed within the context of a regional municipal government. Municipalities form a large segment of the public sector with 444 in Ontario alone.

We acknowledge that several of the issues addressed in the responses are also addressed in the Consultation Paper.

The costs and benefits of any reporting changes must be evaluated. Any additional components added to the financial statements will increase audit requirements and therefore audit costs. In addition, additional staff time will be required to track and prepare information. The hybrid approach alternative, for example, will substantially increase staff time due to the requirement to analyze and track the additional deferrals. This could translate to another full time staff position. The benefit and usefulness of the additional information provided must be evaluated to ensure that the public would agree with the value for the additional cost incurred.

As stated in the paper, the reporting framework in the public sector is extensive. In the municipal arena, different performance indicators are reported through the use of Council reports (including budget to actual variance reports), OMBI measures and MPMP measures in addition to the financial statements, annual budget and annual reports. The information provided in those reports should be considered when reviewing the accountabilities and items to be reported within the scope of the general purpose financial statements (this is discussed in the paper). As stated above, this framework could be highlighted using the financial statements.

Municipalities and other public sector entities are required to provide other reports and submissions to various Ministries where the information is derived from accounting data. One example of such a publicly available report in the Province of Ontario is the Financial Information Return (FIR) which is the basis of MPMP measures. This reporting framework should be considered when making significant changes to the financial statements due to the impact on the time it would take to implement and interpret any changes.

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Due to complexities and differences surrounding financial planning/budgets and financial reporting, none of the three proposed reporting alternatives fully solve the issue of comparison. As this is one of the key issues that gave rise to the project and this item is identified as a broad accountability, it may be necessary to form a task force to review these differences and discuss how actual to budgeted results can be reported with greater ease. As per the comments above, this accountability may not be best addressed in the financial statements.

The consultation paper is based on the revised section PS 1201 Financial Statement Presentation. This section will be applicable in the same year as PS 3450 Financial Instruments and will be mandatory for fiscal periods beginning on or after April 1, 2015 for governments but is applicable for fiscal periods beginning on or after April 1, 2012 for government organizations. As a result, many governments have not had a chance to fully review the impact of the proposed changes on daily operations and reporting. These changes including a new Statement of Remeasurement Gains and Losses will have to be explained to the users. There have also been other changes including PS 3410 Government Transfers. In addition, PSAB is in the process of gathering feedback for a new standard relating to Appropriations which also affects presentation and disclosure. These changes and their impact on the users and training requirements should be considered when evaluating new reporting alternatives.

The public sector requires a multifaceted reporting framework reflected in the many reporting structures currently followed. As stated in the Introduction to Statements of Recommended Practice (SORPs), PSAB recognizes that no rule of general application can be phrased to suit all circumstances and there is no substitute for professional judgment. Since much of the accountability information addressed in the paper requires information found outside the financial statements (such as the information addressed in the SORPs), it is difficult to incorporate this type of additional information into the general purpose financial statements and maintain comparability and consistency in application.

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Appendix A: 16 Proposed Financial Statement Accountabilities The financial statement accountabilities that would provide different perspectives on financial performance and relate to both broad accountabilities (a) and (b) above are:

1. budget compliance (i.e., actual-to-budget financial performance comparison); 2. annual surplus/deficit; 3. the extent to which revenue of the period is sufficient to cover the cost of

providing services in the period (plus any costs related to previous years that were not covered by revenue in previous years);

4. a change in net assets/net liabilities; 5. consumption of tangible capital assets and other resources specific to the public

sector to be included in the measure of financial performance for the period; 6. the separation of unrealized valuation changes from the results of operations; 7. a change in net debt/net financial assets; and 8. the sources and uses of cash.

The remainder of the accountabilities that are expected to be demonstrated through recognition and presentation in the financial statements (i.e., those not related to financial performance but required to be demonstrated in a set of financial statements) relate primarily to providing information about financial position and, thus, about one aspect of the state of financial condition (i.e., broad accountability (c)). They are:

9. all assets and liabilities of the entity; 10. the net assets/net liabilities indicator of financial position; 11. the net debt/net financial assets indicator; 12. cash and cash equivalents; 13. issued debt and other liabilities; 14. tangible capital assets (balances, acquisitions, disposals, etc.); 15. financial assets, including financial instruments; and 16. other public sector resources (balances, acquisitions, disposals, etc.).



Nom : Michel Samson, vérificateur général par intérim

Organisation : Vérificateur général du Québec




Les états financiers à usage général doivent répondre à la fois aux besoins de l'ensemble des divers groupes d'utilisateurs tout en étant axés sur les responsabilités redditionnelles identifiées envers le public et ses représentants élus.


Nous sommes en accord avec le fait que les rapports financiers du secteur public doivent fournir des informations à des fins de responsabilités redditionnelles. Par contre, nous croyons que tous ces objectifs ne peuvent pas être atteints seulement avec les états financiers en tant que tels. Nous croyons que les rapports annuels de gestion sont aussi des communications qui atteignent l'objectif de fournir des informations à des fins de responsabilité redditionnelles. Nous recommandons toutefois que ce projet ne couvre que les états financiers.


Nous sommes en accord avec le fait que les rapports financiers du secteur public devraient être conçus pour rendre des comptes au public et à ses représentants élus. Nous considérons que ces derniers sont des utilisateurs importants de ces rapports financiers. Nous croyons que les états financiers doivent demeurer à usage général pour répondre aux besoins des autres utilisateurs. De plus, nous sommes d'avis qu'ils doivent atteindre un niveau de compréhension général pour le grand public ainsi que pour les représentants élus. Il faut donc avoir un équilibre entre l'atteinte des objectifs redditionnelles et la facilité de compréhension pour l'ensemble des utilisateurs.


Nous sommes en accord avec les objectifs redditionnels proposés pour la reddition de comptes financière des entités du secteur public. Cependant, nous croyons que l'objectif voulant qu'une entité du secteur public doive rendre compte de la mesure dans laquelle les activités ou les résultats actuels ont un effet sur les activités ou les résultats des périodes futures risque d'aller au-delà de l'information financière fournie par les états financiers. En effet, l'équité interpériodes et la viabilité à long terme des politiques et des programmes dépassent en partie le cadre des états financiers et les informations

additionnelles devraient plutôt se retrouver dans les rapports annuels de gestion des entités, car il s'agit en fait de l'information de gestion connue des entités. Nous ne croyions pas que les utilisateurs ont besoin de l'ensemble de cette information dans le cadre de la publication des états financiers.


Nous sommes d'avis qu'il y a certains éléments de reddition de comptes qui peuvent porter à confusion tels que le 2 et le 3, le 4 et le 7 et finalement le 10 et le 11. Nous croyons que cela mériterait des précisions terminologiques. De plus, nous croyons qu'il y a probablement trop d'indicateurs. Il faut préciser les indicateurs qui doivent se retrouver à l'intérieur même des états financiers.


Le modèle que nous préférons est celui de l'approche hybride. Nous sommes d'avis que ce modèle donne l'heure juste au bilan tout en permettant certains reports pour éviter la volatilité des résultats. Le fait que l'excédent/déficit cumulé permette d'identifier distinctement les éléments de report fait en sorte que les utilisateurs obtiennent un indicateur de l'équité interpériode. Cela permet aussi de créer une certaine équité et de conserver les évolutions de l'état de la situation financière que nous avons acquises au fil des ans. De plus, la caractéristique première des entités du secteur public est de fournir des services à la population et cette capacité de fournir ces services est mesurée par l'état de la situation financière. Les entités du secteur public ne sont pas des entités visant à faire des profits ce qui fait en sorte que les résultats de ces entités devraient tendre vers zéro. C'est pour cette raison que nous n'avons pas retenu le modèle de l'approche résultat. De plus, nous croyons que cette approche est révolue et n'est pas le reflet de la tendance internationale.


Aucun autre modèle complet à proposer compte tenu de notre réponse aux questions 6 et 8.







Nous croyons que les postes qui pourraient faire l'objet de report sont les postes qui créent des distorsions dans les états financiers par exemple les gains et les pertes actuariels reportés, les transferts, etc. Par exemple, en ce qui concerne les transferts cédant, lorsqu'une stipulation dit qu'il faut que le bénéficiaire construise une immobilisation et la conserve pendant une certaine période de temps, nous sommes d'avis qu'il devrait y avoir la possibilité de report des dépenses pour le cédant dans le surplus/déficit cumulé afin de permettre de traduire le fait que les actifs vont rendre des services pendant une certaine période. Toutefois, les reports doivent être encadrés, ils doivent par exemple, avoir un lien entre le revenu et le coût des services à fournir dans les périodes futures. Finalement, il faudrait que l'état sur les revenus/dépenses reportés inclue des informations additionnelles dans les notes complémentaires tels que la nature des reports, les échéances, les paiements à effectuer au cours des années futures. Finalement, nous estimons que tous les engagements internes, à eux seuls, ne sont pas suffisants pour déclencher un quelconque report, et ce, même pour une décision irrévocable.


Nous croyons que les états financiers en fonction du modèle hybride répondraient aux besoins redditionnels des utilisateurs. Les utilisateurs qui ont des besoins précis en ce qui concerne les chiffrent apparaissant aux états financiers adaptent l'information auditée afin d'obtenir l'information pertinente pour eux. Les états financiers doivent demeurer à vocation générale. Une surcharge d'information dans les états financiers à vocation générale ne ferait que complexifier l'information à livrer aux utilisateurs et la rendre moins compréhensible. Pour répondre aux objectifs redditionnels identifiés, nous croyons que l'information additionnelle pourrait être présentée dans le rapport annuel de gestion des entités concernées et non dans les états financiers.


Le document de consultation devrait clarifier la notion de rapports financiers par rapport aux états financiers en tant que tels. Nous aimerions savoir ce qu'inclut la notion de rapports financiers. Pour notre part, les rapports financiers comprennent tous les documents de nature financière présentés et préparés par le gouvernement incluant les documents budgétaires et les comptes publics. Le libellé de la page 11 en français (page 9 en anglais) du document de consultation qui se lit comme suit devrait faire partie intégrante du chapitre définitif sur les fondements conceptuels afin que l'Annexe A ne soit pas mal interprétée :

"L'Annexe A propose une liste révisée des principales caractéristiques des entités du secteur public. Cette liste décrit les caractéristiques clés que l'on retrouve généralement dans ces entités. Il se peut toutefois qu'une entité du secteur public ne possède pas toutes ces caractéristiques." Au point 3 de l'annexe A, il faudrait ajouter une caractéristique concernant les structures constitutives des organismes publics qui sont différentes de celles des gouvernements. En effet, certains organismes ont des dirigeants nommés plutôt qu'élus démocratiquement. Par exemple, certains conseils d'administration d'entités du secteur public peuvent nommer leur dirigeant.





Name: Mike St.Amant

Organization: City of Toronto



An approach that focuses on identified accountabilities to the public, although it technically makes sense, may be supportable, depending on how it is implemented. If the implemented approach strays too far from the private sector’s financial statements, this might not be supportable. With implementation of tangible capital assets in 2009, government financial statements finally became more comparable to private sector statements. I wouldn’t want to see them significantly differ now based on accountability information that is readily available from sources other than financial statements.


One of the objectives of public sector financial reports is to provide information for accountability purposes. However, financial statements also meet other objectives as well.


Currently, at least for municipal financial statements, neither the public nor elected officials rely solely on audited financial statements for accountability purposes. To the extent that there is reliance, it is reliance that the audited statements are reconciled to regular reporting to Council on the financial results of various operating Divisions and organizations and the capital projects underway. This reconciliation can be made using the existing reporting framework, which happens to benefit from being similar to reporting for private enterprises.


Given the number of entities included in certain consolidated statements (113 not including subsidiaries of subsidiaries for Toronto), consolidated financial statements, on their own, do not give an accurate reflection of how the municipality performed in accordance with all of these financial plans. The two accountabilities applicable would be more likely: accurate reflection of the annual results and the state of the financial condition, of the entity.


Yes


The asset and liability model is easy to understand and to audit. Its main problem is that it does not allow for matching of revenues and expenses, which most governments try to accomplish through their budgets, and which many users would expect to occur. A hybrid model which allowed for such matching under certain circumstances, would be preferable. However, a model which allowed for deferrals without any rigour, would likely result in more confusion than clarity.


N/A






categories?

Rather than the broader deferred outflows and inflows, I would be more comfortable with additional guidance regarding prepaid expenses and deferred revenues.


No. Financial statements are complex enough as it is, requiring additional statements will make them more complex and less understandable.

GENERAL COMMENTS

I look forward to reviewing and commenting on the Statement of Principles.





Name: Brian Jones, Executive Director Professional Practices

Organization: Office of the Auditor General of British Columbia



We agree that the public sector entities exist to serve the public and, as a result, they need to be accountable for their actions and results in carrying out their responsibilities. However, we do have concerns regarding the basis of the conceptual framework resting solely on accountability with no reference to decision-making (see response to Question 2 below). At this time we are not convinced that the advocated approach of focusing on accountabilities is superior to the traditional approach of determining user needs. In our view, providing information for accountability purposes is driven by user needs, not vice versa, and therefore user needs should continue to be the driving force behind the objectives of financial reporting.


The Task Force advocates that the single or dominant objective of financial reporting is to provide accountability information. Although the paper does recognize that the accountability information in financial reports may be used for decision making purposes, this is not recognized as a primary objective. The Task Force has not, however, provided persuasive arguments as to why their advocated approach is superior to the view that the objectives of financial reporting includes information for both accountability and decision-making purposes. Given an expectation that financial reports produced by a public sector entity will also be used for decision making purposes, we question whether it is prudent to exclude decision-making from the objectives of reporting. We recognize that financial reporting cannot provide all information required by different users for decision making purposes but we would prefer, given that financial reports are used as input to resource allocation decisions, the inclusion of decision-making in the financial reporting objectives. We also note that by providing such a specific focus for financial reporting it is unclear if all the needs of the users are being addressed. Even though the framework does indicate that user's needs are not the overriding objective of the financial statements, the accountability focus must be grounded by the user's needs. One of the user's needs defined by the paper are the investors and creditors to the entity. (The definition of public users in section 3 includes investors and creditors as voluntary resource providers.) Yet, the framework has specifically indicated that the information needs required by this group of users are not an objective of financial reporting. This makes us question whether the financial reporting objective focus on accountability is truly grounded by the user's needs as indicated in the paper. Further, the Consultation Paper does not clearly articulate the implications for financial reporting of adopting one approach over another. Therefore, it is difficult to arrive at a definitive preferential view. We recommend that should the Task Force continue to advocate accountability as the sole objective, the implications of adopting this approach (versus decision-making or dual objectives) be clearly articulated by the Task Force/PSAB in the forthcoming SOP.


We generally support the view that the public and their elected representatives are the primary users of the financial reports. However, we question whether the references to “the public” and “elected representatives” in this context are too narrow. For example, these references may exclude other primary users such as investors in government securities and other lending institutions. Accordingly, we would prefer that the references be broader to accommodate other primary users, similar to the categorizations used by IPSASB in its January 2013 Final Pronouncement, using wording such as: “Financial reports should be designed to provide accountability and decision-making information to resource providers, and their representatives, who do not possess the authority to require a public sector entity to disclose the information they need for accountability (and decision-making) purposes”.


We agree with two of the three proposed broad financial accountabilities in the Consultation Paper. The one “accountability” we are struggling with is (b); the extent to which current activities/results have an effect on the activities/results of future periods. This particular “accountability” appears to have evolved from the concept of “inter-period equity” which for all intentional purposes is a matching concept. We are not convinced with the arguments that the concept of inter-period equity has any place in a historical financial reporting framework. Accordingly, we feel that accountability (b) needs to be examined more thoroughly to determine if it has any role in general purpose financial reports and, more specifically, in general purpose financial statements. Our view is that users need to know basically three things; how well the public sector entity is performing, how well it did against its plan, and how well its maintaining its ongoing capacity to provide current service levels. In this respect, our view is that incorporating financial performance as a broad accountability makes much more sense in the context of general purpose financial reports then inter-period equity. We recognize that “financial performance” has been included as a specific accountability under (a) “the extent to which the entity performed in accordance with its financial plan”, but we feel it should be elevated to one of the three broad accountabilities given its primary importance in financial reporting.


We are not comfortable with the Task Force’s approach of attempting to identify financial statement accountabilities and mapping them to alternative conceptual models. Accountability is an imprecise notion that is open-ended and can lead to the subjective provision of all kinds of information, depending on individual perceptions of what public sector entities should be accountable for. Those perceptions may even be different between public sector entities. For example, financial statement accountability #3, “the extent to which revenue of the period is sufficient to cover the cost of providing services in the period (plus any costs related to previous years that were not covered by revenue in previous years)”, may be a policy choice of individual public sector entities and, therefore, may not be applicable to all entities. At this point it is unclear how identifying financial accountabilities will affect the remainder of the conceptual framework and, therefore, we do not support this approach until this has been more clearly articulated by the Task Force. Our worst fear is that this approach may lead to the adoption of a revenue-expense view (see discussion in the following section).


We prefer the asset and liability view as historically it has proven to be superior in both concept and practice to the revenue and expense matching view that previously dominated financial accounting before the development of conceptual frameworks. Virtually all standard setters currently base their conceptual frameworks on the asset and liability model and current literature and studies have confirmed the superiority of this approach to measuring financial performance. In our view accounting measures should be grounded in real-world economic phenomena and events. This can only be accomplished by defining assets and liabilities in terms of economic resources of an entity and its obligations to transfer

economic benefits to other entities in the future and by defining financial performance in terms of changes to those assets and liabilities. We reject the revenue and expense view because this approach creates assets and liabilities that do not represent economic resources and obligations but rather recognizes revenues and expenses that result from bookkeeping allocations. Our concern is that revenues and expenses are not precise concepts grounded in real-world economic phenomena. This lack of precision makes financial performance in the revenue and expense view unduly subject to the effects of individual judgment or collective opinion about what constitutes appropriate matching or what constitutes reliable financial performance. This approach results in deferred balance sheet debits and credits that do not require any justification as economic resources or obligations; they are simply balances awaiting future allocation. This results in the artificial smoothing of reported performance by averaging out fluctuations in performance. In addition, specific rules to govern how expenses and revenues are recognized and matched to measure periodic financial performance will be necessary to achieve any level of consistency. Moving away from a principles-based accounting framework to a rules-based framework would be a step backwards for the accounting profession. The revenue and expense view while useful and sufficient in a simpler time, has been viewed under rigorous analysis to be an inadequate foundation for the development of accounting standards. For example, a few years back in a study about principles-based standards commissioned under the Sarbanes-Oxley legislation, the U.S Securities and Exchange Commission said the following: “…the revenue/expense view is inappropriate for use in standard-setting—particularly in an objectives-oriented regime…Historical experience suggests that the asset/liability approach most appropriately anchors the standard setting process by providing the strongest conceptual mapping to the underlying economic reality...the FASB should maintain the asset/liability view in continuing its move to an objectives-oriented standard setting regime.” The Consultation Paper suggests that the biggest issue with basing the financial statement presentation on the asset and liability view is the potential for the introduction of volatility into the statement of annual results. However this argument does not resonate with us as we would defend the need to report fluctuations in financial performance on the grounds that economic activities are uncertain by nature and economic results often fluctuate in the real world. The Consultation Paper also suggests that allocating revenues and expenses to a particular period is an application of the concept of inter-period equity. The intention of inter-period equity is to provide information to help assess the extent to which the current generation of citizens shifts the burden of paying for current-year services to future-year taxpayers. However, it is not clear to us how allocating revenues and expenses to specific periods provides this metric. The measurement of net debt under the asset and liability model, which provides a measure of future revenues required to pay for past transactions and events, and the measurement of an entity's accumulated deficit or surplus would appear to be more relevant metrics in assessing the risk of shifting the burden to future generations. Hybrid Approach A hybrid approach is based on the premise that more useful measures of financial performance and financial position can be obtained if appropriate measures of financial performance and financial position are determined independently of each other and each is oriented to meeting user needs. We do not support the hybrid approach for several reasons. First we have significant concerns with the lack of articulation between the statements which will result in internal inconsistencies making them less understandable and meaningful to users. Our view is that articulation of financial statements is both necessary and useful. For example, the double check provided by articulated financial statements and the relative ease of accomplishing articulation are persuasive reasons for maintaining articulation. Double entry accrual accounting which formalizes articulation provides the double check such that an amount of revenue is measured by the amount of an asset received or liability settled and an expense is measured by the amount of an asset sacrificed or liability incurred. Second, we are not persuaded by the view that articulation can result in the presentation of meaningless or misleading information in one statement as a result of an attempt to improve reported information in another. In fact, we reject the hybrid approach for the same reasons we reject the revenue and asset model, that is, financial performance can properly be defined only as changes in assets and liabilities that represent economic resources of an entity and its obligations to transfer resources to other entities. Third, since non-articulation separates financial performance measurement from measures of assets and liabilities, we are concerned that there is no way of knowing whether or not revenues and expenses represent changes in economic resources or merely bookkeeping allocations. And fourth, we are concerned with the added complexity of the hybrid approach, such as increasing the required financial statements from the existing five to six and the anticipated messy reconciliations that will be required to articulate relationships between the statements that will feature into this model.


We fully support the asset and liability view as noted above.






categories?

As discussed above, we do not support the use of deferred inflows and outflows unless those inflows and outflows meet the definition of an asset or liability. However, should PSAB choose to introduce deferred inflows and outflows into the financial statements, it is our view that specific rules around which items would be accounted for as deferrals and their allocation to particular periods will need to be developed to ensure consistency and minimize the inappropriate usage of these categories. In this respect, our preference would be that only inflows externally restricted through terms in an agreement to fund costs of future periods would qualify for deferral treatment. We would also add the caveat that deferrals be limited to non-exchange transactions, similar to IPSASB proposals. We are not supportive of including inflows that are internally restricted through publicly communicated commitments as we see a significant risk in “earnings management” should this avenue be open to preparers (with the understanding that this position is inconsistent with PS Section 3410).


We do not believe there is a requirement to expand the financial statements to include additional information related to the accountabilities. However, given the challenges of some governments and public sector organizations in providing budget to actual comparisons on the statements of financial performance and change in net debt, there may be utility in providing a separate additional financial statement for the budget compliance accountability. Otherwise, any further additional inclusion of information can be disclosed in the notes to the financial statements as this would provide any additional information needed and would ensure that financial statements remain focused and not overly cumbersome.

GENERAL COMMENTS

Thank you for the opportunity to provide input on the proposals in this Consultation Paper 2. While we are generally supportive of the conceptual framework initiative, we feel strongly that the current asset and liability view represents a more disciplined and realistic approach anchored on real-world concepts of economic resources and obligations to transfer

resources. Our experience with the asset and liability model is that it has proven indispensable for determining proper accounting treatment for items that are not specifically addressed in the PSA Handbook. Further, the asset and liability model has undergone rigorous analysis over the years and in all cases has proven to be the only view adequate for the development of consistent accounting standards. In this respect, it would be a step backwards for the profession should PSAB choose to return to former ways by adopting the revenue and expense matching view. We have remained open to probing whether an alternative view may be more appropriate for the public sector, but as yet we have not heard any reasons or support, either in this consultation paper or from discussions taking place in other conceptual framework projects, that would persuade us to change our view.


Commentary on Consultation Paper 2 “Measuring Financial Performance in Public Sector Financial Statements” MFOA Committee on Accounting and Financial Reporting

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MFOA Committee on Accounting and Financial Reporting John Butler Peterborough County Agnes Gaspic Regional Municipality of Halton Barb Goodwin Hamilton Township Patrick Kelly Township of Wilmot Deb McRae Town of Port Hope Danna Munns Town of Ajax Shairoz Murji City of Toronto Clayton Pereira Region of York John Sim City of St. Catharines Stephanie Sinnott City of Oshawa Cynthia Townsend Town of Espanola Robert Voigt Town of Collingwood

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MFOA Committee on Accounting and Financial Reporting Commentary on Consultation Paper 2

The following document represents the views of members of the Municipal Finance Officers’ Association of Ontario’s Committee on Accounting and Financial Reporting. Questions are explored from a municipal government perspective. Local government forms a large segment of the public sector with 444 municipalities in Ontario alone. It is the order of government closest to the public; therefore we feel that the views of local government must be weighed heavily in the assessment of Consultation Paper 2. The document adheres to the sequence of questions found in Consultation Paper 2, “Measuring Financial Performance in Public Sector Financial Statements”. 1. Do you agree with an approach to a public sector conceptual framework that focuses on

identified accountabilities to the public and their elected representatives rather than an approach focused on the needs of discrete user groups? Please explain your reasoning.

That government must be accountable to the public it serves is, without question, a fundamental principle. Given that accountability forms such a basic pillar to government’s responsibility, how can one argue against a public sector reporting conceptual framework that reflects and supports that precept? The question posed here is not about the fundamentals of accountability but rather, does the current framework fail to support accountability and is the Hybrid model a viable alternative? We agree with the consultation paper’s comments that the articulation required in standard financial statement presentation, especially with regard to the inclusion of budget numbers in the general financial statement format, presents a number of unique challenges from a government perspective. The fact remains, however, that the current reporting model provides consistent, empirically verifiable, objective information that users of financial statements are familiar with, employed in their analysis of financial entities for many years, and have achieved a level of confidence with. Simply because government reporting has unique challenges doesn’t necessitate movement away from what has been (and is) considered the basic precepts of our conceptual framework as it stands. The recent changes in the Public Sector Accounting (PSA) handbook that came into effect at the end of 2009, initiated a cascading series of events that proved to be a significant drain on government resources to implement. It was felt at the time that the benefits of the change far outweighed the costs. The reporting standards introduced in 2009 were conceptually different than those previously employed by government (municipalities in particular) requiring extensive restatement especially in the area of tangible capital assets. In a great number of municipalities across Ontario, the repercussions of the 2009 changes are still being addressed. In essence, the 2009 updates brought municipal reporting in line with the reporting principles that elected officials and the public have used in their own private sector business reporting for years. This consistency with other sector accounting practices forms a fundamental foundation for government accountability by serving to present financial information in a format that is widely understood and adhered to. The Consultation Paper challenges the existing reporting model’s requirement for sophistication on the part of the financial statement reader noting that current statements tend to focus on the needs of a specific group, primarily investors and creditors. In response, we suggest that as the information is complex, it needs to be presented in a format that is definable within the terms of accepted reporting practices. To achieve this demands a certain level of sophistication on the part of the statement users, no question, no apology. Further, the question does not recognize elected officials’ polarized

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relationship with financial statements. On one hand, elected officials are part of the broader user group. On the other hand, the public uses financial statements to judge elected officials’ performance as they are responsible for setting the strategic direction of the organization and approving key financial decisions. Current reporting practices allow the users to extract and interpret financial information to meet their particular needs. The need for sophistication ensures that data is presented and interpreted through the lens of professional judgment, not to alienate the readers but rather to ensure a consistent interpretative framework. Again, this is only possible because the current presentation framework is comprehensible and consistent with generally accepted practices. Reader understanding of financial statements is currently supplemented by the inclusion of such elements as; attached notes, segment disclosures, and schedules of tangible capital assets. Should it be felt that this is not sufficient to explain the interrelationship between revenues raised in current periods to address future funding issues or the evaluation of service delivery, perhaps a more detailed Management Discussion and Analysis might be considered or further expansion of the existing attached notes? The point is that there are other alternatives to the hybrid model that lend themselves to enhancing financial disclosure (and accountability) without moving to a new and radically divergent format. The introduction of new financial reports and the redefinition of existing reports as suggested in the hybrid model, based on a standard that is not widely understood and which diverges significantly from other sector reporting, will serve to confuse readers leaving them off balance (not to mention potentially out of balance) and without a clearly understood frame of reference. Conceivably an underlying principle of trust may be fractured, leaving readers with the feeling they are being manipulated rather than reported to. Will this not serve to significantly diminish accountability? The implication that the hybrid model does not require the level of sophistication expected with the current model should also be challenged. As previous stated, the current framework is widely understood and employed, the hybrid model uses a fundamental structure widely divergent from current practices thus demanding a completely new level of sophistication. We cannot be all things to all people, attempting to do so will likely result in confusion, misunderstanding, and most of all, loss of trust. When local government changed financial reporting practices in 2009, we moved government reporting to be more in line with other sectors and in doing so enhanced our accountability motif. The hybrid model serves to again push us away from standard practices. We are having difficulty seeing, from a high level perspective, how this enhances accountability. While we affirm accountability as an unequivocal objective in government reporting, we are not convinced that the hybrid model, addresses that objective. 2. Do you agree with the proposal that the objective of public sector financial reports is to provide

information for accountability purposes? Please explain your reasoning. We agree with the proposal, however, we note that the financial statements are based on objective and verifiable data and the purpose of the financial statements is also to provide accountability for appropriate accounting practices. This consideration will limit the type of information that should be included in the general purpose financial statements. In addition, as stated in the paper, since the accountabilities to the public are broad, the importance of other reports, including financial reports, must be emphasized and the broader reporting framework can be leveraged. As stated in the response

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to question #6, it may be possible to reference these supplementary reports within the general purpose financial statements to educate the reader about the information available to better demonstrate accountability. In addition, it is important to note that the current practice of including the auditor’s report addresses the need to provide information for accountability purposes. 3. Do you agree with the proposal that public sector financial reports should be designed to


We disagree with the proposal on several fronts. As stated above, the financial statements are a part of the report card on elected representatives’ performance as they are responsible for setting the strategic direction of the organization and approving key financial decisions. Elected representatives are not simply users of financial reports. Elected officials may also be more familiar with existing financial reporting practice due to its consistency with other sector accounting practices. The proposal does not recognize this complex relationship. We believe that the investment community is an important user of public sector financial reports. Public sector entities often issue debt and are rated by agencies such as Moody’s. Therefore, financial reports should also focus on the quantity and quality of debt and the organization’s ability to sustain payments. Media and researchers also play an important role as interpreters and providers of public sector financial information. It is vital not to complicate reported results to avoid misinterpretation and misunderstanding, which could erode public confidence. In addition, it is important to understand the needs of the key users identified in the paper. The paper states that the public evaluates the performance of public sector entities from two perspectives: as resource provider and as service recipient. As a result it can be argued that the key performance/accountability indicators most relevant to the public relate to overall taxes levied and value/quality of services and programs provided for taxes levied. These objectives, however, are best evaluated in the annual budget report and through the use of non-financial indicators of service delivery (outside the scope of financial statements), not in the financial statements. The public is also concerned with the financial position of the organization and how the position will impact the tax rate. Again, this information can be found in local government’s operating and capital budget forecasts. Users rely on financial statements for several alternative purposes. Users use financial statements to confirm that the organization’s accounting practices are sound, which provides comfort that the funds provided are spent appropriately, that there is good stewardship of assets and that fraud risk has been addressed by management or mitigated through appropriate controls. 4. Do you agree with the three proposed broad financial accountabilities expected to be

demonstrated by a public sector entity about the financial affairs of the entity? Please explain reasoning.

The three proposed broad financial accountabilities in Consultation Paper 2 that public sector entities are expected to be accountable for are:

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1) the extent to which the entity performed in accordance with its financial plan; 2) the extent to which current activities/results have an effect on the activities/results of future

periods; and 3) the state of the financial condition of the entity.

We agree with the three accountabilities and offer additional comments.

Accountability #1 is very important. Currently, the accountability is being addressed in two ways. First, staff presents performance reports to Council on budget-to-actual variances. Second, Ontario Regulation 284/09 requires Council to adopt reports by resolution on amortization expense, post-employment benefits expense, and solid waste landfill closure and post-closure expense. The purpose of these reports is to link budget items prepared on a cash basis with financial reporting components. The reports include estimates of changes in accumulated surplus and analyses of the estimated impact of the exclusion of the expenses on future tangible capital asset funding requirements. Comparisons of budget-to-actual results are complicated because the basis of budgeting and of audited financial statements may differ for local governments. Although there is a requirement to present budget information in the financial statements, this information is at a high level and is difficult for most readers to understand. Reconciliations are required and the budgeted figures are adjusted to conform to accounting standards, which can impair the link with the original budget document. Municipalities may choose to use other basis (cash) when budgeting for several reasons including:

Financial management objectives, Difficulty of budgeting for gains and losses on investments, and Complexity of capital asset planning due to its long term nature and reliance on a range of

financing sources. In addition according to the Municipal Act, 2001, municipalities cannot budget for an operating deficit and can only use debt to finance capital expenditures. Budgets are, therefore, prepared based on cash requirements to fund current operations and future capital needs. Accountability #2 is complex and includes an assessment of current investment strategies and their effect on the future which can be difficult to estimate. As stated in the paper, this accountability is largely outside the scope of the financial statements because financial statements are based on historical information. The best way to demonstrate this accountability in a financial sense is through budget projections. Statistical information provided in annual reports, as well as, in infrastructure reports showing the current state of capital assets is also useful in the assessment of current and forward looking information. In addition, information regarding the reserves set aside for future operations can be presented in the financial statements as they are an indicator of financial burden borne by the current taxpayer for future expenditures (however, some reserves relate to current use of resources that have to be replaced as in the case of tangible capital assets). Further, it may be difficult for accountabilities 1 and 2 to be consistently applied and measured across a wide variety of municipalities in a standardized financial statement format. How well a municipality performs in relation to its financial plan, or how current year fiscal performance impacts future initiatives, will differ where stakeholder needs vary.

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For example, a municipality may be accountable to their stakeholders by meeting Council directives or responding to emergency issues that occur through a fiscal period. However, these two scenarios may impact both items (a) and (b). How then does a financial statement measure the impact of stakeholder interests such as this? Accountability #3 can be demonstrated by reviewing financial statement items at a high level in conjunction with budget projections. Combining the reports incorporates certain relevant items that are beyond the scope of the financial statements. Overall, these accountabilities are useful to outline, however a standardized financial statement format is likely not the best avenue to show that municipalities are achieving two of the three accountabilities. Stakeholder interests or response to emergency situations are just two scenarios which cannot be well depicted through the financial statements of a public sector entity. 5. Do you agree with the 16 proposed financial statement accountabilities? Are there any missing?

Are there any that should not be included? Please explain your reasoning.

See Appendix A for the 16 proposed financial statement accountabilities. We agree with most of the accountabilities and offer additional comments as follows:

Accountability #1 – We disagree that this accountability is best reflected in the financial statements. As noted above, budget compliance and budget-to-actual comparisons in the financial statements are challenging and this issue requires additional consideration. Currently, budget-to-actual variance reports to Council (which are also available to the public) address this accountability in more detail than is possible in the financial statements.

Accountability #3 – Inter-period equity is a complex issue tied to the above. The paper suggests that the Revenue/Expense model is a simple measure of inter-period equity, but it should be considered that the revenue and expenses in this model do not tie to the taxation for the year because they are partially based on allocations. Therefore the budget document provides better information by showing the amounts collected for current and future expenditures. In terms of financial statements, the use of reserve disclosures could be considered as another simple measure to meet this accountability without significant changes to the reporting framework.

Accountability #5 – We agree with this accountability but there are several issues to consider when evaluating the measurement basis for this item. The use of historical costs to measure consumption of capital is objective and less costly than the use of replacement cost but it does not represent the full current cost of using the asset. Disclosures for capital related reserves may assist in the determination of the full cost by taking into consideration inflation and technological advancements. There are fewer issues relating to operating costs of the assets as they are usually paid for and expensed in the period of service.

Accountability #5 - Tangible capital assets are the largest component of the Statement of Financial Position for local governments. As these assets represent a substantial investment and involve significant planning, much of the related financial information is provided in the budget document. These assets are held to provide services for the public and the related performance measures are best

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reflected by non-financial information (i.e. infrastructure report cards, service related performance indicators). 6. Which of the three financial statement presentation alternatives do you prefer? Is a hybrid

model (hybrid in the sense described in this Consultation Paper) an option that the Task Force should pursue? Please explain the reasoning for your choice and indicate why the other two alternatives were not chosen.

We prefer the existing Asset/Liability model. We have examined the alternatives considering the following key points: The financial statements are based on historical information. The financial statements should contain information that is comparable, understandable, reliable,

objective, verifiable and relevant. The financial statements are used to report the financial position and financial performance with

an overall purpose of confirming that the organization’s accounting practices are sound which provides comfort that the funds provided are spent appropriately, that there is good stewardship of assets and that fraud risks have been addressed by management or mitigated through appropriate controls.

The financial statements are a part of a multi-faceted reporting framework which is required due to the many accountabilities of the public sector (or in our case, the municipal sector).

Preferred model: Asset/Liability

We suggest building on the current model focusing on key issues identified: reducing volatility, improving understandability and to simplify budget-to-actual comparisons (initial issues identified by the senior finance community).

The consultation paper states that the notes to the financial statements are an integral part of the financial statements, but the focus of the paper is the face of the financial statements. We understand that these considerations may be included in greater detail in a Statement of Principles. We believe that disclosures in the notes to the financial statements can be used to address many of the issues identified. Increased audit and staff costs must be considered when evaluating additional information to be provided.

Reduce Volatility

Our understanding of this item is that it mainly relates to the recognition of revenue in the current period when the related expenses are recognized in a different period. In the municipal sector, most general taxation revenue and funding is collected to cover current period expenses. The main exceptions are taxes collected to finance reserves, development charges and grants received for multiyear capital projects (discussed below). Taxes collected for reserves can be addressed through note disclosure. Information regarding the use of surplus funds which are used to finance reserves can be provided in the notes to the financial statements. Many municipalities already provide some degree of disclosure relating to reserves.

The issues surrounding capital funds require additional consideration due to the complexities involved. Capital assets can be funded from different sources including reserves and debt.

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Amortization, which is a current period expense, is not a good measure of the cost of the services provided in the current period as it is based on prior period costs (historical costs). As stated above, reserve disclosures can provide additional information relating to capital assets since it can be argued that reserves set aside to replace these assets are a part of the cost of the services provided in the current period. One alternative to increase inter-period equity would be to adopt a practice of deferring capital related revenue and amortizing it in line with the related assets. In the recently revised section PS 3410 Government Transfers, this treatment is only required when the terms of the funding contract create a liability. This is not a preferred approach as this treatment poses the significant administrative burden of tracking revenues and it further increases the gap between the financial statements and the budget document. The treatment of deferrals was discussed in detail as part of the consultation process for PS 3410 Government Transfers and this option was not well received. If this option was adopted, it should be noted that inter-period equity would not be fully achieved due to the timing of recognition of financing sources. Revenue collected to fund initial transfers to reserves may be recognized in prior periods (assuming they are not treated as deferred inflows) and the recognition of costs associated with debt financing for capital projects (interest cost) may not be in the same period of utility and amortization as the asset (again assuming that recognition criteria would remain the same). Another consideration is that funding for capital is a relatively small portion of the overall revenue for local governments; therefore, the related volatility is insignificant when considering all revenue sources. Overall, we feel that reserve disclosures for the current year are more informative and provide more accountability to the key users than the allocation of inflows and outflows to periods which will not match the cash flow and taxes levied.

In terms of general expenses, most expenditures that are made in advance are recorded as prepaid assets which provide a measure of the current/prior period expenditure incurred for services to be consumed in future periods. The net change in this item can be seen in the cash flow statement. Services and goods consumed before payments are made are accrued in the period they relate to; therefore general expenses do not appear to be creating much volatility in the Statement of Operations.

Improve Understandability

The current model is articulated which allows the users to trace the changes in the various financial statement components therefore promoting understandability.

Assuming the general public and elected officials are key users, items to consider could be improvements to notes for budget-to-actual comparisons which would arguably be the item these users are most concerned about and would want to understand. Additional disclosures relating to other items could also be considered. For example, additional information about surplus and budgeted funds being transferred to reserves would improve understandability. Other sections in the PSA Handbook may be affected to make certain disclosures mandatory or to clarify the information required. As stated above, the scope of the financial statements with respect to this item is limited to high level information.

References in the financial statement notes to the budget document, annual report, variance

reports, Ontario Municipal CAO’s Benchmarking Initiative (OMBI) and Municipal Performance Measurement Program (MPMP) reports could also be used to supplement the financial statements and highlight the broader reporting framework in the public sector which reflects

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the broad user base and multiple objectives as well as the broad accountabilities of the public sector.

Simplify budget-to-actual comparison Most public sector entities use a different basis for budgeting than for financial reporting

purposes for various reasons, including legislative requirements and financial management objectives. This item will, therefore, remain an issue for the Asset/Liability model and for the other two proposed approaches. As stated above, additional information relating to the differences can be included in the financial statement notes but the information has to remain at a high level because the adjustments are complex. As also stated above, capital items remain the key drivers of the differences due to complexities in funding sources and accounting recognition. This issue requires further consideration.

Not recommended: Revenue/Expense Model

This model appears to focus on inter-period equity which is a subcomponent of the second broad accountability (the extent to which activities/results have an effect on the activities/results of the future periods).

The revenue and expenses are partially based on allocations of inflows and outflows to the

accounting period. Although this is argued to be a simple way to illustrate inter-period equity, it may not be the best measure as the allocations are not tied to the budget. In local government, the budget dictates the amount to be collected from the public, which is the real measure of the financial burden.

The addition of new deferred inflow and outflow elements can create confusion in relation to

current deferred revenue categories.

The tracking of new deferred items would require considerable effort.

Budget-to-actual comparisons would still likely require reconciliations – this is one of the key concerns that gave rise to this project.

As stated in the paper, this model may lead to variations in revenue recognition between

organizations based on the interpretation of the relationship of the funding to the expense.

Overall, due to additional reconciliations required and the additional deferred financial statement elements, we believe this approach would impair understandability, another key concern giving rise to the project. Impaired understandability may also impair the trust of the public as they may view complexity as an opportunity to hide or manipulate information.

Not recommended: Hybrid Model

This model also appears to focus on inter-period equity which is a subcomponent of the second broad accountability (the extent to which activities/results have an effect on the activities/results of the future periods).

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As stated above, the revenue and expenses are partially based on allocations of inflows and outflows to the accounting period. Although this is argued to be a simple way to illustrate inter-period equity, it may not be the best measure as the allocations are not tied to the budget. In local government, the budget dictates the amount to be collected from the public, which is the real measure of the financial burden.

The model is not articulated which impairs understandability. Reconciliations may be difficult to

perform and understand, especially by the general public. Impaired understandability may also impair the trust of the public as they may view complexity as an opportunity to hide or manipulate information.

A new flow statement of Deferred Inflows and Outflows may cause confusion compared to

current deferred revenue categories on the Statement of Financial Position.

Budget-to-actual comparisons would still likely require reconciliations – this is one of the key concerns that gave rise to the project.

This model may also lead to variations in revenue recognition between organizations based on

the interpretation of the relationship of funding to expenses. 7. If you do not like any of the three financial statement presentation alternatives set out in this

Consultation Paper, do you have another preferred model that would meet the identified financial statement accountabilities?

We believe that the current Asset/Liability Model is the preferred alternative and do not propose any new models for consideration. The articulation of this model enhances understandability and achieves the key reporting objectives of general purpose financial statements. Where additional information is considered important to the identified financial statement users, we believe this can be accomplished most effectively through the use of reporting outside of the general purpose financial statements, or through expanded note disclosure within the Asset/Liability model, without compromising the integrity of the current financial reporting model. 8. Multi part question. See below. Deferred inflows and outflows are defined in Consultation paper 2 as:

Deferred inflow: An entity’s increase or acquisition of net assets that is applicable to a future reporting period. Deferred outflow An entity’s consumption or reduction of net assets that is applicable to a future reporting period.

1. If new financial statement categories for deferred inflows and outflows are set up, what items

would you see being accounted for in these categories (for example, endowments, general tax revenue, transfers received)?

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We do not agree with the proposed added financial statement categories for deferred inflows and outflows. We believe that these items will add complexity, impair understandability and reduce public confidence in the reliability of the financial statements of public sector entities. The following examples of deferred inflows and outflows are based on our interpretation of the definitions provided. Further clarity regarding recognition criteria and the definition of these items will be required. If new financial statement categories are set up, an example of a deferred inflow is a multi-year grant transferred to the entity that does not meet the definition of a liability, but includes stipulation by the transferor that it is to be used to finance activities of the entity over one or more specified future reporting periods. A second example is revenue collected to fund reserves. An example of a deferred outflow would include grant agreements where funding is conditional on meeting eligibility criteria over a specified multi-year period. Therefore, deferred outflows and inflows appear to be most applicable to multi-year funding agreements for the transferor and the transferee. Please note: these are for non-exchange transactions. Such transactions include (a) involuntary transfers of resources, notably taxation and certain grants, which may be received prior to the period in which they are intended to finance the provision of goods and services, and (b) obligations that do not create a liability. 2. Do you have any suggestions for the criteria that should be used to determine what can/should be

accounted for in those categories? We do not agree with changing criteria and would prefer to continue following the general guidelines set out in the PSA handbook or generally applicable standards for entities outside the public sector, for example in Part III, Section 4410 Revenue Recognition, paragraphs .28-.56 for the Deferral Method. Using these widely accepted criteria would ensure consistency and help with ease of understanding. The increasingly varied methods of reporting further confuse users of financial statements. Therefore, using currently applied criteria will help with consistency and understandability. 3. Does there need to be an external restriction on an inflow, requiring it to be applied to cost of

services provided in future periods (time or performance requirement) in order for the inflow to be deferred?

For consistency purposes, it is crucial to have external restrictions on an inflow. If there was no restriction on an inflow, the municipality is able to use the inflow at its own discretion and the inflow would likely be recorded in the current period.

Current practice of classifying items as deferred revenue requires proof that it meets the definition of a liability. Similarly, there needs to be criteria that can be applied to substantiate the deferral of the inflow or outflow, so consistency can be followed and auditors can refer to the criteria during the audit. Consideration could also be given to internally restricted inflows via by-law, Council direction, or signed agreements. Currently, some similar disclosures are made but they are not mandatory. As per PS 3100 Restricted Assets and Revenues, disclosures relating to designated assets are voluntary so they could

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become a requirement. PSG-4 Funds and Reserves also address disclosures that organizations may make. 4. Is an internally made but publicly communicated commitment to consistently use a certain type of

inflow to provide future services enough to trigger deferral? It would depend on the situation and whether there is authority to reverse the commitment. Each situation needs to be reviewed by analyzing inflows/outflows and assessing conditions attached to the commitments. Consideration of an internally made commitment definition would be necessary – for example, is Council direction considered internal? Currently, restrictions imposed by Council are communicated to the public through Council reports and the budget document. If a municipality is committed to future spending (not an exchange transaction) and cannot opt out, then it could trigger deferral. However, this could become very subjective. On the other hand, if the focus is on accountability to the public, it could be argued that publicly communicated commitments should be enough to trigger deferrals. This would also recognize the financial statements’ role as a report card on elected representatives’ decisions and inspire public trust.

5. If an internal commitment is allowed to trigger deferral, should an irrevocable designation for its

application to the cost of service provision in future periods be made upon receipt of inflow/levying of taxation?

We do not agree. An irrevocable designation could compromise the accuracy and integrity of the financial statements should circumstances change in the future as to the restrictions of the inflow. There may be a change in direction from Council to redirect funds. Also, economic circumstances and strategic directives change so this would likely be too inflexible especially if the commitment is made without an end date. 6. How direct should the relationship be between the inflow and the costs of services to be provided

in future periods in order for deferral of the inflow to be permitted? There must be a direct relationship between the inflows and cost of services for deferral, otherwise the inflow would be recognized in the current period. If there is no direct relationship, then how does one justify the deferral? Not having a direct relationship would possibly allow for some revenue manipulation if the criteria are not specific which would not make the statements more useful or comparative. 7. Should only items that do not meet the definitions of assets and liabilities be considered for

inclusion in deferral categories? We do not agree. This will confuse users and make the financial statements less accessible. If deferral categories are included then they need to be segregated and explained in the notes so that users clearly understand what is included and on what basis it was included. 9. Should a set of general purpose financial statements of a public sector entity include other

statements based on the identified accountabilities? For example, a separate (audited) statement of debt and other liabilities might respond to the financial statement accountability

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relating to debt and other liabilities, the sub-characteristic under “public accountability” that is “debt capacity” and provide useful information to consider in an evaluation of the financial condition of a public sector entity. Please explain your reasoning.

We do not agree that other statements are required. Accountabilities can be addressed through additional note disclosure, through the suite of complementary reports issued by municipalities (Financial Information Return (FIR), OMBI, budget), and by municipal debt ratings by credit rating agencies. Possible indicators of financial condition that could require mandatory presentation as part of note disclosure or statistics include: • Debt as a % of current year surplus (based on audited figures) • Debt as a % of reserves – total or annual (based on audited figures) • Debt as a % of current year taxes levied or total budget (budgeted figures are not audited) • Include information on how the debt will be repaid – summary of policy (2-3 sentences), which is

already done by many municipalities. General Comments: Overall, we are concerned that many of the proposals in Consultation Paper 2 will work counter to the Paper’s intentions. Rather than improving accountability, the introduction of deferrals and additional statements may alienate users by decreasing understandability and consistency and erode public confidence. The costs and benefits of any reporting changes must be evaluated. Any additional components added to the financial statements will increase audit requirements and therefore audit costs. In addition, additional staff time will be required to track and prepare information. The hybrid approach alternative, for example, will substantially increase staff time due to the requirement to analyze and track the additional deferrals. This could translate into another full time staff position. The benefit and usefulness of the additional information provided must be evaluated to ensure that the public would agree that the value matches the possible increase in tax levy. Municipalities and other public sector entities are required to provide other reports and submissions to various Ministries where the information is derived from accounting data. One example of such a publicly available report in the Province of Ontario is the FIR which is the basis of MPMP measures. Council also receives performance reports, including budget-to-actual variance reports. This reporting framework should be considered when making significant changes to the financial statements due to the impact on the time it would take to implement and interpret any changes. Due to complexities and differences surrounding financial planning/budgets and financial reporting, none of the three proposed reporting alternatives fully solve the issue of comparison. As this is one of the key issues that gave rise to the project and this item is identified as a broad accountability, it may be necessary to form a task force to review these differences and discuss how budget-to-actual results can be reported with greater ease. As per the comments above, this accountability may not be best addressed in the financial statements.

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Additional upcoming reporting changes and the effect of these changes on public and practitioner understanding must also be considered. The consultation paper is based on revised section PS 1201 Financial Statement Presentation. This section will be applicable in the same year as PS 3450 Financial Instruments and will be mandatory for fiscal periods beginning on or after April 1, 2015 for governments but is applicable for fiscal periods beginning on or after April 1, 2012 for government organizations. As a result, many governments have not had a chance to fully review the impact of the proposed changes on daily operations and reporting. These changes, including a new Statement of Re-measurement Gains and Losses, will also have to be explained to users. In addition, PSAB is in the process of gathering feedback for a new standard relating to Appropriations which will have yet another effect on financial statement presentation and disclosure. The impact of previously approved modifications must be considered when introducing a new slate of significant reporting changes. In the end, the public sector is complex. Government requires a multifaceted reporting framework. As stated in the Introduction to Statements of Recommended Practice (SORPs), PSAB recognizes that no rule of general application can be phrased to suit all circumstances and there is no substitute for professional judgment. Since much of the accountability information addressed in the paper requires information found outside the financial statements (such as the information addressed in the SORPs), it is difficult to incorporate this type of additional information into the general purpose financial statements and maintain comparability and consistency in application. Development charges As part of the discussion of possible examples of deferred inflows and outflows, the following comments and questions regarding development charges (DCs) were made for the Task Force’s consideration. Of finance officers and experts surveyed, accounting staff appeared to have sufficient processes and controls in place for the recognition of DCs and the capital growth expenditures funded by DCs. Other finance staff, however, appeared to have a slightly different view on the matter and the general sentiment for DCs is that more information either in the form of increased discussion in the notes, management discussion and analysis (MD&A) or possibly a new set of statements would benefit municipalities and the users of the financial statements. To better understand why there is a need for more information on DCs, the following questions are presented for consideration:

1. How frequently are reconciliations for DC bylaws performed either by consultants or by municipal Finance staff?

2. Specifically, are any reconciliations performed for monies drawn for growth- related projects and related funding sources during the period a DC bylaw is approved by Council?

3. Are there any tracking mechanisms in place to determine the stages of completion for DC related projects?

4. How much influence do the above reconciliations have on the setting of DC rates and the adequacy of the DC revenues? Have DC rates being reviewed and possibly reset during the maximum five year period to ensure economic cycles or developers’ appetite are considered?

How do the above questions influence the level of detail reported on the financial statements in the current state? Would a statement of deferrals as a new category assist or impede on the information for deferrals and specifically for DCs?

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Appendix A: 16 Proposed Financial Statement Accountabilities The financial statement accountabilities that would provide different perspectives on financial performance and relate to both broad accountabilities (a) and (b) above are:

1. budget compliance (i.e., budget-to-actual financial performance comparison); 2. annual surplus/deficit; 3. the extent to which revenue of the period is sufficient to cover the cost of providing services in

the period (plus any costs related to previous years that were not covered by revenue in previous years);

4. a change in net assets/net liabilities; 5. consumption of tangible capital assets and other resources specific to the public sector to be

included in the measure of financial performance for the period; 6. the separation of unrealized valuation changes from the results of operations; 7. a change in net debt/net financial assets; and 8. the sources and uses of cash.

The remainder of the accountabilities that are expected to be demonstrated through recognition and presentation in the financial statements (i.e., those not related to financial performance but required to be demonstrated in a set of financial statements) relate primarily to providing information about financial position and, thus, about one aspect of the state of financial condition (i.e., broad accountability (c)). They are:

9. all assets and liabilities of the entity; 10. the net assets/net liabilities indicator of financial position; 11. the net debt/net financial assets indicator; 12. cash and cash equivalents; 13. issued debt and other liabilities; 14. tangible capital assets (balances, acquisitions, disposals, etc.); 15. financial assets, including financial instruments; and 16. other public sector resources (balances, acquisitions, disposals, etc.).

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PSAB Consultation Paper 2: Response by the Research Universities’ Council of British Columbia Date January 31, 2013

Prepared by Research Universities’ Council of British Columbia (RUCBC)

Primary Authors:

Larry Guthrie, Simon Fraser University

Murray Griffith, University of Victoria

Ian Burgess, University of British Columbia

Consulted Senior Management Finance Teams of B.C. Research Universities

Executive Summary

One financial statement number matters more than all others combined – the Annual Surplus (Deficit). The media, the public, politicians, regulators and universities themselves invariably focus only on this one measure. Our methodology as accountants must accomplish the measurement in a manner that ensures the Annual Surplus (Deficit) is an indicator of financial sustainability, inter-generational equity and financial equilibrium which these parties believe it is.

In order to satisfy these expectations, the Revenue and Expense Model must be utilized as it enables deferrals to account for incomplete service provision expectations when financial reporting is based on fiscal periods rather than the natural end-of-service provision.

Changes in the valuation of marketable securities need to be recognized in operations as they occur to ensure financial statements are based on real economic phenomena and have credibility with the public. The presentation of an additional statement for remeasurement adds unnecessary complexity that obscures the impact of changing market values. Many public sector entities with large investment portfolios are using IFRS rather than PSAS.

In the United States, the National Association of College and University Business Officers developed principles of financial governance that are widely accepted in the Canadian sector. These principles have been applied to edit the Broad Accountabilities of Public Sector Entities and the Financial Statement Accountabilities proposed in the Consultation Paper in order to focus financial accountability on the themes of financial sustainability, inter-generational equity and financial equilibrium. This provides the foundation of the rationale for selection of the Revenue and Expense Model.

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Finally, in order to assist in defining deferral criteria, characteristics and examples are provided.

Question 1 - Agree

In RUCBC’s experience, most, if not all, discrete users of the universities’ financial information access additional information as required. These users include government funding agencies (who frequently have their own special audits performed); bond rating agencies, bank lenders and special interest groups (who utilize access to information requests).

Universities have a clear separation of governance and management. In some public sector entities the division of governance and management roles is obscured. Where there is a clear separation of governance and management, audited financial statements are particularly critical to allow the flow of accountability between management, the board and the public with external audit providing assurance over the process.

RUCBC notes that financial statements are referenced in providing accountability to central government, but the primary focus of this accountability is specialized reporting schedules – not audited financial statements.

Practically speaking, if one wanted to build financial statements based on the needs of discrete user groups determining who the discrete users are and developing a consensus would be unlikely to be achievable. Therefore, financial statements must be a general use document and focus on those who do not have other access to their unique information needs.

Question 2 - Agree

Accountability is the primary objective as the relationship with the public is paramount. Public entities are normally purposed to create sustained service value – not financially realizable value – and to deliver the service in a financially sound manner. Financial statements are intended to measure the financial soundness of the delivery of service, not the value of the service. Whereas, corporate entities have the reverse order of priorities with the primary focus on valuation.

Never-the-less, sound valuation is important in order to be founded in reality.

How financial results are reported and presented has real impacts on program operations, in particular when the organization is subject to ‘no annual deficit’ requirements. The theoretical issues in this Consultation Paper have practical implications that are critically important.

Question 3 - Agree

Financial statements have a key role in the public forum by providing a fixed hub for financial dialogue.

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Question 4 – Somewhat Agree (Deletion, Replacement, and Revision)

RUCBC agrees that some accountability can be demonstrated in financial statements, but not all. In order to extend the scope of accountability reporting from the financial statements base, RUCBC suggests that more extensive Management Discussion and Analysis (MD&A) be encouraged as part of comprehensive general purpose reporting.

Accountability Roles: A common view of accountability in the university context is that the:

Board is accountable for the results of the University in the context of legislated and contractual requirements, and stakeholder expectations. Accountability and transparency by the Board will be provided in key decision processes and by reporting of results. This will demonstrate fulfillment of its stewardship responsibility to control, protect, nurture and utilize assets consistent with the mission, vision, and values.

President is accountable to the Board and stakeholders for financial and program results and the provision of oversight of personnel in relation to their roles.

Accountability Criteria: The National Association of College and University Business Officers (USA) and the Association of Governing Boards of Universities and Colleges (USA) collaborated in the publication of a book by William S. Reed titled the Financial Responsibilities of Governing Boards which has enunciated principles of financial governance that are widely accepted by universities. These principles provide the criteria upon which financial performance of universities is adjudicated and should be the foundation elements of financial statement accountabilities. We have synthesized NACUBO’s principles of financial governance as follows:

Alignment: to allocate and utilize resources based on the University’s strategic priorities.

Financial sustainability: to match predictable revenue to fulfill the University’s basic mission; and, to utilize less predictable revenue, when it becomes more certain, to augment strategic priorities.

Inter-generational equity: to balance providing services to current and future students, in perpetuity, by replenishing physical, financial and intellectual assets.

Financial flexibility: to allow the University to innovate, improve, grow, adapt, and realize opportunities in order to maintain relevance in perpetuity.

Financial equilibrium: to simultaneously achieve operating results that are balanced and sustainable; endowment purchasing power that is protected; physical assets that are preserved; debt that does not exceed the related future service potential; organizational infrastructure that will sustain operations; and, personnel who are developed and nourished as assets of the University.

By applying these financial governance principles of universities, we have the following suggestions to revise the list of proposed financial statement accountabilities.

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Suggestion – Add a New Accountability (a)

RUCBC proposes that the following be inserted as the first accountability and that the other accountabilities be renumbered accordingly:

(a) the stewardship control, protection and utilization of assets in alignment with mandate, mission and strategic plans of the organization;

Rationale: Governance literature clearly states the need to have strategic alignment. Therefore, strategic alignment should be the starting point for accountability.

Suggestion – Renumber Current Accountability (a) as (b)

Suggestion – Revise Current Accountability (b) and Renumber as (c)

RUCBC proposes that the current accountability (b) be revised as follows: (c) the extent to which current activities/results represent financial performance that is financially sustainable, inter-generationally equitable, and in a state of financial equilibrium; and,

Rationale: Rather than make a general reference to future period considerations, it is desirable to more specifically state the basis on which future period considerations are normally adjudicated.

Suggestion – Renumber Current Accountability (c) as (d)

Question 5 – Somewhat Disagree

RUCBC agrees with most of the accountabilities, but disagrees with some as described below.

Financial Statement Accountability 1: Budget Compliance –Proposed Revisions

RUCBC proposes that this be described as budget comparison, not budget compliance.

Rationale: Reported results that are different than budget are not necessarily indicating a state of non-compliance. Thus, this negative connotation should not be implied.

Many universities have budget practices that enable adaption to changing circumstances. These are expressed in terms of a requirement that transactions be funded along the following lines:

Funded: Sufficient funding, after considering pre-existing commitments, exists to cover the expenditure pursuant to the following five types of funding approval:

1. Budget approval by the Board;

2. Specific approval of the project or expenditure by the Board;

3. Legislative or contractual requirements that necessitate the expenditure;

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4. Sourced revenue from duly authorized contracts, i.e., sponsored research; or,

5. Performance revenue adjustment, where variable expenses may be funded from performance based revenue that exceeds budget, when approved by the Vice-President, Finance and Administration, but only where a revenue shortfall would result in a corresponding reduction of variable expenses.

Based on application of the foregoing, a difference between actual and budget may be fully in compliance. Therefore, the use of the word comparison is preferable.

Financial Statement Accountability 4: Change in Net Assets/Net Liabilities – Proposed Deletion and Replacement

RUCBC proposes that this accountability be restated as: A change in net surplus (deficit).

Rationale: Accountability 4 as currently stated necessitates an asset and liability model as the primary focus of financial reporting; whereas, the RUCBC believes a Revenue and Expense Model is more appropriate (see response to question 6) and is the better measure. The financial statement accountability should, accordingly, be restated.

Financial Statement Accountability 6: Unrealized Valuation Changes – Proposed Deletion

RUCBC proposes that this factor be deleted from the list of accountabilities.

Rationale:

• Portfolio performance of marketable securities as measured by the market value is the only relevant measure of financial conditions. Page 18 of the Consultation Paper describes the current model as being grounded in real economic phenomena; but that statement does not apply to the measurement of financial instruments.

• Investment decisions should be made based on investment rationale, not to artificially massage the reporting of financial results by making accounting-driven decisions.

• During the 2008/9 market collapse, universities were utilizing NPO mark-to-market accounting. Thus, from a financial reporting perspective, universities were indifferent to a major shift of funds between investment managers which resulted in superior financial performance thereafter. Application of a remeasurement model could have driven a different decision; accounting should not drive bad business decisions.

• Entities with large investment portfolios have them managed by professional third party managers. Institutional management does not have control of day-to-day investment decisions. They are accountable for manager selection and oversight – not particular transactions. The proposal implies that management has control of trading decisions – which is not the case.

• Well performing investments may be held for a long time. When fair value gains are not recognized, this restricts the organization’s ability to utilize the gains; which is not in the interest of the service recipients of the organization.

• The addition of a remeasurement statement adds complexity to the overall presentation without adding value.

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• Credibility with the public is diminished if the real volatility of investment gains and losses is not reflected in the financial statements in a straight-forward manner.

Financial Statement Accountability – Suggested Additional Accountability

RUCBC proposes that the following accountability be added: Equity by major category reported at the beginning of period, changes in the period and end of period for operating unrestricted, operating restricted, capital and endowment.

Rationale: The operating categories of equity are major indicators of the future financial capability of the organization and the changes in the year indicate the enhancement or diminishment of that future capability. In universities, operating equity balances are accounted for at a very granular level due to their relevance to developing and sustaining programs.

Question 6 – Prefer Revenue and Expense Model

Preference: RUCBC Strongly Prefers the Revenue and Expense Model

Rationale for Choice of Revenue and Expense Model: 1. Media & Public Perspective: The media frequently only presents one number to report financial performance, Annual Surplus (Deficit). The public utilizes this as THE indicator of financial sustainability and the degree of inter-period transfers from past or future taxpayers. The public and media have a revenue expense view. Regardless of possible technical merits of other approaches, this reality will not change and, as a profession, accountants must adapt to it. 2. Governance & Management Perspective: Based on the response to question 4, the Revenue and Expense Model provides the critical information to demonstrate the application of the principles of financial sustainability, inter-generational equity and financial equilibrium. 3. Financial Statement Accountabilities Perspective: Some of the proposed accountabilities are not met, but are not a concern. The rationale as to why not meeting these accountabilities is not a concern is as follows:

a. Accountability 4 (Change in Net Assets/Net Liabilities): Not meeting this proposed accountability is not a concern. The change in operating surplus is more important. In any case, this data could easily be determined from the financial statements if a user chose to do so. Accountability #4 should be restated as described in the response to question 5.

b. Accountability 6 (Separation of Unrealized Valuation Changes): As discussed above in the response to question 5, RUCBC does not agree with the proposed accountability and suggests it be deleted.

c. Accountability 7 (Change in Net Debt/Net Financial Assets): Is met in the model financial statements and thus this accountability is satisfied.

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Rationale for Not Selecting Asset and Liability View: Measurement of financial sustainability trumps valuation as government entities are not securitized and traded.

Not recognizing unrealized gains/losses in order to buffer financial reporting from real economic phenomena is highly undesirable as it leads to a separation from reality and offers opportunities for artificial smoothing.

Rationale for Not Selecting Hybrid View: The increased complexity of the financial statements will make it much more difficult for the public to be well informed and could negatively impact credibility.

Sophisticated financial analysts at bond rating agencies, lenders and central government already have sufficient information available to them so that they can restructure data as they choose.

Volatility from real economic phenomena is appropriate to report and essential for credibility.

Removing volatility through deferrals to address the arbitrary nature of accounting periods is desirable to stabilize financial planning and avoid sub-optimal spending as fiscal year-end approaches.

Articulation has been a characteristic of double entry accounting and financial reporting that is historically documented in the Farolfi ledger of 1299 -1300. After 700 years of accepted use, disconnecting articulation would require a higher threshold and broader consensus of need than has been demonstrated here.

Question 7 – No Other Alternative Suggested

Question 8 – Deferrals Definition Discussion

Development of accounting criteria for the recording of deferrals may best be accomplished by discussing definition factors in the context of examples.

External restriction of an inflow may not meet a liability test of being repayable, but where there is a clear obligation to perform a defined service, deferral is appropriate. Alignment of revenue recognition with the related expense recognition is appropriate otherwise discontinuity is introduced with profits in the first year and losses in subsequent years. Worse yet, ‘no annual deficit’ requirements can preclude spending for the intended purpose in future years. In universities, these non-liability external restrictions include funds provided for types of research projects, scholarships for certain types of students, funding for program development or for best use by the person in a defined position. Contributions for the development of capital facilities are a sub-category of these externally restricted contributions that are amortized in alignment with the related amortization of the capital asset.

Internal restrictions could either create (a) a deferral of an inflow or (b) internally restricted surplus in either of two manners.

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1. A publicly communicated understanding of the purposed nature of either specific inflows or a portion of general inflows can result in a deferral. For example, if a certain portion of a tuition fee increase was to fund a special activity or development, these funds should be deferred until expended. 1. Formally decided internal allocations for specific projects should qualify for deferral as organizations should save first and spend later. An example would be funds internally allocated to enable a major systems project that would not normally involve public commitments. Authorizations may be formally decided, depending on the governance structure of the institution, by either the board or most senior management body.

Therefore, the recording of funds for future use exists on a spectrum of: liability, deferral, internal restriction of surplus, or unrestricted surplus. Accordingly, the definitions of all these components must be coordinated and considered in the context of ‘no annual deficit’ legislation. If PSAS does not provide for the recognition of internal restrictions of surplus, then more latitude for the inclusion in deferrals will be necessary. Alternatively, if internal restriction of surplus is available, a more stringent definition may be feasible. In any case, restrictions that meet the highest standard of restrictions, but are not external liabilities, should be considered deferrals.

Irrevocability of internal commitments need not be an absolute condition of deferral. However, where the basis is a public commitment, discontinuance of the deferral should be communicated in a manner that corresponds with the communication of the original commitment. In some cases, this may include disclosure in the financial statements. Conditions change and absolutism is rarely desirable in life in general.

Some inflows are purposed in very specific ways that provide a very clear relationship with the related expenditure. For example, provide an annual scholarship of a certain amount to the student in a particular discipline who has the highest mark and do so until all the funds are spent. In other cases, a donor may state the funds are to be used by the Dean of a particular faculty for whatever is considered the best use at the time. In this second example there is a clear decision process and a relatively widely defined purpose.

If an inflow meets all the conditions of a liability then it would not be a deferral, but it is a liability.

Endowments are a unique and not widely understood type of arrangement. Endowment capital is held in perpetuity and the income thereon is held under conditions that it only be spent on a particular purpose. The inflow of income from the endowment investment is clearly a deferral. However, how does one account for the original inflow of capital that can never be spent? It is not a liability as it will never be returned to the donor. Under PSAS without PS4200, it is recognized as income – in RUCBC’s opinion inappropriately – even though it will never be available for expenditure. The NPO approach of treating it as contributed capital is appropriate. Alternatively, one could consider a special class of deferral as a deferral in perpetuity. RUCBC prefers the established NPO methodology.

Question 9 – No Other Statements Needed

No other statements are considered necessary as the notes to financial statements provide sufficient and growing disclosures.

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The Question That Was Not Asked

PSAS was developed by and for governments with taxation authority and the ability to incur debt under their own authority only. Later, entities in the broader public sector were consolidated into taxing governments through definition of the Government Reporting Entity.

The application of PSAS to the financial statements of entities in the broader public sector where taxation is not allowed and debt is precluded has not been an easy fit where central government has precluded the use of the PS4200 series. Universities believe they have different financial reporting needs than central government with two of the leading reasons being lack of taxation and borrowing authority.

A number of provincial governments have established accounting standards to be used in their provincial jurisdictions with the result that identical fact sets in different provinces result in the production of different financial statements. Within the university sector the loss of financial comparability of universities across Canada is viewed as unfortunate. It is viewed as highly desirable to achieve a Canada-wide relevant accounting model.

Perhaps, different models of presentation are appropriate in order that entities in the broader public sector can produce financial statements that present their final situation in a meaningful manner. Thus, there is a question that was not asked that needs to be addressed:

Are the public accountabilities, financial statement accountabilities and thus the model of financial statements the same for central government and for government not-for-profit entities? RUCBC believes they have different accountabilities and recommends this be considered in the work of the Conceptual Framework Task Force. The decisions made here on how financial statements will be presented may impacts how funds can be utilized to provide services to the public.

Larry Guthrie, CA [email protected] 778-782-4708 On behalf of: Research Universities’ Council of British Columbia

January 31, 2013 Public Sector Accounting 277 Wellington Street West Toronto, Ontario M5V 3H2 Attention: Tim Beauchamp, Director Dear Mr. Beauchamp:

RE: Conceptual Framework Consultation Paper 2 In response to the Conceptual Framework Consultation Paper 2 – Measuring Financial Performance in Public Sector Financial Statements, this is to confirm that the British Columbia Association of Institutes and Universities (BCAIU) endorse the response submitted by the Research Universities’ Council of British Columbia (RUCBC). The BCAIU represents the following post-secondary institutions: British Columbia Institute of Technology Capilano University Emily Carr University of Art & Design Justice Institute of British Columbia Kwantlen Polytechnic University Nicola Valley Institute of Technology University of the Fraser Valley Vancouver Island University Thank you for the opportunity to comment on this important concept paper. Sincerely,

Jackie Hogan Chair, BCAIU VP Finance

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Response to PSAB Consultation Paper #2

Measuring Financial Performance in Public Sector Financial Statements

Prepared by: District of Taylor

Contact: Melany A. de Weerdt, Director of Finance, 250-789-3392

December 21, 2012

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To be considered, comments must be received by January 31, 2013, addressed to: A PDF response form has been posted with this document to assist you in submitting your comments. You can save the form both during and after completion for future reference. You are not restricted by the size of the interactive comment fields in the response form and there is also a general comments section. Alternatively, you may send comments by email (in Word format), to: [email protected]. Tim Beauchamp, Director Public Sector Accounting 277 Wellington Street West Toronto, Ontario M5V 3H2

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Contents Executive Summary ....................................................................................................................................... 4

Purpose and Background .......................................................................................................................... 4

Asset and Liability View ............................................................................................................................ 5

Other Views ............................................................................................................................................... 5

Identified Accountabilities ............................................................................................................................ 6

Objective of Public Sector Financial Reports ................................................................................................ 6

Accountability Information ........................................................................................................................... 7

Three Proposed Broad Financial Accountabilities ........................................................................................ 7

16 Proposed Financial Statement Accountabilities ...................................................................................... 9

Financial Performance Accountabilities .................................................................................................... 9

Financial Position Accountabilities ......................................................................................................... 11

Financial Statement Presentation Alternatives .......................................................................................... 12

Asset and Liability View .......................................................................................................................... 12

Revenue and Expense View .................................................................................................................... 13

Hybrid View ............................................................................................................................................. 14

Another Preferred Model ........................................................................................................................... 14

Categories for Deferred Inflows and Outflows ........................................................................................... 17

What Items should be accounting for via deferral of revenue inflows? ................................................ 17

External Restrictions ............................................................................................................................... 18

Publicly Communicated Commitments .................................................................................................. 18

Internal Commitments ............................................................................................................................ 18

Relationship between Inflow and Cost of Service .................................................................................. 19

Clear Definitions – Assets, Liabilities and Deferrals ................................................................................ 19

Other Statements? ...................................................................................................................................... 20

Debt Capacity .......................................................................................................................................... 20

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Executive Summary

Purpose and Background PSAB is seeking input on concepts underlying financial performance in the existing public sector conceptual framework. Specifically, the demand for public accountability and financial accountability in particular, has evolved as the lens through which the proposals in the Conceptual Framework were developed. The project and the conceptual framework focus only on general purpose financial statements. The input received will be considered in drafting a statement of principles for public comment. A Joint Working Group comprised of selected PSAB members and Deputy Ministers of Finance was established to deal with concerns expressed by the senior government finance community. A final subgroup report was issued suggesting PSAB review its conceptual framework. The application of standards based on concepts in the framework were seen to be creating volatility in, and affecting the understandability of, reported results and making it difficult to provide actual-to-budget comparisons. After careful consideration we have developed this response to Consultation Paper #2. Our response is from the perspective of a small local government. We appreciate the opportunity to provide input into this decision and hope that our suggestions and concerns will be carefully considered in these concepts. In developing this response we have looked at the current state of infrastructure, revenues and financing for local government, volatility in financial reporting, budget to actual comparisons and assessed the value added contribution that PSAB Standards could make in measuring both public accountability and financial performance in the public sector. We agree that reporting on accountability for governance, non-financial performance and sustainability measures are beyond the scope of financial statements and that only some of the accountability of an entity for its financial performance can be illustrated by financial statements. We also agree that some of the accountability of an entity for stewardship is represented by reporting on its financial condition and that financial position is a relevant indicator. As a small municipality, we would like to highlight the fact that any change in financial statements will place a tremendous administrative burden on small local governments and native communities all across the county, namely those least able to afford it! In our opinion, a change from the current Asset/Liability based financial statements will create a tremendous demand on limited resources with little or no value resulting from the change. Should PSAB decide that a change to the Financial Statements to either a Revenue/Expense or Hybrid View be required for other public sector entities, we would propose that they be incorporated into a Statement of Recommended Practice for non-government public service entities and that they NOT be required of local government or small native communities where the format is diametrically opposed to both the “user friendliness” of our public reporting process and our internal use as a measure of viability in terms of long term infrastructure requirements.

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Asset and Liability View Our review leads us to recommend the current Asset and Liability View and augment it with an ability to incorporate the replacement cost for capital items rather than being exclusively based on “original purchase cost” which in all probability is no longer a realistic value of future replacement cost. In our opinion, the Asset and Liability View’s fundamental weakness is that it does not include replacement value depreciation. In the interest of maintaining a standard of living for ourselves and the next generation we must focus on steady replacement of assets augmented by reasonable levels of debt financing where necessary. Public accountability and financial accountability need this View. One option proposed by the District of North Vancouver is to consider the South Australian Local Government (Financial Management) Regulations 20111. Simply put this recommended model would lead us to funding replacement value measures for tangible capital assets and the application of replacement value for depreciation to measure public accountabilities on financial performance, financial position and ultimately place PSAB Standards in the position of laying a foundation for financial sustainability in Canada. We believe existing volatility in, and affecting the understandability of, reported results in the Asset and Liability View are not due to the application of standards based on concepts in the framework but a function of policy and legislation. Some of these gaps are reasonable such as capital budgets based on assets and projects.

Other Views We do not recommend either the Revenue and Expense View or the Hybrid View as presented. It is our opinion that both the Revenue and Expense View and the Hybrid View, as presented, have inherent complexity and risk of misinforming the public or elected officials such that that is not in the best interests of communicating public accountability or financial performance. Specifically, we must disagree with the statements made in Consultation Paper #2 on the inter-period equity concept to the extent that those statements lead to any deferral of revenue to future periods to align with or match depreciation. Should this manifest itself in PSAB Standards, in our opinion, it risks perpetuating and growing existing intergenerational inequities, does not anticipate fundamental financial gaps that currently exist related to infrastructure and would be in major conflict with future oriented best practices in asset management planning, long term financial planning and community planning requirements. In our opinion, revenue deferrals from senior levels of government should be limited to the time of construction or date of asset acquisition. In the case of operating revenues it is reasonable to match revenues to the expenditures. Please take time to fully review not only this response but to consider the impact any change will have on hundreds of small municipalities and native communities all across the country. Changes based on abstract benefits to large government organisations do not in this case translate into benefits to our local municipality or to the public we serve.

1 Wardell, Andy. Response to PSAB Consultation Paper #2 Measuring Financial permofance in Public Sector Financial Statements. District of North Vancouver. December 18, 2011.

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1. Identified Accountabilities 1. Do you agree with an approach to a public sector conceptual framework that focuses on


Yes. Identified accountabilities to the public and elected representatives are fundamental to financial reporting. The fundamental issue at hand is specifically what those identified accountabilities to the public and their elected representatives should be. Consultation Paper #2, Page 13 states “sustainability is beyond the scope of financial statements”. However, to be meaningful financial statements (inclusive of financial position and financial performance) must support sustainability; in particular “financial sustainability”. Financial reporting should be seen as an annual report on financial position and performance and we must ensure that identified accountabilities remain relevant and in alignment with other accountabilities beyond the scope of financial reporting. Accordingly financial reporting is part of the public and financial accountability continuum and identified accountabilities need to support reporting out on progress (or lack of progress) toward financial sustainability. Given the infrastructure intensive nature of local governments and the growing gap between very old historical costs and replacement values we need to confirm that governments remain “going concerns”. If a financial report can’t confirm that a local government is a “going concern” or at least support financial sustainability one must question its usefulness. At the local government level Official Community Plans ground the vision for a community’s future and long term financial plans document the resources required to support that vision. Financial reporting and financial statements should align as closely as possible to both types of long term planning.

2. Objective of Public Sector Financial Reports 2. Do you agree with the proposal that the objective of public sector financial reports is to


Yes. Reporting on financial position and financial performance can be a key information resource for informing voters, communicating high level information on programs and supporting elected officials to facilitate informed future oriented decision-making. Future oriented decisions generally support a long term planning horizon so it is important that public sector financial reporting inform and track those decisions. In particular, financial reporting should enable the tracking of progress over multiple annual accounting periods and support the use of high level financial indicators to track sustainability. This is particularly relevant at the local government level where political terms are short.

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3. Accountability Information 3. Do you agree with the proposal that public sector financial reports should be designed to


Yes. Public sector financial reports should strike a balance between complexity and ease of use for the general public. While the details within public sector financial reports will be of interest to a number of users, what the general public needs to understand is not so much those details but how financial reports can both communicate financial information and support high level key financial indicators that are easily understood, can be calculated consistently and tracked over time.

4. Three Proposed Broad Financial Accountabilities


As quoted in the Report, “Broad accountabilities expected regarding the financial affairs of a public sector entity. Public sector entities are expected to be accountable for:

o (a) the extent to which the entity performed in accordance with its financial plan;

o (b) the extent to which current activities/results have an effect on the activities/results of future periods; and

o (c) the state of the financial condition of the entity.

a) We believe that financial reporting should align as closely as possible with long term financial plans and community plans. It should also be based on accrual accounting. It should be easy to read and understand so that readers can see if the entity has performed in accordance with its plan and what the results were.

b) We agree with the need to be accountable to the extent to which current activities/results have an effect on the activities/results of future periods but with a major qualification.

Qualification The ultimate goal must be financially sustainable communities at agreed upon levels of service. The concept of steady infrastructure replacement is a fundamental tenant of life cycle asset management, long term financial planning and community sustainability. The Inter-period equity concepts as articulated in Consultation Paper #2, to the extent that the deferral of infrastructure funding/revenue to future periods is considered, is a diametrically opposing concept to the creation of steady state replacement of infrastructure that requires a combination of funding supported by limited debt financing to operate, maintain and replace assets.

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Said another way, communities should strive to be self-sustaining. In our opinion, the inter-period equity concepts of deferring revenues to match depreciation risks placing government in the position of explaining to the public the need to tax or charge user fees to replace assets when it appears in the Statement of Operations that deferred revenues serve that purpose. This runs the risk of perpetuating infrastructure deficits and creating a barrier to self-sustaining government at all levels. The world is moving through its first urban century. During this time, the gap between asset management planning, financial planning and financial reporting has grown. Bold new ideas are needed in financial reporting that report out on progress toward financially sustainability and support a reasonable standard of living. We urge PSAB to strive toward aligning the concepts underlying financial reporting in the public sector conceptual framework to this fundamental reality. Canada’s First National Report Card on Infrastructure estimated Canada’s “current” gap at $172 Billion on core infrastructure alone.

Overall report-card ratings for the four asset categories show that a significant amount of municipal infrastructure

ranks between “fair” and “very poor”—on average about 30%. The replacement cost of these assets alone totals

$171.8 billion, nationally. 2

A Penny Now, or a Dollar Later

The report card points to the cost of delaying infrastructure repairs, rehabilitation, or renewal. Under current practices (investment, operations, maintenance), most

infrastructure, even if in good-to-very-good condition now, will require ever-increasing investment as it ages.

The report card emphasizes the importance of having an asset-management system in place to establish practices that will increase the longevity of the assets and optimize

investments in maintenance and rehabilitation.3 At the end of World War 2 society started the significant build-out of infrastructure that today supports our cities and towns. The generations that built most of that core infrastructure are no longer with us. In fact, the generations alive today are living for free on a good portion of that infrastructure. The fabric of Canadian society is such that to sustain the current or a reasonable standard of living we need to not only address the current infrastructure gap that we owe for the assets we are consuming but, we should also be saving to replace a reasonable share of long lived infrastructure for when it comes due for replacement. Baby boomer demographics are against us and, in the absence of action today, the next generation will be left holding the bag and wonder why we did not act sooner.

c) We agree with need to state the financial condition of the entity. 2 http://www.canadainfrastructure.ca/downloads/Canadian_Infrastructure_Report_Card_Highlights_EN.pdf, page 2 3 http://www.canadainfrastructure.ca/downloads/Canadian_Infrastructure_Report_Card_Highlights_EN.pdf, page 2

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5. 16 Proposed Financial Statement Accountabilities 5. Do you agree with the 16 proposed financial statement accountabilities? Are there any

missing? Are there any that should not be included? Please explain your reasoning.

In general terms we agree with these proposed financial statement accountabilities but that is subject to the final outcomes on the approach PSAB takes with the three financial statement alternatives; namely that we recommend the continuation of our current financial statement format.

Financial Performance Accountabilities

1. Budget compliance (i.e., actual-to-budget financial performance)

We agree with this accountability. We believe the Asset and Liability View meets this accountability better than the Revenue and Expense View. While the Asset and Liability View is grounded in real economic resources and obligations, it still requires a reconciliation including conversion from depreciation on tangible capital assets to actual/budget capital acquisitions. At the local government level annual budgeting and long term financial planning are expenditure based as opposed to expense based. We do not see this changing given the future oriented focus of most forms of planning. There are always timing issues where a local government is unable to spend revenues on a tangible capital asset or major project and the revenue flows to Accumulated Surplus and subsequently placed into reserves. Those reserves are drawn upon to purchase or complete tangible capital asset projects. As these revenues have already been reported in the audited financial statements, local government reserve transactions are typically eliminated on consolidation in the audited financial statements with the audited record only reporting a reduction in cash and the purchase of an asset. Local government needs flexibility in the management of reserves and for PSAB to seek out methods of prescribing deferrals based on certain conditions or revenue types runs the risk of creating PSAB standards based deferrals and a continuing but smaller set of reserve transactions. There is great potential here to add more complexity with a PSAB driven set of deferred accounts and a set of reserve accounts that are not eligible for PSAB deferrals. This is confusing for elected officials, creates an administrative burden for staff and also increases the risk of making financial reporting less reader friendly. We strongly believe that multi-year amortization of revenue (regardless of source) to match depreciation must be avoided and this concept must not be factored into how the Revenue and Expense View or Hybrid View is applied, if either of those Views is adopted contrary to our input. We expand upon this under Questions #4, #6 and #7. Using PSAB accounting standards as the basis for budgeting should be avoided.

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Under all Views accountability is best met through reconciliations in the notes to the financial statements. We do question the first bullet point on page 23 of Consultant Paper #2 that shows the Revenue and Expense View meets accountability #1. It is not consistent with your comments in the second bullet point on page 23 or the Summary Comparison of the Alternatives on Page 45.

2. Annual Surplus/Deficit We agree that this accountability has the potential to be the most important financial performance measure. However, we also note that its value will be subject to the View chosen and how that View is applied by PSAB. We disagree with the assumptions on inter-period equity as proposed on page 38 in the bullet points under Broad Accountabilities b). Again, we strongly believe that multi-year amortization of revenue to match depreciation must be avoided. We respond at length to this point under Question #4. An operating surplus could be meaningless without supporting financial indicators that assist in tracking progress toward financial sustainability. If the final View PSAB adopts enables the use of such indicators we believe PSAB reporting will both add value and be highly valued by the public and elected officials.

3. The extent to which revenue of the period is sufficient to cover the cost of providing services in the period (plus any costs related to previous years that were not covered by revenues in previous years).

We agree that this accountability has potential of high value but that value will be subject to View chosen by PSAB and how that View is applied. We believe it is not as simple as presented in Consultation Paper #2. We believe there is significant risk of misinformation using the Revenue and Expense View depending on how that View is applied; in particular an approach that targets the allocation of revenues to future periods to match depreciation must be avoided. Refer to comments made under questions #4, #6 and #7.

4. A change in net assets/net liabilities We agree with this accountability. In the event that PSAB pursues the use of a Revenue and Expense View we recommend reporting in the Consolidated Statement of Operating all deferred revenues and expenses below an Annual Surplus/Deficit subtotal in order to isolate economic activities from deferral accounting. We support the treatment of depreciation as an economic activity.

5. Consumption of tangible capital assets and other resources specific to the public sector to be included in the measure of financial performance for the period.

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We agree with this accountability. As noted under Questions #4, #6 and #7 we also support the use of replacement value depreciation to measure financial performance and its potential to assist in measuring financial and asset sustainability. Again, we do not support the deferral of revenues to match depreciation associated with tangible capital assets under the inter-period equity concept.

6. The separation of unrealized valuation changes from the results of operations

We agree with this accountability.

7. A change in net debt/net financial assets We agree with this accountability. We see this object is met more effectively through the current financial statement reporting format than either of the other proposed Views.

8. The sources and uses of cash

We agree with this accountability. A statement of cash flows provides useful information on the major financial and non-cash activities of a government.

Financial Position Accountabilities

9. All assets and liabilities of the entity;

We agree with this accountability using historical cost. 10. The net assets/net liabilities indicator of financial position (Accumulated Surplus);

We agree with this accountability using historical cost. Use of the description “net assets/net liabilities” is driven by use of the Revenue and Expense View and Hybrid View necessitated by the deferral of revenues and expenditures. We recommend not to implement those Views. Under the Revenue and Expense View or Hybrid View, Tangible Capital Assets should still be presented at Net Book Value.

11. The net debt/net financial assets indicator:

We believe that the net financial assets/net debt position of a government at the end of an accounting period is one of the more powerful measures of accountability that can be used along with other financial indicators to track progress on financial sustainability over multiple annual accounting periods.

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12. Cash and cash equivalents; We agree with this accountability.

13. Issued debt and other liabilities; Issued debt and other major liability categories are appropriate disclosure on the statement of financial position.

14. Tangible capital assets (balances, acquisitions, disposals, etc.);

We agree with this accountability inclusive of the consumption measure of TCAs. We also support the measure of depreciation at both historical and replacement value as described under Question #7 as consumption measures track the TCA life and establish the need to focus on financial sustainability over the long term. We do not agree that financial sustainability is beyond the scope of financial reporting. Rather we believe financial reporting should be part of the continuum of reporting on financial sustainability.

15. Financial assets, including financial instruments;


16. Other public sector resources (balances, acquisitions, disposals, etc.).

We agree with this accountability; in particular with regard to financial statement notes that expand up the general support financial statements.

6. Financial Statement Presentation Alternatives


We emphatically prefer the Asset and Liability View.

Asset and Liability View

We prefer the Asset and Liability View that is currently in use. The reason this is preferred is that we can currently (and easily) leverage it to create a financial statement view that strongly supports financial sustainability, it aligns with the full spectrum of governance and stewardship responsibilities, asset management, long term financial planning and key financial indicators. It has already been implemented and understood by elected officials, staff and our public. Any change must provide an appreciable positive benefit to these groups to offset the significant burden of changing our financial report View.

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The Asset and Liability view lays a strong foundation for long term sustainable government reporting and the “going concern” nature of government. This is contrary to the statement made on page 19 in Consultation Paper #2 that “this approach does not reflect the long term and going concern nature of government.” The reasons are:

As articulated in Consultation Paper #2, page 18. While PSAB reporting is on a single annual accounting period, the larger objective

is to demonstrate financially sustainability each and every year over a number of years.

Taking a longer term perspective generally dilutes fluctuations in any given year to the point that gains and losses that are market value based adjustments, peripheral or incidental to on-going operations are generally not material to long term sustainability. If this is a major issue for the federal and provincial governments we believe that it is a separate issue that must be address via other means such as a Statement of Recommended Practice specific to those entities and definitely not be required of local governments or native communities.

The Asset and Liability View with the addition of replacement value provide “readable” information.

The concerns regarding gains and losses peripheral or incidental to on-going operations could simply be reports “below the line” separately on Consolidated Statement of Operations.

Revenue and Expense View

We believe concerns and complexity outweigh benefits. We believe the current Asset and Liability View is the best with reconciliation to budgets as currently done now.

Some of the difficulties of creating deferral categories reflect the risks of the Revenue and Expense View (see Question #8 response as well). Concerns we have with deferrals include:

Any application of revenue deferral (see question #4) that attempts to match depreciation under the Inter-period equity concept.

The Consultation Paper seeking input on “items” rather than general high level categories. This speaks to a need for deferral beyond simple revenue and expense deferrals based on third party transactions or simple external revenue restrictions (most revenues can already be restricted via contract language).

Addressing deferrals driven by approved operating and capital budgets. The question then becomes, at what level does deferral take place?

o Unspent budgets? o Deferrals via a formal process to commit revenues and expenses to a future

period supported by formal approval processes (that already happens in some governments via operating and capital reserves outside of PSAB standards)?

o What about infrastructure projects that use your own labour force to construction? Do we defer those?

The effectiveness of reporting deferrals on the Consolidated Statement of Operations. In general terms, whether using a traditional object view categorization or a service view categorization when reporting expenses, neither

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are conducive to matching deferrals to specific lines on the Statement. One must question the value of the effort required to strive for alignment by expense category versus that value that information provided to the financial statement reader when reconciliations will still be required in financial statement notes between PSAB expenses based budgets and expenditure based budgets.

The effectiveness of reporting deferrals on the Consolidated Statement of Net Financial Assets/Net Debt. We already report tangible capital assets and work-in-progress so deferral would need to go beyond WIP to unspent budgets.

Most likely Consolidated Statement of Operations deferral items will not be comparable from budget to actuals even at a high level. The presentations in Appendix “F” of the Consultation Paper are too simplistic to convey the complexities surrounding this issue. Should this view be chosen we recommend that deferrals be reported as a single line separately below economically driven activities that specifically relate to revenues and expenses for on-going operations (the latter being supported by accrual accounting and proper accounting cut-offs at year end).

Hybrid View

We do not support this View. We provide an alternative Hybrid View based on the Asset and Liability View under Question #7. The concerns we have articulated under the Revenue and Expense View with regard to deferrals apply to any Hybrid View. We believe this places another layer of financial reporting on the municipality with limited, if any, relevance to local governments, especially to small municipalities and native communities and places an onerous administrative burden on these communities and their limited resources. Should this view be chosen we believe that any deferrals should be reported separately below activities that specifically relate to revenues and expenditures for on-going operations (the latter being supported by accrual accounting and proper accounting cut-offs at year end).

7. Another Preferred Model 7. If you do not like any of the three financial statement presentation alternatives set out in


In our opinion the (current view) Asset and Liability View and using historical cost for financial reporting lays a strong foundation for documenting both financial position and performance accurately. The general purpose financial statements using traditional historical cost measures for depreciation could be improved upon. Local governments in particular are capital intensive. In our opinion, financial reporting exclusively based upon historical cost measures present local governments as viable going concerns with potentially strong financial positions when in fact they may not be. Infrastructure is so long lived and the

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gap between old historical costs measures and current replacement costs is growing so large that historical cost and depreciation lose relevance. Funds required to maintain and ultimately replace infrastructure are significant and use of replacement cost and replacement cost depreciation to measure public accountability and financial performance is but a first step in assessing the financial sustainability of government. Due to past revenue and expenditure decisions at all levels of government, many do not know their asset age, condition and risk profiles, cannot quantify their true financial requirements and do not have capacity to address needed asset renewals without substantial borrowings. Moving forward the focus must be on maintaining a healthy operating result in the future. To appropriately report out on public accountability and financial accountability, PSAB Standards must come into alignment with financial sustainability best practices inclusive of replacement cost measures. Given the longevity of major infrastructure assets, over time, historical cost depreciation becomes less and less meaningful for financial reporting purposes and by inference alignment with the budgets that under PSAB we report against. In planning, governments work toward funding levels that target infrastructure fair value (replacement costs). In order to better align financial reporting with community planning, asset management planning and long term financial planning we strongly recommend the current Asset and Liability View augmented in one of three ways: 1. Augment the Asset and Liability View with an additional Consolidated Statement of

Operations that includes replacement value depreciation, 2. Move to replacement value depreciation or, 3. Remain at historical cost and PSAB support governments using replacement value

depreciation under a Statement of Recommended Practice for financial reporting outside of the current Asset and Liability View.

We believe that PASB 3150 was a major leap forward and that the use of replacement value depreciation is the next natural step in the evolution of Canadian financial reporting. We also believe the Asset and Liability View, when augmented with replacement value measures for depreciation provides a much clearer picture of the financial performance of a government at any level and should form part of the research being undertaken. Not only in Canada but over most of the developed and developing world professions from finance, engineering, operations and community planning still research and plan in the best interest of the public but they still work in silos, struggle to maintain infrastructure, strive to manage aging populations and migration to cities while setting levels service that the public expects will maintain a certain standard of living. To break down these silos we need all professions to come into alignment. The District of North Vancouver proposes consideration of the South Australian Local Government (Financial Management) Regulations 20114 as a standard that could be further evaluated and adopted to Canadian financial reporting standards. In Australia financial sustainability indicators are based on audited financial reporting inclusive of fair value depreciation. After years of testing and analyzing eight measures, three have become

4 Wardell, Andy. Response to PSAB Consultation Paper #2 Measuring Financial permofance in Public Sector Financial Statements. District of North Vancouver. December 18, 2011.

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best practice. The Local Government (Financial Management) Regulations 2011 require a government to use three specific indicators:

An operating surplus ratio – objective: a small surplus each year over time (inclusive of fair value depreciation);

A net financial liabilities ratio – objective: to educate Councils that use of debt is acceptable to a maximum of 100% of major controllable revenues.

An asset sustainability ratio: Objective to measure funding made available for existing assets compared to fair value depreciation over a three year moving average. (Target: 90% to 110%)

From a financial sustainability perspective it is clear that these three ratios focus on material financial performance and are grounded in the annual audited financial reports complete with auditor general oversight. PSAB’s Consultation paper #2 affirms that the first two ratios are considered viable in Canada. We just need replacement value depreciation. Governments should be expected to become self-sustaining to the extent possible. This doesn’t mean that higher levels of government don’t have programs that support local government but it does mean that the Asset and Liability View lays the foundation and gives Canada an opportunity to accelerate quickly to a tested best practice standard. It should also negate from any View the amortization of revenue to match depreciation.

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8. Categories for Deferred Inflows and Outflows 8. If new financial statement categories for deferred inflows and outflows are set up, what

items would you see being accounted for in these categories (for example, endowments, general tax revenue, transfers received)? Do you have any suggestions for the criteria that should be used to determine what can/should be accounted for in those categories? For example, consider the following for inflows (and similar questions for outflows):

What Items should be accounting for via deferral of revenue inflows?

We believe that local governments already have an effective method of deferral in place: reserves. This should be continued. Deferrals need to support a strategic flexible approach to both financial management and financing that is essential for at each level of government. Local government also needs flexibility in the management of reserves and should PSAB to go down the path of the Revenue and Expense View or Hybrid, which we recommend against doing, we are effectively prescribing and creating two types of deferrals:

PSAB standards based deferrals plus, a continuing set of reserves set up by government for specific purposes. These

reserves are currently part of Accumulated Surplus and government manages both statutory and non-statutory reserves.

PASB currently ignores these reserves leaving them to each local government and how management reports them in the Notes to the Financial Statements. Use of deferrals in either the Revenue and Expense View or the Hybrid View will add complexity and risk making the general purpose financial statements of public sector entities (local governments) less reader friendly and placing an onerous burden on small municipalities and native communities. PSAB needs to consider the future, when Canada starts to address its infrastructure deficit and makes moves toward steady replacement of its aging infrastructure. What will deferrals look like? Is there a need for deferrals or will deferrals become so large and unwieldy that they overwhelm a “historical cost” based Consolidated Statement of Financial Position? At this point given the risks we see inherent with deferral in the Revenue and Expense View and the Hybrid View we simply do not recommend that PSAB proceeds with either of these options.

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External Restrictions


Time Approach: No The time approach is not acceptable via deferral accounting or agreement when

the purpose is to match depreciation over the life of a tangible capital asset. As previously stated such restrictions are not aligned with the current state of infrastructure, infrastructure deficits and the need to plan to replace infrastructure. In our opinion such revenue deferral serves no purpose in moving government or the communities they serve toward financial sustainability. Such restrictions creates the potential opposite effect and risks reporting that governments are financially sound when there is a strong possibility they are not.

The time approach is not appropriate where senior levels of government provide operating and maintenance funding. Although it is unlikely in the foreseeable future, it would be more appropriate to create tax room at the local government level and then local government be able to report out on their sustainability.

A simple statement for tangible capital assets is that the maximum deferral period for revenue should be the period of construction or the date an asset is placed in service.

Publicly Communicated Commitments


No. Elected officials should be required to vote and approve commitments through formal processes. Publicly communicated commitments may not receive formal approval and that is a risk of political office and training. PSAB should not consider it enough to trigger a deferral. It is the government that PSAB standards should apply to; not individual elected officials making commitments.

Internal Commitments If an internal commitment is allowed to trigger deferral, should an irrevocable


No. In most cases the alignment between revenue and the final expenditure is clear via formal budget approval and an irrevocable designation is not necessary. For the balance there are many reasons not to make irrevocable designation; Emergencies and disasters where immediate access to funding is required. Statutory reserves are set for major specific purposes and deferral simply adds

complexity and confusion.

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Government and elected officials should also be able to reverse commitments and explain their decisions to the public.

Relationship between Inflow and Cost of Service

How direct should the relationship be between the inflow and the costs of services to be provided in future periods in order for deferral of the inflow to be permitted? For operating and maintenance purposes deferrals could be based on proper cut-

offs on expenditures at the end of an annual accounting period augmented by a formal approval process that support with documented evidence the need for deferral.

For tangible capital assets the maximum deferral period should be the construction period or the in-service date.

There should be a limited set of circumstances where deferral is still permitted where items that do not meet the definitions of assets and liabilities can be considered for inclusion in deferral categories (see next question).

Clear Definitions – Assets, Liabilities and Deferrals


Yes. If you go down this path you need a clear line that demarcates the differences between assets, liabilities and deferrals. Example: A local government is moving into a significant growth phase. Any revenues from that growth will be targeted to providing services to support that growth. However, there is a timing issue. The revenue will flow in via the usual taxation business processes but the expenditure may be delayed pending significant community input and decisions by elected officials on what levels of service will be provided. Opposing options to consier: PSAB standards allow the deferral of that revenue to enable elected officials and

the community some time to properly assess the services and the level of services that best fit the growth. OR,

PSAB standards don’t allow deferral of that revenue to enable the community some time to properly assess the services and the level of services that best fit the growth. Rather the revenue falls to Surplus, will be placed in a capital or operating reserve and then budgeted in a future period once services and levels of service are determined. In this latter case actual to budget reconciliations will continue as they do now.

In our opinion, the Revenue and Expense Views and Hybrid models that consider deferral will create unavoidable complexities.

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9. Other Statements?


Yes. We believe the core set of general purpose financial statements in the Asset and Liability View is the purest and easiest for elected officials and the general public to understand of three models presented. The three options we provided for PSAB to consider are either:

1. Augment the Asset and Liability View with an additional Consolidated Statement of Operations that includes replacement value depreciation,

2. Move to replacement value depreciation or, 3. Remain at historical cost and PSAB support governments using replacement value


Debt Capacity A general purpose financial statement for debt is not recommended. Using the example noted, the concept of debt in itself does not reflect the full capacity of a government to sustain itself. Debt is but one tool. Debt should never be incurred without considering total revenue plus the condition of a government’s tangible capital assets and where those assets are in their life cycles.

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Response to PSAB Consultation Paper #2

Measuring Financial Performance in Public Sector Financial Statements

Prepared by: District of North Vancouver

Contact: Andy Wardell, Manager, Financial Services 604-990-2232

December 18, 2012

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To be considered, comments must be received by January 31, 2013, addressed to: A PDF response form has been posted with this document to assist you in submitting your comments. You can save the form both during and after completion for future reference. You are not restricted by the size of the interactive comment fields in the response form and there is also a general comments section. Alternatively, you may send comments by email (in Word format), to: [email protected]. Tim Beauchamp, Director Public Sector Accounting 277 Wellington Street West Toronto, Ontario M5V 3H2

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Contents Executive Summary ....................................................................................................................................... 4

Purpose and Background .......................................................................................................................... 4

Asset and Liability View ............................................................................................................................ 5

Other Views ............................................................................................................................................... 6

Identified Accountabilities ............................................................................................................................ 7

Objective of Public Sector Financial Reports ................................................................................................ 7

Accountability Information ........................................................................................................................... 8

Three Proposed Broad Financial Accountabilities ........................................................................................ 8

16 Proposed Financial Statement Accountabilities .................................................................................... 10

Financial Performance Accountabilities .................................................................................................. 10

Financial Position Accountabilities ......................................................................................................... 12

Financial Statement Presentation Alternatives .......................................................................................... 13

Asset and Liability View .......................................................................................................................... 13

Revenue and Expense View .................................................................................................................... 14

Hybrid View ............................................................................................................................................. 15

Another Preferred Model ........................................................................................................................... 15

Categories for Deferred Inflows and Outflows ........................................................................................... 19

What Items should be accounting for via deferral of revenue inflows? ................................................ 19

External Restrictions ............................................................................................................................... 20

Publicly Communicated Commitments .................................................................................................. 20

Internal Commitments ............................................................................................................................ 20

Relationship between Inflow and Cost of Service .................................................................................. 21

Clear Definitions – Assets, Liabilities and Deferrals ................................................................................ 21

Other Statements? ...................................................................................................................................... 22

Debt Capacity .......................................................................................................................................... 22

End Notes .................................................................................................................................................... 23

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Executive Summary

Purpose and Background PSAB is seeking input on concepts underlying financial performance in the existing public sector conceptual framework. Specifically, the demand for public accountability and financial accountability in particular, has evolved as the lens through which the proposals in the Conceptual Framework were developed. The project and the conceptual framework focus only on general purpose financial statements. The input received will be considered in drafting a statement of principles for public comment. A Joint Working Group comprised of selected PSAB members and Deputy Ministers of Finance was established to deal with concerns expressed by the senior government finance community. A final subgroup report was issued suggesting PSAB review its conceptual framework. The application of standards based on concepts in the framework were seen to be creating volatility in, and affecting the understandability of, reported results and making it difficult to provide actual-to-budget comparisons. After careful consideration we have developed this response to Consultation Paper #2. Our response is through the lens of local government. In developing this response we have looked at the current state infrastructure, revenues and financing for local government, volatility in financial reporting, budget to actual comparisons and assessed the value added contribution that PSAB Standards could make in measuring both public accountability and financial performance in the public sector. We agree that reporting on accountability for governance, non-financial performance and sustainability measures are beyond the scope of financial statements and that only some of the accountability of an entity for its financial performance can be illustrated by financial statements. We also agree that some of the accountability of an entity for stewardship is represented by reporting on its financial condition and that financial position is a relevant indicator. However, regardless of “View”, general purpose financial statements using traditional historical cost measures for depreciation are of limited value. Local governments in particular are capital intensive. In our opinion, financial reporting exclusively base upon historical cost measures present local governments as viable going concerns with potentially strong financial positions when in fact they may not be. Infrastructure is so long lived and the gap between old historical costs measures and current replacement costs is growing so large that historical cost and depreciation lose relevance. Funds required to maintain and ultimately replace infrastructure are significant and use of replacement cost and replacement cost depreciation to measure public accountability and financial performance is but a first step in assessing the financial sustainability of government. The systemic issue not being addressed is that, due to past revenue and expenditure decisions at all levels of government, many do not know their asset age, condition and risk profiles, cannot quantify their true financial requirements and do not have capacity to address needed asset renewals without substantial borrowings. Moving forward the focus must be on maintaining a healthy operating result in the future. To appropriately report out on public accountability and financial accountability, PSAB Standards must come into alignment with financial sustainability best practices inclusive of replacement cost measures.

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Asset and Liability View Our review leads us to recommend the current Asset and Liability View and augment it with “Another Preferred Model” we have provided. In our opinion, the Asset and Liability View’s fundamental weakness is that it does not include replacement value depreciation. First and foremost we believe PSAB needs to make an informed decision and that international best practices must be considered in any major amendment to PSABs conceptual framework. We support PSAB reviewing and contributing to the International Public Sector Accounting Boards “Conceptual Framework Exposure Draft #3, November 2012”. Further we support PSAB by recommending “Another Preferred Model” that is based on a combination of the South Australian Local Government (Financial Management) Regulations 20111 and Australian Accounting Standard AASB 116. The fundamental benefits of this model are it:

Is tested and proven to work. Augments PSAB’s current Asset and Liability View and can be easily implemented via

PASB Standards or Statements of Recommended Practice. Would place PSAB Standards directly alignment with both international asset

management and long term financial planning best practices. Under this model, PSAB Standards and financial reporting can play a lead role in tracking progress toward a sustainable future for Canadian society.

Remove volatility and some of the major reconciling items between budgets and actual comparisons.

Removes ambiguity with regard to accountability, transparency and stewardship of government resources.

Led to the creation of South Australia’s Local Government Association award winning Financial Sustainability Program that is now modeled across Australia; this program is now in use by state auditor generals’ with three best practice financial indicators used to measure financial performance now enshrined in legislation. Canada should have such a program. PSAB and its task force members have a unique opportunity to make this a reality.

In the interest of maintaining a standard of living for ourselves and the next generation we must focus on steady state replacement of assets augmented by reasonable levels of debt financing. Public accountability and financial accountability need this View. Simply put this recommended model would lead us to funding replacement value measures for tangible capital assets and the application of replacement value for depreciation to measure public accountabilities on financial performance, financial position and ultimately place PSAB Standards in the position of laying a foundation for financial sustainability in Canada. We believe existing volatility in, and affecting the understandability of, reported results in the Asset and Liability View are not due to the application of standards based on concepts in the framework but a function of policy and legislation. Some of these gaps are reasonable such as capital budgets based on assets and projects.

1 Click on the link and then search the legislation for South Australian Local Government (Financial Management) Regulations 2011

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We believe the core set of general purpose financial statements in the Asset and Liability View is the purest and easiest for elected officials and the general public to understand of three models presented. We also believe the alternative view we offered under Question #7 builds upon that view in a meaningful way. The three options we provide for PSAB to consider are:




Other Views We do not recommend either the Revenue and Expense View or the Hybrid View as presented. It is our opinion that both the Revenue and Expense View and the Hybrid View, as presented, have inherent complexity and risk of misinforming the public or elected officials such that that is not in the best interests of communicating public accountability or financial performance. Specifically, we must disagree with the statements made in Consultation Paper #2 on the inter-period equity concept to the extent that those statements lead to any deferral of revenue to future periods to align with or match depreciation. Should this manifest itself in PSAB Standards, in our opinion, it risks perpetuating and growing existing intergenerational inequities, does not anticipate fundamental financial gaps that currently exist related to infrastructure and would be in major conflict with future oriented best practices in asset management planning, long term financial planning and community planning requirements. In our opinion, revenue deferrals from senior levels of government should be limited to the time of construction or date of asset acquisition. In the case of operating revenues it is reasonable to match revenues to the expenditures. Please take time to fully review not only this response but to research the links provided in the document. As two fully developed nations with similar aging infrastructure and Accounting Standards we can learn a lot from our Australian friends and leverage their years of experience to our advantage in creating a Canadian-made model.

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Identified Accountabilities 1. Do you agree with an approach to a public sector conceptual framework that focuses on


Yes. Identified accountabilities to the public and elected representatives are fundamental to financial reporting. The fundament issue at hand is specifically what those identified accountabilities to the public and their elected representatives should be. Consultation Paper #2, Page 13 states “sustainability is beyond the scope of financial statements”. However, to be meaningful financial statements (inclusive of financial position and financial performance) must support sustainability; in particular “financial sustainability”. Financial reporting should be seen as an annual report on financial position and performance and we must ensure that identified accountabilities remain relevant and in alignment with other accountabilities beyond the scope of financial reporting. Accordingly financial reporting is part of the public and financial accountability continuum and identified accountabilities need to support reporting out on progress (or lack of progress) toward financial sustainability. Given the infrastructure intensive nature of local governments and the growing gap between very old historical costs and replacement values we need to confirm that government remain going concerns. If a financial report can’t confirm that a local government is a going concern or at least support financial sustainability one must question its usefulness. At the local government level Official Community Plans ground the vision for a community’s future and long term financial plans document the resources required to support that vision. Financial reporting and financial statements should align as closely as possible to both types of long term planning.

Objective of Public Sector Financial Reports 2. Do you agree with the proposal that the objective of public sector financial reports is to


Yes. Reporting on financial position and financial performance can be a key information resource for informing voters, communicating high level information on programs and supporting elected officials make informed future oriented decisions. Future oriented decisions generally support a long term planning horizon so it is important that public sector financial reporting inform and track those decisions. In particular, financial reporting should enable the tracking of progress over multiple annual accounting periods and support the use of high level financial indicators to track sustainability. This is particularly relevant at the local government level where political terms are short.

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Accountability Information 3. Do you agree with the proposal that public sector financial reports should be designed to


Yes. Public sector financial reports should strike a balance between complexity and ease of use for the general public. While the details within public sector financial reports will be of interest to a number of users, what the general public needs to understand is not so much those details but how financial reports can both communicate financial information and support high level key financial indicators that are easily understood, can be calculated consistently and tracked over time.

Three Proposed Broad Financial Accountabilities


As quoted in the Report, “Broad accountabilities expected regarding the financial affairs of a public sector entity. Public sector entities are expected to be accountable for:

o (a) the extent to which the entity performed in accordance with its financial plan;

o (b) the extent to which current activities/results have an effect on the activities/results of future periods; and

o (c) the state of the financial condition of the entity.

a) We believe that financial reporting should align as closely as possible with long term financial plans and community plans. It should also be based on accrual accounting.

b) We agree with the need to be accountable to the extent to which current activities/results have an effect on the activities/results of future periods but with a major qualification.

Qualification The ultimate goal must be financially sustainable communities at agreed upon levels of service. The concept of steady state replacement for infrastructure is a fundamental tenant of life cycle asset management, long term financial planning and community sustainability. The Inter-period equity concepts as articulated in Consultation Paper #2, to the extent that the deferral of infrastructure funding/revenue to future periods is considered, is a diametrically opposing concept to the creation of steady state replacement of infrastructure that requires a combination of funding supported by limited debt financing to operate, maintain and replace assets.

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Said another way, communities should strive to be self-sustaining. In our opinion inter-period equity concepts is that defer revenues to match depreciation risks placing government in the position of explaining to the public the need to tax or charge user fees to replace assets when it appears in the Statement of Operations that deferred revenues serve that purpose. This runs the risk of perpetuating infrastructure deficits and creating a barrier to self-sustaining government at all levels. The world is moving through its first urban century. During this time, the gap between asset management planning, financial planning and financial reporting has grown. Bold new ideas are needed in financial reporting that report out on progress toward financially sustainability and support a reasonable standard of living. We urge PSAB to strive toward aligning the concepts underlying financial reporting in the public sector conceptual framework to this fundamental reality. Canada’s First National Report Card on Infrastructure estimated Canada’s “current” gap at $172 Billion on core infrastructure alone.

Overall report-card ratings for the four asset categories

show that a significant amount of municipal infrastructure ranks between “fair” and “very poor”—on average about 30%. The replacement cost of these assets alone totals

$171.8 billion, nationally. i

A Penny Now, or a Dollar Later

The report card points to the cost of delaying infrastructure repairs, rehabilitation, or renewal. Under current practices (investment, operations, maintenance), most

infrastructure, even if in good-to-very-good condition now, will require ever-increasing investment as it ages.

The report card emphasizes the importance of having an asset-management system in place to establish practices that will increase the longevity of the assets and optimize

investments in maintenance and rehabilitation.ii At the end of World War 2 society started the significant build-out of infrastructure that today supports our cities and towns. The generations that built most of that core infrastructure are no longer with us. In fact, the generations alive today are living for free on a good portion of that infrastructure. The fabric of Canadian society is such that to sustain the current or a reasonable standard of living we need to not only address the current infrastructure gap that we owe for the assets we are consuming but, we should also be saving to replace a reasonable share of long lived infrastructure for when it comes due for replacement. Baby boomer demographics are against us and, in the absence of action today, the next generation will wonder why we did not act sooner.

c) We agree with need to state of the financial condition of the entity.

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16 Proposed Financial Statement Accountabilities 5. Do you agree with the 16 proposed financial statement accountabilities? Are there any

missing? Are there any that should not be included? Please explain your reasoning.

In general terms we agree with these proposed financial statement accountabilities but that is subject to the final outcomes on the approach PSAB takes with the three financial statement alternatives and the fourth approach recommended in this response.

Financial Performance Accountabilities

1. Budget compliance (i.e., actual-to-budget financial performance)

We agree with this accountability. We believe the Asset and Liability View meets this accountability better than the Revenue and Expense View. However, this is subject to how the Revenue and Expense View is applied. While the Asset and Liability View is grounded in real economic resources and obligations, both methods will require reconciliation including conversion from depreciation on tangible capital assets to actual/budget capital acquisitions. At the local government level annual budgeting and long term financial planning are expenditure based as opposed to expense based. We do not see this changing given the future oriented focus of most forms of planning. There are always timing issues where a local government is unable to spend revenues on a tangible capital asset or major project and the revenue flows to Accumulated Surplus and subsequently placed into reserves. Those reserves are drawn upon to purchase or complete tangible capital asset projects. As these revenues have already been reported in the audited financial statements, local government reserve transactions are typically eliminated on consolidation in the audited financial statements with the audited record only reporting a reduction in cash and the purchase of an asset. Local government needs flexibility in the management of reserves and for PSAB to seek out methods of prescribing deferrals based on certain conditions or revenue types runs the risk of creating PSAB standards based deferrals and a continuing but smaller set of reserve transactions. There is great potential here to add more complexity with a PSAB driven set of deferred accounts and a set of reserve accounts that are not eligible for PSAB deferrals. This also increases the risk of making financial reporting less reader friendly. We strongly believe that multi-year amortization of revenue (regardless of source) to match depreciation must be avoided and this concept must not be factored into how the Revenue and Expense View or Hybrid View is applied. We expand upon this under Questions #4, #6 and #7. Using PSAB accounting standards as the basis for budgeting should be avoided unless there is a conscious move to align both budgets and actuals as part of a larger in scope financial sustainability model.

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Under all Views accountability is best met through reconciliations in the notes to the financial statements. We do question the first bullet point on page 23 of Consultant Paper #2 that shows the Revenue and Expense View meets accountability #1. It is not consistent with your comments in the second bullet point on page 23 or the Summary Comparison of the Alternatives on Page 45.

2. Annual Surplus/Deficit We agree that this accountability has the potential to be the most important financial performance measure. However, we also note that is its value will be subject to the View chosen and how that View is applied by PSAB. We expand upon this under Questions #4, #6 and #7. In brief, we cannot fully agree with the assumptions on inter-period equity as proposed on page 38 in the bullet points under Broad Accountabilities b). Again, we strongly believe that multi-year amortization of revenue to match depreciation must be avoided. We respond at length to this point under Question #4. An operating surplus could be meaningless without supporting financial indicators that assist in tracking progress toward financial sustainability. If the final View PASB adopts enables the use of such indicators we believe PSAB reporting will both add value and be highly valued by the public and elected officials.

3. The extent to which revenue of the period is sufficient to cover the cost of providing services in the period (plus any costs related to previous years that were not covered by revenues in previous years).

We agree that this accountability has potential of high value but that value will be subject to View chosen by PSAB and how that View is applied. We believe it is not as simple as presented in Consultation Paper #2. We believe there is significant risk of misinformation using the Revenue and Expense View depending on how that View is applied; in particular an approach that targets the allocation of revenues to future periods to match depreciation must be avoided. Refer to comments made under questions #4, #6 and #7.

4. A change in net assets/net liabilities We agree with this accountability. In the event that PSAB pursues the use of a Revenue and Expense View we recommend reporting in the Consolidated Statement of Operating all deferred revenues and expenses below an Annual Surplus/Deficit subtotal in order to isolate economic activities from deferral accounting. We support the treatment of depreciation as an economic activity.

5. Consumption of tangible capital assets and other resources specific to the public sector to be included in the measure of financial performance for the period.

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We agree with this accountability. As noted under Questions #4, #6 and #7 we also support the use of replacement value depreciation to measure financial performance and its potential to assist in measuring financial and asset sustainability. Again, we do not support the deferral of revenues to match depreciation associated with tangible capital assets under the inter-period equity concept.

6. The separation of unrealized valuation changes from the results of operations


7. A change in net debt/net financial assets We agree with this accountability. In the event that PSAB pursues the use of a Revenue and Expense View we recommend reporting in the Consolidated Statement of Operating all deferred revenues and expenses below an Annual Surplus/Deficit subtotal in order to isolate economic activities from deferral accounting. This would facilitate reporting on the Consolidated Statement of Change in Net Financial Assets/Net Debt.

8. The sources and uses of cash

We agree with this accountability. A statement of cash flows provides useful information on the major financial and non-cash activities of a government.

Financial Position Accountabilities

9. All assets and liabilities of the entity;

We agree with this accountability using historical cost. 10. The net assets/net liabilities indicator of financial position (Accumulated Surplus);

We agree with this accountability using historical cost. Use of the description “net assets/net liabilities” is driven by use of the Revenue and Expense View and Hybrid View necessitated by the deferral of revenues and expenditures. Under the Revenue and Expense View or Hybrid View, Tangible Capital Assets should still be presented at Net Book Value.

11. The net debt/net financial assets indicator:

We believe that the net financial assets/net debt position of a government at the end of an accounting period is one of the more powerful measures of accountability that can be used along with other financial indicators to track progress on financial sustainability over multiple annual accounting periods.

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12. Cash and cash equivalents; We agree with this accountability.

13. Issued debt and other liabilities; Issued debt and other major liability categories are appropriate disclosure on the statement of financial position.

14. Tangible capital assets (balances, acquisitions, disposals, etc.);

We agree with this accountability inclusive of the consumption measure of TCAs. We also support the measure of depreciation at both historical and replacement value as described under Question #7 as consumption measures track the TCA life and establish the need to focus on financial sustainability over the long term. We do not agree that financial sustainability is beyond the scope of financial reporting. Rather we believe financial reporting should be part of the continuum of reporting on financial sustainability.

15. Financial assets, including financial instruments;


16. Other public sector resources (balances, acquisitions, disposals, etc.).

We agree with this accountability; in particular with regard to financial statement notes that expand up the general support financial statements.

Financial Statement Presentation Alternatives


To make an informed decision one must know not only what the concepts are but how they will be applied.

Asset and Liability View

In the absence of knowing how the concepts will be applied, we prefer the Asset and Liability View that is currently in use. Why this is preferred is that we can currently (and easily) leverage it to create a financial statement view that strongly supports financial sustainability, it aligns with the full spectrum of governance and stewardship responsibilities, asset management, long term financial planning and key financial indicators.

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The Asset and Liability view lays a strong foundation for long term sustainable government reporting and the going concern nature of government. This is contrary to the statement made on page 19 in Consultation Paper #2 that “this approach does not reflect the long term and going concern nature of government?” The reasons are:

As articulated in Consultation Paper #2, page 18. While PSAB reporting is on a single annual accounting period, the larger objective

is to demonstrate financially sustainable each and every year over a number of years.

Taking a longer term perspective generally dilutes fluctuations in any given year to the point that gains and losses that are market value based adjustments, peripheral or incidental to on-going operations are generally not material to long term sustainability. If this is a major issue for the federal and provincial governments we believe that it is a separate issue that must be address via other means.

The reasons for our choice are fairly apparent in the comments under question #7 that profile additional support for the Asset and Liability View plus enhancing it using replacement value.

The concerns regarding gains and losses peripheral or incidental to on-going operations could simply be reports “below the line” separately on Consolidated Statement of Operations.

Revenue and Expense View

In the absence of knowing how this View will be applied we believe concerns and complexity out weight benefits. We believe the current Asset and Liability View is the best with reconciliation to budgets as currently done now.

Some of the difficulties of creating deferral categories reflect the risks of the Revenue and Expense View (see Question #8 response as well). Concerns we have with deferrals include:

Any application of revenue deferral (see question #4) that attempts to match depreciation under the Inter-period equity concept.

The Consultation Paper seeking input on what “items” rather than general high level categories. This speaks to a need for deferral beyond simple revenue and expense deferrals based third party transactions or simple external revenue restrictions (most revenues can already be restricted via contract language).

Addressing deferrals driven by approved operating and capital budgets. The question then become at what level does deferral take place?

o Unspent budgets? o Deferrals via a formal process to commit revenues and expenses to a future

period supported by formal approval processes (that already happens in some governments via operating and capital reserves outside of PSAB standards)?

o What about infrastructure projects that use your own labour force to construction? Do we defer those?

The effectiveness of reporting deferrals on the Consolidated Statement of Operations. In general terms, whether using a traditional object view

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categorization or a service view categorization when reporting expenses, neither are conducive to matching deferrals to specific lines on the Statement. One must question the value of the effort required to strive for alignment by expense category versus that value that information provided to the financial statement reader when reconciliations will still be required in financial statement notes between PSAB expenses based budgets and expenditure based budgets.

The effectiveness of reporting deferrals on the Consolidated Statement of Net Financial Assets/Net Debt. We already report tangible capital assets and work-in-progress so deferral would need to go beyond WIP to unspent budgets.

Most likely Consolidated Statement of Operations deferral items will not be comparable from budget to actuals even at a high level. The presentations in Appendix “F” of the Consultation Paper are too simplistic to convey the complexities surrounding this issue. Should this view be chosen we recommend that deferrals be reported as a single line separately below economically driven activities that specifically relate to revenues and expenses for on-going operations (the latter being supported by accrual accounting and proper accounting cut-offs at year end).

Hybrid View

As we do not know how this View will be used there is not sufficient information in Consultation Paper #2 to render an informed decision. We provide an alternative Hybrid View based on the Asset and Liability View under Question #7. The concerns we have articulated under the Revenue and Expense View with regard to deferrals apply to any Hybrid View. Should this view be chosen we believe that any deferrals should be reported separately below activities that specifically relate to revenues and expenditures for on-going operations (the latter being supported by accrual accounting and proper accounting cut-offs at year end).

Another Preferred Model 7. If you do not like any of the three financial statement presentation alternatives set out in


In our opinion the (current view) Asset and Liability View and using historical cost for financial reporting and lays a strong foundation documenting both financial position and performance accurately. However, given the longevity of major infrastructure assets, over time, historical cost depreciation becomes less and less meaningful for financial reporting purposes and by inference alignment with the budgets that under PSAB we report against. In planning, governments work toward funding levels that target infrastructure fair value (replacement costs). In order to better align financial reporting with community planning, asset

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management planning and long term financial planning we strongly recommend the current Asset and Liability View augmented in one of three ways: 1. Augment the Asset and Liability View with an additional Consolidated Statement of

Operations that includes replacement value depreciation, 2. Move to replacement value depreciation or, 3. Remain at historical cost and PSAB support governments using replacement value


We believe that PASB 3150 was a major leap forward and that the use of replacement value depreciation is the next natural step in the evolution of Canadian financial reporting. We also believe the Asset and Liability View, when augmented with replacement value measures for depreciation provides a much clearer picture of the financial performance of a government at any level and should form part of the research being undertaken. In Consultation Paper #2, page 2, PSAB’s initial approach was to plan its review in conjunction with work being undertaken by the International Public Sector Accounting Standards Board (IPSASB), “However, the senior government finance community expressed concern, indicating that PSAB should be proactive in developing a “made-in Canada” solution. To date Canada has been unable to find a reasonable approach that embraces financial sustainability in any profession with an interest in government and infrastructure. As leaders we should be seeking out best practices internationally. We believe PASB has a fundamental obligation to the profession and the public to explore these best practices. In the absence of that leadership Canada may spend many more years of further reflection and debate while infrastructure deficits grow and levels of service in communities are further compromised. Not only in Canada but over most of the developed and developing world professions from finance, engineering, operations and community planning still research and plan in the best interest of the public but they still work in silos, struggle to maintain infrastructure, strive to manage aging populations and migration to cities while setting levels service that the public expects will maintain a certain standard of living. To break down these silos we need all professions to come into alignment.

Australian Accounting Standard AASB 116 requires assets to be recorded either at fair value or at historical cost less accumulated depreciation. However, as noted above, the Local Government (Financial Management) Regulations 2011 require regular revaluations of the carrying value all material non-current assets to their updated ‘fair value”.

The Australian finance profession laid the foundation for movement toward financial sustainability and government regulation embraced the necessity of replacement value measurement bringing true alignment across all professions and governments in Australia with an interest in government sustainability. Australia is home to the International Infrastructure Management Manual (IIMM), has a national asset management strategy (NAMS) that includes the Australian Infrastructure

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Financial Management Guidelines (AIFMG). The Local Government Association of Southern Australia’s has leveraged these best practices along with the South Australian Local Government (Financial Management) Regulations 2011 South Australian Local Government (Financial Management) Regulations 2011 and Australian Accounting Standard AASB 116. and created an award winning Financial Sustainability Program that has been modeled across Australia. Integration of best practices is to the point that a review of local government financial sustainability now takes place under the mandate of auditor general offices in Australia with legislation enshrining financial and non-financial measures to assess the performance of Councils. We urge PSAB to review relevant Australian Accounting Standards and South Australia’s award winning Local Government Association Financial Sustainability Program. Where Canada is just starting this discussion, in Australia, the research has been years in the making with 27 financial sustainability papers just re-released in early 2012. We are not that different. Sample papers of relevance are linked below for your consideration:

o Information Paper #1 – Financial Stability o Information Paper #6 – Infrastructure and Asset Management o Information Paper #8 – Long Term Financial Plans o Information Paper #9 – Local Government Financial Indicators o Information Paper #10 Debt o Information Paper #17 – Depreciation and Related Issues o Information Paper #23 - Financial Governance

We believe Australia’s approach is the most compelling case for improvements to Canadian financial reporting standards. Chart 1 shows the progress made by targeting a small operating surplus inclusive of fair value (replacement value) depreciation.iii

In Australia financial sustainability indicators are based on audited financial reporting inclusive of fair value depreciation. After years of testing and analyzing eight measures,

Chart 1: Local Government Sector - Operating Surplus/(Deficit)

-80

-60

-40

-20

0

20

40

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

$ m

illio

n

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three have become best practice. The Local Government (Financial Management) Regulations 2011 require a government to use three specific indicatorsiv:

An operating surplus ratio – objective: a small surplus each year over time (inclusive of fair value depreciation);

A net financial liabilities ratio – objective: to educate Councils that use of debt is acceptable to a maximum of 100% of major controllable revenues.

An asset sustainability ratio: Objective to measure funding made available for existing assets compared to fair value depreciation over a three year moving average. (Target: 90% to 110%)

From a financial sustainability perspective it is clear that these three ratios focus on material financial performance and are grounded in the annual audited financial reports complete with auditor general oversight. PSAB’s Consultation paper #2 affirms that the first two ratios are considered viable in Canada; we just need replacement value depreciation as all three ratios become relevant. Governments should be expected to become self-sustaining to the extent possible. This doesn’t mean that higher levels of government don’t have programs that support local government but it does mean that the Asset and Liability View lays the foundation for any Hybrid model and gives Canada an opportunity to accelerate quickly to a tested best practice standard. It should also negate from any View the amortization of revenue to match depreciation. Please leverage this work to, in the words of your task force, create a Canadian-made model. Canadian researchers Dr. Harry Kitchen and Enid Slack are world renowned for their research on local government funding and financing. The following quote is from Dr. Harry Kitchen’s, Discussion Paper, Principles and Best Practices for Funding, Financing, and Cost Sharing Metro Vancouver’s Municipal Services (2010)

When two or more levels of government fund the same service, accountability problems arise. When the level of government making the spending decision (municipalities) is not the same level of government that raises the revenue (a more senior level of government), accountability is blurred. International experience tells us that governments are more likely to carry out their operating and capital expenditure responsibilities in a responsible, efficient, transparent, and accountable manner if they are also responsible for raising their own revenues to pay for these services (Bird, 2001; Bird and Bahl, 2008)

If you follow this concept to its theoretical conclusion, local government raises revenue itself and become less reliant on transfers from senior levels of government. This in itself diminishes the need for smoothing inter-government transfers that seem to be so topical again today. The debate is more a symptom of the lack of sound infrastructure planning over the last fifty years than a need to amend PSAB Standards.

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Categories for Deferred Inflows and Outflows 8. If new financial statement categories for deferred inflows and outflows are set up, what

items would you see being accounted for in these categories (for example, endowments, general tax revenue, transfers received)? Do you have any suggestions for the criteria that should be used to determine what can/should be accounted for in those categories? For example, consider the following for inflows (and similar questions for outflows):

What Items should be accounting for via deferral of revenue inflows?

Items? Rather deferral need to support a strategic flexible approach to both financial management and financing that is essential for at each level of government. Deferral categorization at a very high level would support managing and reporting in strategically and holistically optimum ways rather than in silos. Local government also needs flexibility in the management of reserves and should PSAB to go down the path of the Revenue and Expense View, we are effectively prescribing and creating two types of deferrals:

PSAB standards based deferrals plus, a continuing set of reserves set up by government for specific purposes. These

reserves are currently part of Accumulated Surplus and government manages both statutory and no-statutory reserves.

PASB currently ignores these reserves leaving them to each local government and how management reports them in the Notes to the Financial Statements. Use of deferrals in either the Revenue and Expense View or the Hybrid View will add complexity and risk making the general purpose financial statements of public sector entities (local governments) less reader friendly. PSAB needs to consider tomorrow, when Canada starts to address its infrastructure deficit and makes moves toward steady state replacement of infrastructure. What will deferrals look like? Is there a need for deferrals or will deferrals become so large and unwieldy that they overwhelm a historical cost based Consolidated Statement of Financial Position? At this point given the risks we see inherent with deferral in the Revenue and Expense View and the Hybrid View we simply do not recommend that PSAB proceed with either of these options.

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External Restrictions


Time Approach No. The time approach is not acceptable via deferral accounting or agreement

when the purpose is to match depreciation over the life of a tangible capital asset. As previously stated such restrictions are not aligned with the current state of infrastructure, infrastructure deficits and the need to plan to replace infrastructure. In our opinion such revenue deferral serves no purpose in moving government or the communities they serve toward financial sustainability. Such restrictions run potential have the opposite effective and risk reporting that governments are financially sound when there is a strong possibility they are not.

Yes. As simple statement for tangible capital assets is that the maximum deferral

period for revenue should be the period of construction or the date an asset is placed in service.

No. Where senior levels of government provide operating and maintenance

funding. While unlikely in the foreseeable future… more appropriately tax room should be created at the local government level and local government to be able to report out on their financial sustainability.

Publicly Communicated Commitments


No. Elected officials should be required to vote and approve commitments through formal processes. Publicly communicated commitments may not receive formal approval and that is a risk of political office and training. PSAB should not consider it enough to trigger a deferral. It is the government that PSAB standards should apply to; not individual elected officials making commitments.

Internal Commitments If an internal commitment is allowed to trigger deferral, should an irrevocable


No. In most cases the alignment between revenue and the final expenditure is clear via formal budget approval and an irrevocable designation is not necessary. For the balance there are many reasons not to make irrevocable designation; Emergencies and disasters where immediate access to funding is required. Statutory reserves are set for major specific purposes and deferral simply adds

complexity and confusion.

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Government and elected officials should be also able to reverse commitments and explain their decisions to the public.

Relationship between Inflow and Cost of Service

How direct should the relationship be between the inflow and the costs of services to be provided in future periods in order for deferral of the inflow to be permitted? For operating and maintenance purposes deferrals could be based on proper cut-

offs on expenditures at the end of an annual accounting period augmented by a formal approval process that supports, with documented evidence, the need for deferral.

For tangible capital assets the maximum deferral period should be the construction period or the in-service date.

There should be a limited set of circumstances where deferral is still permitted where items that do not meet the definitions of assets and liabilities can be considered for inclusion in deferral categories (see next question).

Clear Definitions – Assets, Liabilities and Deferrals


Yes. If you go down this path you need a clear line that demarcates the differences between assets, liabilities and deferrals. Example: A local government is moving into a significant growth phase. Any revenues from that growth will be targeted to providing services to support that growth. However, there is a timing issue. The revenue will flow in via the usual taxation business processes but the expenditure may be delayed pending significant community input and decisions by elected officials on what levels of service will be provided. Options: PSAB standards allow the deferral of that revenue to enable elected officials and

the community some time to properly assess the services and the level of services that best fit the growth.

PSAB standards don’t allow deferral of that revenue to enable the community some time to properly assess the services and the level of services that best fit the growth. Rather the revenue falls to Surplus, will be placed in a capital or operating reserve and then budgeted in a future period once services and levels of service are determined. In this latter case actual to budget reconciliations will continue as they do now.

In our opinion, the Revenue and Expense Views and Hybrid models that consider deferral will create unavoidable complexities.

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Other Statements?


Yes. We believe the core set of general purpose financial statements in the Asset and Liability View is the purest and easiest for elected officials and the general public to understand of three models presented. We also believe the alternative view we offered under Question #7 builds upon that view in a meaningful way. The three options we provide for PSAB to consider are:




Debt Capacity

A general purpose financial statement for debt is not recommended. Using the example noted, the concept of debt in itself does not reflect the full capacity of a government to sustain itself. Debt is but one tool. Debt should never incurred without considering total revenue plus the condition of a government’s tangible capital assets and where those assets are in their life cycles. What each type of government needs then is a debt capacity benchmark target. Such as the Australian key indicator “net financial assets or net financial liabilities ratio”. This compares the net financial assets or net financial liabilities position on the balance sheet to major controllable revenues. Other measures of debt are less meaningful due to the variability of interest rates and length of debt term.

We again point you to Information Paper #9 – Local Government Financial Indicators as PSAB could support such indicators with a set of general purpose financial statements or a Statement of Recommended Practice.

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End Notes i http://www.canadainfrastructure.ca/downloads/Canadian_Infrastructure_Report_Card_Highlights_EN.pdf, page 2 ii http://www.canadainfrastructure.ca/downloads/Canadian_Infrastructure_Report_Card_Highlights_EN.pdf, page 2 iii South Australia Local Government Sector Financial Indicators Report 2012 http://www.lga.sa.gov.au/site/page.cfm?u=769 iv Australian Information Paper #9 – Financial Indicators, February 2012

Tim Beauchamp, Director, Public Sector Accounting RE: Response to Consultation Paper 2 Dear Mr. Beauchamp Attached is my response to Consultation Paper2. I wish you and the Public Sector Accounting Board the necessary wisdom in dealing with the fundamental issue of identifying the appropriate model to report financial results to the users of public sector financial statements. Regards Daryl Wilson, FCA

Measuring Financial Performance In Public Sector Financial Statements

Response to Consultation Paper 2

Introduction The existing model in the PSA Handbook, known as the Asset and Liability View, is described in pages 17 to 20 in the Consultation Paper. Key features of the model are set out as follows:

“the measure of financial performance is grounded in real economic phenomena”. “no judgment is required to determine which transactions and events……are included or

excluded”. “no judgment is required to ascertain if an inflow or outflow is appropriately attributable to the

current or future periods”. “Artificial smoothing of reported results is not possible”.

In establishing a model that is based on “real economic phenomena” and one that does not permit the preparers of financial statements to smooth reported results I believe that PSAB as a standard setter is on solid ground. I do not believe that a compelling case has been forward in the Consultation Paper to move away from this model. While the paper sets out reasons for looking at different models, they are not in my opinion sufficient to move PSAB off the principle based model it has adopted. My response will examine the reasons put forward for change. In this regard my report will not follow the format suggested by answering specific questions. Reasons for questioning the validity of the Asset and Liability Model I have identified 4 reasons why the adequacy of the Asset and Liability Model is being questioned.

1. Users were asked leading questions leading up the adoption of the Asset and Liability Model 2. The validity of the model is questioned because it is based on “private sector conceptual

frameworks” 3. The model has created volatility, and 4. There are more accountabilities that must be addressed beyond what the Asset and Liability

Model addresses I will now discuss each of these reasons.

1. Users were asked leading questions leading to the adoption of the Asset and Liability Model PSAB as a standard setter must be focused on getting things right for the users of financial statements. This is fundamental. The suggestion that leading questions had been asked of users leading up to the adoption of the Asset and Liability Model is a serious matter. This charge must be either refuted by PSAB as false, or users be

consulted again in a manner that is seen to be fair and unbiased. The needs of users must be clearly understood. It would certainly be premature to suggest other models such as Revenue/Expense or Hybrid before receiving appropriate feedback from users. I believe it is condescending to suggest, as set out in the paper, that getting input from users is problematic because of “the less financially sophisticated nature of the public sector”. PSAB must be careful not to use this thinking as a reason to ignore the users. What this might mean, is that different approaches must be sought to obtain a good understanding of what users in the public sector are looking for. The view put forward in the paper is that users, which include Canadian taxpayers and citizens, are not knowledgeable enough to know what they need, so someone else has to tell them. PSAB as a standard setter must not be associated with this line of thinking.

2. The validity of the model is questioned because it is based on “private sector conceptual frameworks”.

It is true that when the Asset and Liability model was adopted it was being followed in the private sector. However I believe this to be a very superficial commentary because in substance the model lines up very well with how we as Canadians look at our own finances. As individuals we know what assets are; we have homes, cars, investments and money in the bank. As individuals we know what liabilities are; we have mortgages, bank loans, and credit card debt. As individuals we have had the experience of going to a financial institution for a loan or a mortgage and understand that having assets worth more than liabilities is a good thing. And we know that when liabilities are greater than assets that is a bad thing. We know that if our liabilities are greater than our assets we have to curtail spending and rely on future earnings to get ourselves out of financial trouble. As individuals we are familiar with unforeseen events like a downturn in the stock market or a slow real estate market. At the end of a year our net worth may be lower than it was at the start of the year. Real estate and stock markets are volatile. This is a fact of life and we understand this. Employment can be volatile, one day you have a job, the next day your employer is out of business. So the concept of volatility is familiar to most if not all Canadians. As individuals we know that if we receive a significant inheritance from a will, that this is a one-time payment and we must use the money wisely. We cannot rely on payments such as this on a regular basis. Does the Asset and Liability Model not align very well with how we as individuals look at our own finances? And really, when you think that governments are really doing things (build roads, provide health care, etc. ) for us collectively that we cannot do ourselves, is there not a real benefit in having government look at its financial performance the same way we do? The inference is that since the Asset and Liability model is also used in the private sector, it must be inadequate, it must be inappropriate. In substance however this is not true since the financial

information provided by the model is both relevant and understandable. The Asset and Liability Model is also transparent. There is no confusion created by deferred credits and deferred debits, something that is totally foreign to how we as Canadians look at our personal financial performance.

3. The Asset and Liability model has created volatility The Consultation Paper makes the following comment on page 2; “The application of standards based on concepts in the framework were seen to be creating volatility….”. This is seen as a bad thing. On the other hand The Paper also recognizes that with the Asset and Liability Model, “the measure of financial performance is grounded in real economic phenomena”. So if the “real economic phenomena” results in an unexpected gain or loss should the accounting model being used not recognize that event? This seems to very basic. The volatility has arisen from the activities undertaken by the government. This is the substance! This is the “economic phenomena”! If a government cannot tolerate volatility then appropriate steps should be taken to eliminate or mitigate the risks that give rise to the volatility. To look for an accounting model to deal volatility would not be transparent and could in fact be misleading. PSAB must be careful to not adopt standards that smooth out the impact of real gains or losses. PSAB should also be able to answer the question, is volatility a problem for the users of the financial statements or the preparers? My view is that in a political environment where an opposition party is always looking for ways to discredit (justified or not) the government of the day, that the government of the day will go to great lengths to avoid providing any “negative” information. My conclusion is that volatility is a big concern for preparers. In effect PSAB has already taken proactive action in dealing with volatility and that is by providing guidance for the preparation of a Financial Statement Discussion and Analysis (FSDA). The FSDA is where a government can explain the unforeseen events that occurred during the year in simple language that is understandable by the media and Canadian taxpayers. It is through the FSD&A that a public sector entity or government can faithfully explain the causes behind the volatility and what steps will be taken to manage such events in the future. Such a faithful explanation would be transparent. The Annual Reports of private sector companies is where an investor learns the details of extraordinary events or losses.

4. There are more accountabilities that must be addressed beyond what the Asset and Liability Model addresses

The Consultation Paper has a lot say about the current Asset and Liability Model in the context that it is too narrow in meeting the needs of a broader group of users. The Paper indicates that this broader group of users, “demand accountability from public sector entities on multiple fronts given the multiple objectives of public sector entities. Therefore, an accountability approach is proposed that would focus on the multiple perspectives of financial performance needed to describe the financial performance of a public sector entity.” On page 20 I learned that the current Asset and Liability Model meets 14 of the 16 identified financial statement accountabilities. Only two are missing, one related to the budget to actual comparison and the other related to measuring the extent to which annual revenue covers the cost of providing services. With the general tone of the consultation paper and the need to focus on “multiple perspectives of

financial performance”, I was expecting much more than this. Basically, the Asset and Liability Model is providing everything except the revenue/cost of services comparison. Are users of public sector financial statements looking for this additional comparative information? Or is it being driven by the way governments want to budget? There is no question that alignment between the budget and actual financial results is important for accountability but I do not think the solution is for PSAB, the standard setter for public sector accounting, to be influenced by how budgets are put together. There should be concern over a comment like the one that appears on page 21 of the Consultation Paper, “For example, governments may, for fiscal policy reasons, decide to defer the expenses related to economic shocks or the revenues related to economic surprises to be borne by future resource providers”. I cannot see how Canada can have an acceptable basis of accounting in the public sector if governments on their own can decide “for fiscal policy reasons” how something is to be recorded. PSAB’s role is to get the accounting and reporting right. With the Asset and Liability model “grounded in real economic phenomena” and “artificial smoothing of reported results is not possible”, it is my opinion that PSAB’s role as a standard setter is complete. Conclusion I do not believe that a compelling argument has been put forward to move away from the Asset and Liability Model. The current model is based on “real economic phenomena”, does not permit the preparers of financial information to smooth financial results and aligns very well with how Canadians as individuals understand and measure financial performance. The suggestion that PSAB reached a conclusion on the Asset and Liability Model by asking leading questions must be refuted. This cannot continue to stand as a reason for moving away from the current model. If it cannot be refuted then PSAB should go back to the beginning and learn what the users of public sector financial statements need.

2013-01 measuring performance in the public sector responses

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