SPECIFIC MATTERS FOR COMMENT
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SPECIFIC MATTERS FOR COMMENT

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March 31, 2003 142938 Martha E. Jones Denning, CA Principal, Public Sector Accounting The Canadian Institute of Chartered Accountants 277 Wellington Street West Toronto ON M5V 3H2 E-mail: ed.psector@cica.ca Dear Ms. Jones Denning: Attached is the response from the Office of the Comptroller General on the Public Sector Accounting Board's Statement of Principles for changes to Government Transfers, Section PS 3410, of the CICA Public Sector Accounting Handbook. If you have any questions, please feel free to contact me (250 387-6692) or Barbara Reuther, Director, Financial Reporting and Advisory Services (250 387-3975). Yours truly, [Original signed by] Arn van Iersel Comptroller General Attachment pc: Barbara Reuther Ministry of Finance Office of the Mailing Address: Comptroller General PO Box 9413 STN PROV GOVT Victoria BC V8W 9V1 www.gov.bc.ca Province of British Columbia Response to Statement of Principles: Government Transfers CICA Public Sector Accounting Board GENERAL MATTERS FOR COMMENT The topic matter of this SOP is critical in nature. It is important that any guidance provide further clarity regarding the substance of the transfer and not in any way restrict the legitimate management of the bottom line by either the issuer of a transfer or the intended recipient of a transfer. It is important to approach the matter from the perspective that moves away from the traditional ...

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Ministry of Finance
Office of the
Comptroller General
www.gov.bc.ca
Mailing Address:
PO Box 9413 STN PROV GOVT
Victoria BC
V8W 9V1
March 31, 2003
142938
Martha E. Jones Denning, CA
Principal, Public Sector Accounting
The Canadian Institute of Chartered Accountants
277 Wellington Street West
Toronto ON
M5V 3H2
E-mail:
ed.psector@cica.ca
Dear Ms. Jones Denning:
Attached is the response from the Office of the Comptroller General on the Public Sector Accounting
Board's Statement of Principles for changes to
Government Transfers
, Section PS 3410, of the CICA
Public Sector Accounting Handbook.
If you have any questions, please feel free to contact me (250 387-6692) or Barbara Reuther, Director,
Financial Reporting and Advisory Services (250 387-3975).
Yours truly,
[Original signed by]
Arn van Iersel
Comptroller General
Attachment
pc:
Barbara Reuther
Province of British Columbia
Response to Statement of Principles: Government Transfers
CICA Public Sector Accounting Board
GENERAL MATTERS FOR COMMENT
The topic matter of this SOP is critical in nature.
It is important that any guidance provide further
clarity regarding the substance of the transfer and not in any way restrict the legitimate management
of the bottom line by either the issuer of a transfer or the intended recipient of a transfer.
It is
important to approach the matter from the perspective that moves away from the traditional
accounting, which focused heavily on, and primarily followed, annual cash flows to better matching
of expenses with the benefits derived..
With some governments already legislating balanced budgets and legislating the following of
generally accepted accounting principles (GAAP), it is more critical than ever that GAAP support
sound reporting and effective management of resources and not have completely inappropriate
reporting results from one year to the next.
The Province of British Columbia has grappled with all the issues outlined in this SOP in the
application of the original PS 3410 throughout our government operations since it was issued.
We
have communicated policy and practice to users and clients that is essentially similar to the point of
view taken in this SOP, and in the marked up draft of the new PS 3410, and with the same
emphasis.
While we are in general agreement with the proposed guidance and have found the
explanations and additional discussion both applicable and parallel to our own original
understanding and practice of PS 3410, we have major concerns with respect to multi year
payments for special purposes and with respect to items, which we believe should be treated as
prepaids.
General comments on the material:
In relation to the multi year funding issues, it was felt that more detail around the definition of a
non-exchange transaction might be helpful to resolve this issue.
The nature of this class of
government transactions is, that although no services are provided directly to the Government, they
are provided by the recipient of the transfer, to the public.
The argument about future economic
benefit to the donor could be clarified by a more complete definition that provides more decision
points to assess all the ways in which non-exchange transactions differ from exchange transactions.
For example, should matching principles completely apply to non-exchange transactions, or should
the definition of a non-exchange-generated pre-payment be excluded from consideration as an asset
because it is "non-exchange"?
The unique nature and particularity of a government's transfer
payments relates to the very different role of a government as opposed to any other kind of
enterprise.
Governments provide globally for the public interest what may not be practical or
affordable by private interests.
This is such a unique and solitary function of governments that the
meaning of non-exchange transactions would benefit from more discussion and guidance.
There
needs to be further understanding and acknowledgement of the different nature and purpose of
governments throughout the discussion, i.e. public versus private, PSAB versus CICA.
Wording:
We find some of the wording used to describe the debate on the application of PS 3410 less useful
than others.
The terminology creating the division between the "asset/liability viewpoint" or
emphasis on the statement of financial position, and the "revenue/expense viewpoint" or emphasis
Province of British Columbia
Response to Statement of Principles: Government Transfers
CICA Public Sector Accounting Board
on the statement of operations, we found complicated and unhelpful.
The users of financial
information in our experience, relate to, and consider equally important as a source of information,
the statement of financial position and the statement of operations.
Within the constraints identified
earlier, we found much more useful the concepts surrounding "recipient driven" or "transferor
driven", as well as the specific discussions to clarify precedent "eligibility" from subsequent
"conditions".
In addition, the guidance proposed for freeing the public sector from "symmetrical
accounting" is entirely salutary.
The particular concept that is most useful in thinking about governments, is that accounting follows
a legislative authority that typically has a short term mandate, and must annually vote all expense,
and consider annual taxation revenue.
This is not to argue for the "revenue/expense" viewpoint, but
to note that this accountability is better served by giving effect to the actions done by that
government within its accountability timeframe, as far as GAAP allows.
All actions would affect
both the financial position and the operations result.
Also, when exploring this concept, if you look only to what one government itself can do re:
expenses and annual taxation revenue, you ignore the impact that other levels of government may
have on the bottom line of that government through provision of non routine transfers.
We would confirm also that the time requirements commentary, pp.26 of the issues paper, clearly
points out the impracticality of including a grantor's spending conditions regarding recipient
spending as eligibility requirements or having the recipient accounting treatment imposed upon the
grantor.
We concur that, unless the transfer is a transfer under a shared cost agreement, or an
exception below, stipulations about timing and purpose of spending render the transfer a conditional
grant.
Advance payment under these circumstances only affects the recipient accounting, but would
not be a prepaid on the books of the transferor.
Notwithstanding the above, we believe that the SOP takes a black and white, "either or" viewpoint,
which ignores the complexity and cross subsidization of governments.
It could benefit, as
mentioned earlier, by incorporating greater flexibility in allowable deferrals of revenue recognition
for the recipient where the grants relate to future expenditures, where they relate to the acquisition
of controlled fixed assets, or where they relate to term funding agreements between the public and
private sector.
These indicate a reasonable accounting alternative as a prepaid or deferred asset.
We suggest reasons why these need not create difficulty with the basis of distinction and rationale
in the SOP.
Exceptions:
Multi Year Funding:
The controversy surrounding the multi-year funding issue is well described in the Issues Paper pp.
19.
It is our belief that there must be flexibility available to both the donor and recipient of transfers
to arrange their affairs so that accounting for the transfers best reflects their intentions and supports
their ability to manage their own bottom line(s).
This flexibility should not support differing
expenditure or revenue recognition from one year to the next for the same type of transfer by the
same donor or recipient.
The flexibility is required, at a minimum, to acknowledge the complex
nature of government transfers, particularly government-to-government transfers.
Province of British Columbia
Response to Statement of Principles: Government Transfers
CICA Public Sector Accounting Board
Since the intention of the donor may be different from the recipient, it is appropriate that there
would not necessarily be symmetry between the two.
In the current health-funding situation, the
federal government wants to flow non-routine grants out all at once (probably as a 2002/03
expense).
The federal government has set up trust funds that allow provinces to draw down their
share of the funds as they choose over the next 3 years.
The province's expenses that are to be
funded from these federal transfers may not follow that three-year funding pattern.
Normally
governments can only defer revenue if there are external restrictions on the use of transfers but the
federal government wants to recognize the contribution now and does not want to compromise its
ability to do so by putting too definitive of restrictions on the funds.
Provincial governments may
find that, for accounting purposes, they have to recognize revenue now that directly relates to future
years' expenses.
Since receipt of the funds does not trigger a liability, expenses may not be
recorded in the same year as the revenue is received.
This offends the matching principle, as these
are special purpose transfers not regular tax transfers.
Following existing accounting rules could
force governments not to meet their legislated balance budget bottom lines due to timing differences
between receipt and expenditures for these special purpose transfers.
It is critical that GAAP
facilitate sound management of government bottom lines in order to ensure acceptance of the
guidance.
More flexibility (guided by sound principles), not less flexibility, is desirable.
Prepaid Capital Advances (PCAs):
PSAB, in recent years, has made a big move to full accrual accounting and in so doing recognized
the need to report the volume and nature of Tangible Capital Assets (TCAs) used in government.
This further move away from the cash basis of accounting is to be lauded.
It is now appropriate to
move another step further and look at the recognition of transfer payments that relate to acquisition
of TCAs where the jurisdiction making the grant has an on-going ownership interest (residual asset
ownership interest) in the underlying asset to be purchased with the grant.
The province of British Columbia records PCAs for tangible capital asset purchases of Schools,
Universities, Colleges and Hospitals (SUCH) that are funded by the province.
The PCA is funded
as a financing transaction and then amortization (based on the useful life of the underlying asset) is
charged to operations each year.
We believe that the deferral and amortization of these grants is
appropriate because the grant is for a provincially mandated program, the grants are material in
nature, the TCAs purchased are amortized by the agency on a similar basis, and there are
restrictions placed on the assets use, sale and disposition (the SUCH sector entities cannot dispose
of the asset without getting the province's approval).
We propose exception to the general rule concerning deferral/prepaid of transfers on the books of
the donor for the case of grants to acquire capital assets.
Government's role in funding education
and health infrastructure, and other public assets outside or inside the government reporting entity,
includes both funding, then maintaining an interest in the title to, and usage of, those assets.
In
other words, these assets cannot be used for any alternate purpose without having permission or
repayment recourse to the grantor.
Effectively, this means that the conditions of the grant are not
fulfilled merely by the acquisition of the asset, but would only be fulfilled as the asset so acquired is
Province of British Columbia
Response to Statement of Principles: Government Transfers
CICA Public Sector Accounting Board
applied to use.
Thus the conditions would not be fulfilled until the asset is depreciated or
amortized.
In this case it would be appropriate for the donor to record the contribution as an asset,
and amortize it over the same period as is the related acquired asset.
The recipient would defer the revenue received for the asset and amortize it over the same term and
rate as the asset.
This accounting is proposed, not for reasons of matching revenue and expense, but to follow the
rules of condition regarding the original transfer, namely to complete the "use" of the asset
according to the fixed asset purpose stated.
This accounting would be an exception to the simple
"on/off" eligibility rules as described in the SOP, but would not be considered to be breaking those
rules.
It could be viewed as an extension of eligibility over time, because of the nature of fixed
assets under donor control, and be a special circumstance.
British Columbia Situation: As with other provinces, our practices have followed the present
guidelines, with the exception noted above.
At present, the SUCH sector is outside the reporting
entity, but will be included in 2004/05.
Their infrastructure has been funded largely by PCAs, a
special type of government transfer that is a non-financial prepaid amount on the Statement of
Financial Position.
These amounts will be eliminated on consolidation of the enlarged entity in
2004/05.
If the universities sector was to be excluded from the government reporting entity, we
would want to continue reporting PCAs paid to universities.
At this time there is no intention to
expand PCAs outside the SUCH sector although that expansion could be conceivable in the future.
Shared cost agreements -
Other prepaid amounts to private sector, not for profit enterprises or
other levels of government
We have a problem with the statement that says whenever a shared cost agreement, which is
properly classified and is operating as a reimbursement, is pre-paid, that this causes the nature of the
transfer to become a conditional grant.
This is not a workable decision.
Under contractual shared
cost agreements where re-qualification of the recipient occurs after each billing or review and
certainly annually, there may be payables or receivables related to such contracts at the end of
accounting periods.
If there happens to be a short term pre-payment, this should not be considered
grounds to convert the agreement to a conditional grant.
(Please see comment under .70/.71.)
We
think it is important to clarify this part of the guidance to make it clear that accounting rules should
not change the effective practices of contract management that are used in an organization.
The advantage of the SOP is that a government's liabilities will be correctly stated.
This is
congruent with the innate accountability that exists for any legislative body and ensures that another
government will not have to account for past transfer decisions.
This outcome is consistent with the
current broad interest in accountability.
Finally, it is proposed that a new category of government transfer be created to include long term
performance based arrangements.
This category would permit the deferral or prepayment of a
transfer in the special circumstance where it is intended by the donor, and agreed by the recipient,
that it is a multi-year funding mechanism.
Where the intent is clear, and the wording of an
agreement determines that a pre funding arrangement or deal is made such as in a business
partnership agreement or similar arrangement, the funding paid in advance in these circumstances
Province of British Columbia
Response to Statement of Principles: Government Transfers
CICA Public Sector Accounting Board
would not be considered a conditional grant, but would be prepaid and amortized over the agreed
upon term that the funding is to cover.
This type of transfer would not create the impractical
problems related to the demand that the donor account for the transfer on the basis of the recipient
accounting, but would allocate the funding over the term agreed to at inception.
We feel that this
category of grant is necessary to adapt to new and changing relationships between the public and
private sector, yet we agree that fully symmetrical accounting for prepaid grants is not practical or
desirable.
Hence, the simpler solution of the donor expensing the prepaid amount over the term of
the agreement, regardless of how the recipient spends or utilizes the funds.
Specific Items
PS 3410.01/02
It is important to note that the guidance clearly concerns non-exchange transactions, government
transfers, to entities and individuals external to the government reporting entity.
Note also that non-
monetary transfers such as transfers of natural resources, rights, investments and physical assets
continue to be excluded from this guidance and from the definition of Government Transfers.
PS 3410.01/02
Further to our comments submitted for the SOP on Liabilities, Contingent Liabilities and
Commitments, we would mention again that the new descriptions for present obligations that now
include "valid expectation" or "detrimental reliance", and include "when a government has indicated
to other parties that it will accept certain responsibilities", which in turn may create what is
described in this document as "in substance authorizations", will open a pandora's box of new and
difficult situations.
This kind of terminology provides new opportunities for persons or entities in
the way of litigation to obtain advantage or benefit from a government that may not be due.
We note that there are descriptions that try to hedge the guidance and make it clear and restrictive,
however it may tend to facilitate an environment that encourages hasty decision making and
improperly thought out programs.
In the world of political statements by government members, in a
world where a government may have provided a mining licence, therefore becomes "in substance"
responsible for environmental pollution, terminology such as valid expectation and detrimental
reliance should not be used.
We feel the dividing line should be drawn much more closely to the legal liability line, rather than
"in substance authorization" to ensure that where government accountants may be reasonable, that
the clients of governments may also be encouraged to be reasonable.
Where governments have
indicated publicly their intention to create a transfer or a liability in a year, and the change requires
legislation that due to legislative calendars was not passed before the fiscal year end, then before the
sign off of the financial results for the year, we believe it is appropriate to record and reflect the
intended action in the fiscal year the decision was made, notwithstanding the small delay in
legislation.
PS 3410.08
Well said and agreed.
Province of British Columbia
Response to Statement of Principles: Government Transfers
CICA Public Sector Accounting Board
PS 3410.09
We understand the argument that the revenue expense matching principle does not apply to
government in this case because we are dealing with a non-exchange transaction.
A corollary to
this exception is that because government transfers by definition do not provide goods or services
directly in return, then there can be no applicability to the matching of expense to "services
received" or value returned over time, as would be the case in an exchange transaction.
The simple
fact is that all government transfers provide a future benefit to the province and the recipient, but
there is no practical way that accounting can record in the present, this future value (again, some
opinion to the contrary).
However, we do have concerns that intergovernmental special purpose
transfers may need to be looked at differently for the recipient government.
The recipient
government is bound to perform future services for which it received the transfer.
Is it appropriate
to inflate current year revenue knowing that future costs must be incurred to deliver the special
purpose result?
Is this not contrary to the conservatism principal?
However, when special purpose funds are transferred from one government entity to another, and
the donor requires future delivery of services e.g. The special purpose health funding descriped
earlier, the accounting should follow the more conservative approach and delay revenue recognition
by the recipient until the expenses related to that transaction are made.
There is no need to defer the
expense of the donor.
The principle is that a government has taken money under the expectation
that it will deliver a service in the future.
For the recipient this supports both principles of
conservation and matching.
For the donor, where there are no further approvals required, it can be
recognized as expense, allowing both entities to report the transaction appropriately, but not
necessarily requiring symmetry.
The last two sentences of this paragraph should be omitted.
It is inaccurate to state that "Revenues
and expenses or expenditures, and therefore operating results for an accounting period, result only
from changes in assets and liabilities".
The accounting measurement of the business activity of any
entity is an arbitrary means of communicating complex and intertwined financial transactions.
It is
facile to say that results only proceed from one measurement of this activity.
The split between the
"asset and liability" versus the "revenue and expense" emphasis is a dead end argument that does
not help the guidance.
PS 3410.13
This paragraph is unnecessary and redundant after .12, and overstates the case.
We suggest its
removal.
PS 3410.17/18
These are clear and well expressed.
We have been applying the eligibility criteria in this way, and
ensuring broad understanding of the control and discretion of the transferring government, with the
exceptions described previously in this document.
Also, the comments on commitment disclosure
are also agreeable.
PS 3410.28
We have difficulty with the first sentence of this paragraph.
While in .29 it states that professional
judgement is necessary in determining when "in substance authorization" has occurred, .28 contains
the sentence "However, where details of a proposed new law have yet to be finalized, evidence of
Province of British Columbia
Response to Statement of Principles: Government Transfers
CICA Public Sector Accounting Board
"in substance authorization" of the transfer would, all other recognition criteria being met, require
recognition of a liability or an asset."
We find this sentence unclear.
PS 3410.35
It is clear that in this section and the related sections, that extensive wording is necessary to explain
and contain the concept of "in substance authorization".
If there is a firm intention to use this
concept for accounting purposes, then this section .35 appears to extend the limits to a concept that
needs to be severely limited.
The inclusion of these items that accountants and administrators are to
use for "evidence" that a valid expectation have been created, will be in turn used by claimants
against governments to the detriment of the government's ability to obtain a fair result.
We believe
that the terminology "valid expectation" and "detrimental reliance" should be omitted for the same
reason that disclosure of amounts regarding legal cases in progress might prejudice the fair
outcome.
PS 3410.37
This section makes clearer the meaning of the recognition timing criteria wording "in the period that
the events giving rise to the transfer occurred".
We agree that stub period events such as final
approvals would not affect the reporting date qualification.
PS 3410.38 to 43
These sections are the most useful addition to the quidance.
The only realm of discussion or
confusion that we experienced repeatedly in the application of the old 3410 concerned the
understanding of the "on" or "off" condition of eligibility.
Its application clear when it is
understood to be the key event before the transfer decision is made, while conditions are
subsequent.
Again, for multi-year funding, special conditions, or prepaids noted above, then the
eligibility criteria would still be applied in an orderly way, over time.
PS 3410.70/.71
Some further clarity is needed concerning the last sentence of this paragraph.
We suggest the
wording "if a government chooses to pay a shared cost agreement a year or years in advance before
the recipient…".
The reason for this change is that many shared cost contracts are funded by the
use of averaged or approximate payments by month or quarter to ensure the solvency of the
recipient and efficient provision of services to the public.
There may be minor prepayments or
underpayments, but a prepayment in these types of circumstances should not trigger a change in the
accounting treatment of the transfer.
Upon eligibility tests monthly or quarterly subsequent, any
over or under is adjusted through subsequent instalments of the transfer.
This should not convert
the accounting to that of a conditional grant.
This is not completely clear in paragraph .70, and the
.71 wording is much oversimplified , leaving too much room for mis-interpretation.
PS 3410.75
A much desired clarification of the use of the words discretionary and non-discretionary,
confirming that this distinction does not have an effect on recognition by the transferring
government.
We are still overcoming some of the confusion about the use of these "old" grant
words as against the new emphasis on eligibility.
The "discretion" of the transferor remains intact
until the essentially irrevocable decision is made and the transfer becomes a liability.
Once the
Province of British Columbia
Response to Statement of Principles: Government Transfers
CICA Public Sector Accounting Board
discretion of the transferor has been exercised, then the transfer would be in a class with
entitlements triggered by eligibility, and be non-discretionary.
PS 3410.76/.77/.78
Agreed, in particular the point that it is not necessary for the transferor to specifically identify the
recipients at the reporting date in order to have a liability.
Paragraph .78 is very helpful to sort out
for recipients which circumstances require recognition, and which require only a note or a
subsequent event mention.
PS 3410.81
Again, the timing of the use of a transfer by a recipient does not affect the timing of the expense of
the transferor, eligibility being met and subsequent conditions being accepted.
The recipient would
assess the conditions to evaluate the restrictions that would determine the accounting, as described
above.