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Governments are different
By Martha Jones Denning
The accountability for, and transparency of, government decision-making has never been more critical.
Illustration: Randy Butterfield
 Arguably, if governments are different from businesses, then government accounting rules and their reporting model should also be different. This view holds that there are no immutable accounting or financial-reporting rules that apply irrespective of the nature and purpose of the organization whose activities and results are being displayed, or regardless of the objectives of presentation.
A contrasting view is that a transaction is a transaction and it should be accounted for in the same way by all types of organizations. This view asserts that the nature of assets, liabilities, revenues and expenses, gains and losses does not change because they are held by the public, instead of the private, sector. This argument would propose using the same accounting rules and reporting model for a business ("the commercial model") and a government.
Such views generate debate in the public sector at home and abroad. In Finland, for example, the mutual comparability of economic entities and the adoption of generally accepted accounting principles were central arguments in the choice of the public sector's commercial accounting model. However, as Salme Näsi, a Finnish academic, notes, "Comparability is, of course, a fine thing, but if the economic entities themselves cannot, in reality, be compared with each other or, at best, only to some slight extent, the application of the same accounting system will provide few, if any, blessings" (from Criteria for Choosing a Business Accounting Model in the Finnish Public Sector, University of Jyväskylä School of Business and Economics Working Paper No. 198, 1999).
These contradictory views hint at the debate being rekindled in the federal / provincial / territorial (senior) government community in Canada as it, once again, considers how government financial statements can best portray government financial positions and results.
Arguments have been made to move governments toward a commercial reporting model in Canada. But such a decision must be guided by a clear set of criteria, not by intuitively trusting to the superiority of the business accounting model. One of the criteria to be evaluated is whether the unique characteristics of government justify different accounting and reporting models than those used in business.
Background
In 1997, the senior government reporting model in the CICA Public Sector Accounting (PSA) Handbook was revised to accommodate the reporting of tangible capital assets (Section PS 3150). The revised model permits alternative presentations for reporting tangible capital assets and for the statement of annual results, but continues to focus on net debt as a primary measure of government financial position and the change in net debt as the measure of government financial performance. This model was a compromise reached over many years of consultation. As governments moved to comply with the capital asset recommendations, however, it became clear that only a few senior governments in Canada were content with the new reporting recommendations.
Governments are changing how they deliver services to respond to political and fiscal pressures and advances in technology. Re-engineering, downsizing, more user fees, new organizations such as foundations, and privatization are at the forefront of that reform. And, although Canadian governments have made clear progress, the annual surpluses or reduced deficits being reported are fragile, and significant debt remains. These changes, coupled with new legislative requirements for balanced budgets, mean that accountability for, and transparency of, government decision-making has never been more critical. So, governments are questioning if the current government reporting model meets their needs.
At cross-Canada meetings with senior government officials in 1999, several governments indicated that they were considering a reporting model other than the PSA Handbook model. These meetings prompted the Public Sector Accounting Board (PSAB) to look at its reporting model anew. Preliminary proposals for changes to the reporting model were issued for comment to the senior government community in July 2000.
Unique characteristics
When a government owes money, it has a liability just as does a business. And, when it carries out operations using subsidiary organizations, then it includes those activities in its financial statements, just as a business does. Many accounting rules for recognizing, quantifying, valuing and recording transactions and events are the same for government as they are for business. When unique government circumstances support a different accounting approach, PSAB recommends a different standard from the private sector rules only after a thorough consultation with its constituents.
PSAB's preliminary proposals recommend a change from a financial resources focus to the economic resources focus of the commercial model. The former means that financial statements report financial assets and liabilities and the changes in them. Capital assets and prepayments are excluded. The current PSA Handbook model focusses on net debt (liabilities less financial assets) and the change in net debt (revenues less expenditures) as measures of government financial position and results, and is best described as a financial resources model. An economic resources focus means that financial statements report monetary and fixed assets as well as short- and long-term items. The reporting model embodied in the CICA Handbook - Accounting for both profit-oriented enterprises and not-for-profit organizations focusses on net assets (assets less liabilities) and net income / results (revenues less expenses) as the measures of an organization's financial position and results, and is best described as an economic resources model.
PSAB's proposals do not recommend that government financial statements look identical to those of a business. Instead, the proposals assert that the characteristics that make government different from business argue for reporting standards tailored to government. The accompanying exhibit identifies the unique characteristics of government and their reporting implications.
The PSAB's proposed model has the following elements:
The statement of financial position reports net debt and then deducts non-financial assets (capital assets and prepayments) from net debt to measure the accumulated surplus or deficit.
The statement of operations reports the excess / deficiency of revenues over expenses as the surplus / deficit for the period.
The new statement of changes in net debt reconciles a government's total expenses to its spending on operations for the period, and also reports the capital spending, the extent to which total spending was financed by revenues earned (that is, the change in net debt in the period), and the opening and closing net-debt balances.
The statement of cash flow replaces the statement of changes in financial position. It calculates cash flows from operating activities using the indirect method that adjusts the surplus or deficit for the period to the amount of cash used by, or available from, operations.
No statement of tangible capital assets is prepared. This statement has been replaced by disclosure.
The model takes an asset / liability ("balance sheet") viewpoint, which holds that revenues and expenses, and therefore annual results, result only from changes in assets and liabilities. Definitions of the elements that comprise annual results - revenues and expenses - are derived only from the definitions of assets and liabilities. Both the Canadian commercial models and governmental reporting models are balance-sheet focussed, although the governmental model reports only liabilities and financial assets on its "balance sheet."
The main advantage to the proposed model in comparison to the commercial model is that the proposed model incorporates net debt and highlights capital spending. Both features are essential to counter concerns that adopting a commercial model will result in the loss of control over spending because depreciation, rather than capital spending, would be reflected in government annual results. The proposed model reports net debt on the statement of financial position and includes a new statement of changes in net debt that provides disclosure of capital spending.
The proposed model is a move toward full accrual accounting and reporting because it reports the cost of services - a change in reporting that supports the new thinking and reorganization of governments in Canada. And, in contrast to the current model, all of the assets a government is entrusted to manage are reported on the statement of financial position.
The proposed model is also simpler than the current PSA Handbook because only one measure of annual results is reported on the operating statement. The existing model allows the reporting of the subtotal of revenues less expenses on the statement of operations but also requires the change in net debt to be reported as the measure of annual results.
Respondents' views to the preliminary proposals are currently being analysed and will be considered by PSAB in early 2001.
Martha Jones Denning, CA, is a principal in the CICA's Public Sector Accounting department.
Technical Editor: Robert T. Rutherford, FCA, Vice-president, Standards, CICA.
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