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      January-February 2005
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A summary of current CICA projects and initiatives
 
Accounting bases used in Canadian government budgeting

by J. Paul-Émile Roy, CA

The Organization for Economic Co-operation and Development, a recognized leader in the field of public sector budgeting, regards the budget as the single most important policy vehicle for giving effect to economic and social priorities. It is an integral part of financial management because it indicates the resources needed for government programs and forms the basis for operational and financial control and accountability.

Given the importance of government budgets, the CICA’s Public Sector Accounting Board (PSAB) commissioned a research report to survey the state of the union. The survey looks at the basis of accounting and accounting policies used by Canadian federal, provincial and territorial governments in their budgets and estimates (appropriations) as compared with those adopted in their summary financial statements. The accounting relationships between these three sets of documents and the budget to actual comparisons required by PSAB are key issues.

Interpreting the survey findings requires a basic understanding of how Canadian government is organized and operates. There are 14 jurisdictions — one federal, 10 provincial and three territorial — with a total population of almost 32 million and a total geographic area of nearly 10 million square kilometers (see Exhibit 1). Ontario has the largest population (40%) and Nunavut has the largest geographic area (20%) but the smallest population.

With such a vast geographic area and a widely dispersed population, Canadian governments face uncommon challenges. They are closely modeled after the British West-minster parliamentary tradition. Policymaking and administration are controlled by an executive council, commonly called the cabinet or the government, comprising the prime minister (or a provincial/territorial premier) and appointed ministers, supported by a treasury board (a sample organization chart is provided in Exhibit 2).

The budgetary process requires that the legislature annually approve the funds required for government programs and that expenditures are to be incurred only for the purposes authorized. For the 2004-2005 fiscal year, spending authority was granted for more than $400 billion, of which the largest amount was the federal government budget, at about $183 billion (see Exhibit 1). This includes expenditures authorized by continuing legislation such as a financial administration act.

Under parliamentary traditions, three fundamental practices provide legislative control of the public purse. First, legislative appropriations must precede expenditures. Second, there is a statutory requirement for a single fund (typically called a consolidated revenue fund) and legislative authority must be obtained for expenditures from it. Third, legislatures have used the cash basis to grant authority, to control the flow of funds and to report accounting information. Traditional practices are now being judged more pragmatically, however. Certain expenditures are authorized on a continuing basis by statute rather than by annual lapsing appropriation.

Planning, budgeting and reporting are elements of a government’s performance management and accountability framework. The report discusses each of these elements. Traditionally, the approach begins with priority setting and planning, followed by the budgeting process and ending with reporting and auditing.

Building on this foundation, the report explains that a detailed questionnaire was developed to provide a framework for the survey of budgeting practices. To confirm the accuracy and completeness of the survey results, face-to-face meetings were held with budget officials in all jurisdictions. The meetings provided an opportunity to find out about planning, budgeting and financial reporting cycles, and current and planned initiatives. Pertinent statutes were also discussed. Combined with a review of other reference materials, this provided the basis for defining terminology and preparing a glossary of terms.

In developing the questionnaire, a fundamental question was raised: what does accounting bases refer to? In the most general sense, it refers to the prescribed method of accounting — such as cash or accrual — specifying when revenues, expenses/expenditures, assets and liabilities should be recognized in the financial statements. For purposes of this survey, accounting bases also encompass the government reporting entity, the basis of consolidation and the significant accounting policies used in preparing a government’s budget, estimates and summary financial statements.

Because legislation provides a central focus for government operations across Canada, the survey looks at legislative provisions governing budgets, estimates and financial statements. The survey findings indicate that: a financial administration act (or equivalent) provides a central focus for the operations of all 14 governments in Canada; nine of 14 jurisdictions have legislation that requires a balanced budget. With respect to recent or planned changes to legislation, the current situation in both British Columbia and Ontario is discussed.

What accounting basis is used in the budget, estimates and summary financial statements? The survey findings indicate a clear trend for senior governments in Canada to move to the accrual basis of accounting. In fact, for the fiscal year ended March 31, 2004, the budgets, estimates and the summary financial statements for almost all government jurisdictions are on the accrual basis (see Exhibit 3). In the case of the federal government, the estimates continue to be prepared on the modified cash basis and accrual information is provided separately for decision-making purposes.

There are many reasons why governments are changing from a cash basis of accounting to an accrual basis. Some of those reasons are discussed in the report, for example:

The survey addresses several questions about how the budget numbers provided in the summary financial statements relate to the published original budgets. Is the same reporting entity used in the budget as in the financial statements? Is the same basis of consolidation used? Are the same accounting policies used? Are adjustments, reconciliations and/or explanations provided to ensure the numbers are comparable? Survey findings indicate that, for summary financial statement purposes, all 14  jurisdictions:

For budget purposes, however, only nine jurisdictions include government organizations and government enterprises in the reporting entity. Of these, five use the line-by-line basis of consolidation for government organizations and four use one-line consolidation. All nine include government enterprises on a modified equity basis. In addition, the survey findings indicate that, for both the budget and the summary financial statements, most jurisdictions use accrual accounting for debt servicing, for health and education transfer payments, and for pension and employee benefits. A majority of jurisdictions capitalize and amortize capital assets.

The survey findings also indicate two significant trends. First, it is anticipated that all 14 senior government jurisdictions in Canada will prepare a summary budget by March 31, 2006 (see Exhibit 4). Second, the budgets, estimates and the summary financial statements for all senior government jurisdictions will be on the accrual basis of accounting for tangible capital assets by March 31, 2005 (see Exhibit 5). That means tangible capital assets will be capitalized and amortized over their estimated useful lives.

The report also responds to the question: what changes, if any, are planned to the accounting bases used in the budget, estimates or financial statements? It presents the survey highlights of current and planned initiatives regarding changes to legislation, migration to accrual-based accounting and changes to the reporting entity, basis of consolidation and significant accounting policies. Regarding changes to legislation, specific initiatives include the following: adopting new accounting bases in the budget, estimates and summary financial statements; implementing balanced budget requirements; and modernizing budgeting practices. As previously noted, the survey findings indicate a clear trend for senior governments in Canada:

It is evident that government planning, budgeting and financial reporting is changing rapidly. Because of their size and complexity of operations, however, governments do not find it easy to make changes. There are a number of complicating factors that make change even more difficult. Amending the legislation and making sure the changes are reflected in the budget first (not in the summary financial statements) are some of the factors identified in the report.

No descriptive, comparative analysis of Canadian government budgets currently exists. Therefore, it is anticipated that the recently published report Accounting Bases Used In Canadian Government Budgeting will be a valuable resource to government budget officers, financial officers and decision-makers, as well as politicians, the media and citizens interested in knowing how Canada’s senior governments prepare their budgets. Adding further value, the electronic version of the re-port includes Internet hyperlinks to the Finance Web page, key survey documents, statutes and relevant information on the legislative assembly for each jurisdiction.

 J. Paul-Émile Roy, CA, a principal in the CICA’s Research Studies department, is responsible for the project on government  budgeting


New insights into the CEO and CFO certification requirements

CICA’s Canadian Performance Reporting (CPR) board recent- ly released a discussion brief to help CEOs and CFOs better understand and implement the CEO and CFO certifications required under the Canadian Securities Administrators’ (CSA) Multilateral Instrument 52-109.

Under the bare certificate provisions of MI 52-109, CEOs and CFOs of Canadian public companies are required to certify that their filings contain no untrue statement of a material fact and do not omit any material fact. As well, the certifications require that interim and annual financial statements, together with other financial information included in their company’s filings, fairly present in all material respects the issuer’s financial condition, results of operations and cash flows.

“The certification process requires the CEO and CFO to have the right information and to exercise their professional judgment,” says Jim Goodfellow, FCA, chairman of the CPR board. “Accordingly, we decided to explore the types of issues executives will encounter and suggest some practical considerations, both in respect of processes to follow and disclosures to be made. For example, the discussion brief reviews the notion of an issuer’s financial condition and contrasts it with the financial position presented in an entity’s financial statements. As well, the brief discusses the fairly present test in the certifications, which is not qualified by the phrase ‘generally accepted accounting principles’ that is usually applied to financial statements. We believe management’s discussion and analysis [MD&A] is central to these elements of the certification process and expect that the CPR board publication Management’s Discussion and Analysis: Guidance on Preparation and Disclosure will be a useful tool to assist companies in making complete and balanced disclosures.”

The certification requirement that commenced in 2004 is being introduced in three phases; therefore, companies will need to develop multiyear implementation plans. The second full certificate phase of the program is expected to extend the certification to reporting on the design and evaluation of disclosure controls and procedures and reporting on the design of and changes in internal control over financial reporting. As of the time of writing, the regulators are calling for the full certificate to be required in years ending on and after March 31, 2005. The securities regulators are still discussing the timing, scope, and application for the third phase that is expected to require a report on management’s assessment of internal control over financial reporting. Staff at the securities regulators have stated, however, that this should not be expected to be required until the year ending on June 30, 2006, at the earliest.

Senior executives of Canadian companies who were interviewed in preparing the discussion brief identified three factors critical to successfully implementing the new requirements:

“If executives embrace the certification program as an opportunity to improve internal communication as well as provide ac-countability for public disclosures, then the program has the potential to have a positive and significant impact on the quality of corporate reporting,” says Goodfellow. “On the other hand, CEOs and CFOs whose actions and words communicate that the process is just another compliance exercise will likely see significantly fewer benefits.”

CICA’s president and CEO, David W. Smith, FCA, agrees: “The new certification requirements present excellent opportunities for companies to strengthen their risk management programs, link the financial statements and MD&A and better align the performance measures used to manage the business with external reporting.”

When preparing MD&A, companies may wish to access the CICA’s MD&A Resource Centre at www.cica.ca/mda. In addition to the preparation and disclosure guidance, the resource centre contains an MD&A self-assessment tool, examples of MD&A disclosures, summaries of legal cases involving MD&A and cross-references MD&A regulatory websites.

The CPR board is particularly interested in receiving feedback about issues raised by the certification process, such as the need for more criteria involved in making the fairly present assess-ment, assessing disclosure related to future prospects and the period that forward-looking information should address.

“The discussion brief presents the CPR board’s preliminary views,” says Goodfellow. “We expect these to evolve as experience is gained with the certification process and the new reporting requirements.”

If you have comments and suggestions about either the certification process or discussion brief, please send them to Chris Hicks at CICA at (416) 204-3233 or chris.hicks@cica.ca. The brief can be downloaded at www.cica.ca/cpr.

William Daye wins CICA Award for Excellence in Tax Practice and Education

William Daye, FCAThe CICA congratulates William Daye, FCA, the 2004 winner of the CICA Award for Excellence in Tax Practice and Education. This prestigious award is presented annually at the CICA’s national Conference on Income Taxes to the professional who best exemplifies the highest qualities of a tax leader in Canada through public practice, corporate or other organizational work and through the promotion of tax education.

Daye has made a substantial contribution to both his profession and his community since receiving his designation in 1970. The founder and managing partner of Daye & Co. in Edmonton, he has played a major leadership role in the area of tax specialization, serving both as chairman of the CICA Tax Alliance Board and as a member of CICA’s Tax Seminar and Professional Development committees. In addition, he has authored numerous professional development courses for both the CICA and ICAA. Daye’s extensive volunteer work includes serving as president of the board and chairman of the Strategic Planning Committee for Big Brothers Big Sisters Canada (Edmonton).

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