Be prepared…

By Barry Naik
Illustration: Mike Constable

Public sector reporting is coming of age, and auditors and preparers should get ready for the proposed implementation date

In June the Public Sector Accounting Board (PSAB) issued an exposure draft, Generally Accepted Accounting Principles — a further step in the development of a new proposed CICA Public Sector Accounting Handbook section.

But how will the proposals in the exposure draft affect those involved in the preparation or audit of general purpose financial statements (financial statements) of entities following the CICA PSA Handbook?

Because, once finalized, the exposure draft will replace existing guidance in the CICA PSA Handbook regarding how an affected organization determines what accounting guidance should be followed in the preparation of its financial statements.

Structure and objectives
In developing the exposure draft, PSAB saw merit in assessing the applicability of the CICA Handbook — Accounting, Generally Accepted Accounting Principles, Section 1100. For the most part, it was determined that Section 1100’s approach was appropriate although the exposure draft has incorporated modifications to take into consideration the public sector context.

In brief, the proposed section clarifies:

• what constitutes GAAP;
• the “primary sources of GAAP” for entities using the Accounting Recommendations of the CICA PSA Handbook (within the exposure draft, such entities are referred to as public sector reporting entities); and
• what criteria must be satisfied in determining an “other source of GAAP” when there’s no primary source available.

What is GAAP?
The definition of GAAP appearing in the exposure draft (identical to that in Section 1100) reflects that GAAP is broader than the contents of the CICA PSA Handbook. “Generally accepted accounting principles encompass broad principles and conventions of general application, as well as rules and procedures that determine accepted accounting practices at a particular time.”

While any accounting handbook issued by a recognized standard setter forms a significant component of GAAP, there is a myriad of sources of accounting material that in aggregate constitutes GAAP.

Preparers and auditors in the public sector are confronted with a variety of accounting issues in preparing and auditing the financial statements of a public sector reporting entity. Specific guidance for many of these accounting issues can be found within the CICA PSA Handbook, which takes into consideration the Canadian public sector environment.

Given the breadth of GAAP, the exposure draft assists preparers and auditors by bringing an element of order to these sources.

Primary sources of GAAP
The exposure draft introduces a category of GAAP termed the “primary sources of GAAP.” It requires a public sector reporting entity to apply every primary source in the preparation of its financial statements. For the purposes of the exposure draft, the primary source of GAAP is the CICA PSA Handbook. However, the CICA PSA Handbook is comprised of recommendations, guidelines and other material such as illustrative examples.

Therefore, the exposure draft also provides a ranking of types of material that appear within the CICA PSA Handbook. In practice this results in the exposure draft requiring the CICA PSA Handbook to be the first port of call for determining the accounting treatment for all transactions and events encountered by the public sector reporting entity.

At present, existing guidance (located in Objectives of Financial Statements — Local Governments, paragraph PS 1700.44, and Financial Statement Presentation — Federal, Provincial & Territorial Governments, paragraph PS 1200.014), while making reference to the CICA PSA Handbook, does not formally acknowledge it as the “primary source of GAAP” (note: the proposed section will replace these two existing paragraphs).

Other sources of GAAP
Having defined the primary source of GAAP, the exposure draft acknowledges issues might arise that are not addressed in the primary sources. In these circumstances, the exposure draft introduces and explains “other sources of GAAP.”

In brief, the exposure draft requires that where the primary sources of GAAP are silent, public sector reporting entities should apply professional judgment and adopt accounting policies that are consistent with the primary sources of GAAP, and the conceptual framework embodied in the CICA PSA Handbook.

The exposure draft does not provide a suggested listing nor does it give preference to potential other sources of GAAP but instead adopts a principles-based approach. Consequently, the suitability of a source or item of accounting guidance as another source of GAAP is determined solely by its ability to satisfy the criteria specified within the proposals.

This approach can be contrasted with the existing guidance that provides a sequential listing of other sources of accounting guidance. Notable within each listing is the reference to “accepted Canadian public sector practice” and also the CICA Handbook — Accounting. As discussed, it is proposed that such a listing no longer be provided.

With the existing guidance, the provision of a sequential listing could have been interpreted by some users as implying an ordered ranking to those sources listed. To continue applying another source of GAAP based solely on its perceived ranking under the existing guidance could be problematic under the exposure draft.

From a practical perspective, for some users of the CICA PSA Handbook, the approach proposed for determining another source of GAAP in the exposure draft could conflict with a well-entrenched paradigm. This is because many users of the CICA PSA Handbook would have been educated and subsequently spent much of their professional life using the CICA Handbook — Accounting (commonly referred to as the Bluebook).

In the absence of specific guidance in the CICA PSA Handbook, it has become almost intrinsic to refer to guidance in the Bluebook, which was the next logical port of call. However, given the exposure draft places no special need to refer to the Bluebook above other sources, but places it equally with all other possible sources of accounting guidance, may result in users finding the apparent freedom of the revised approach takes getting used to.

Similarly, the same sentiment may also hold true for accepted Canadian public sector practice. This is because, as with the CICA Handbook — Accounting, accepted Canadian public sector practice is not specifically listed or afforded any degree of rank amongst the many possible other sources of GAAP. This despite the fact that in practice many would view that source as being a mandatory resource to be consulted or followed.

It should be noted that while the existing guidance also specifies some criteria that should be satisfied in determining an other source of GAAP (that criteria resembling the criteria appearing in the exposure draft), it could have potentially been perceived that application of the criteria was not mandatory for all circumstances. The criteria’s replication with supportive guidance in the exposure draft not only reaffirms but also further entrenches their mandatory application in determining that other source.

Bottom line, for all those public sector reporting entities that currently have transactions or events, the financial reporting of which is not currently addressed in the primary sources of GAAP, it would be beneficial to review those accounting treatments and determine their compliance with the proposals.

Legislation and  regulatory requirements
The exposure draft also proposed that if the financial statements of a public sector reporting entity encompasses any regulatory, legislative or contractual reporting requirements, it would again be to that  entity’s advantage to review such requirements to ensure they are consistent with the exposure draft. If such requirements materially conflict with the exposure draft, then it will create difficulties in describing those financial statements as being prepared in accordance with GAAP.

Italics and non-italics
A further proposal revises the status of non-italic type in CICA PSA Handbook sections. Presently, recommendations are set in italic type. In addition to recommendations, with non-italicized background material, illustrations and guidance on desirable practices also provided.

This has translated into the italicized material being viewed as more important and consequently receiving more attention than the non-italicized paragraphs. Some may have viewed compliance with the section having been achieved by complying solely with italics.

Under the proposals, public sector reporting entities will need to ensure that the financial statements are in compliance with both the italicized and non-italicized paragraphs of the CICA PSA Handbook sections — as both texts will have an equal ranking — both will be equally important. To comply solely with one text could again create difficulties in stating that the financial statements have been prepared in accordance with GAAP. However, when there appear to be different ways of interpreting the non-italicized paragraphs, the public sector reporting entity should select the treatment that is most consistent with the italicized paragraphs.

Implementation date
Finally, the exposure draft proposes an implementation date of all fiscal years beginning on or after April 1, 2005. Those affected need to ensure that their financial statements have been reviewed and are in compliance by the proposed date (which was selected to align with the date for the new reporting model for federal, provincial and territorial governments).