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CICA Research Report Principal Author: Terry Christie May 2009

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Page 1: Accrual in Canada

CICAResearchReport

Principal Author: Terry ChristieMay 2009

Page 2: Accrual in Canada

Notice to ReaderThe Knowledge Development Group of the Canadian Institute of Chartered Accountants (CICA) commissioned this Research Report as part of its continuing research program. The views and conclusions expressed in this publication are those of the principal author. They have not been adopted, endorsed, approved, disapproved or otherwise acted upon by a Board, Committee, the governing body or membership of the CICA or any provincial Institute/Ordre.

The CICA research reportAccrual Budgeting by Canadian Federal, Provincial and Territorial Governments

is available on the Internet (www.cica.ca).

Library and Archives Canada Cataloguing in PublicationChristie, Terry, 1947-

Accrual budgeting by Canadian federal, provincial and territorial governments / principal author, Terry Christie.

Includes bibliographical references.ISBN 978-1-55385-437-1

1. Accrual basis accounting--Canada. 2. Finance, Public--Canada--Accounting. 3. Budget--Canada.I. Canadian Institute of Chartered Accountants II. Title.

HJ9921.C465 2009 657’.83500971 C2009-904418-8

Copyright ©2009The Canadian Institute of Chartered Accountants277 Wellington Street WestToronto, CanadaM5V 3H2

Printed in CanadaDisponible en français

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Accrual Budgeting by Canadian Federal, Provincial and Territorial Governments

Principal Author: Terry Christie

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OTHER RESEARCH REPORTS AND RESEARCH STUDIES* Limited Audit Engagements and the Expression of Negative Assurance (1980)* Extent of Audit Testing (1980)* Accounting for Pension Costs and Liabilities (1980)* Analytical Review (1983)* Accounting for Portfolio Investments (1984) Financial Statements for Pension Plan Participants (1984)* Pension Plan Auditing (1984)* Financial Reporting by Credit Unions (1984)* Materiality: the Concept and its Application to Auditing (1985)* Local Government Financial Reporting (1985)* Accounting and Financial Reporting by Agricultural Producers (1986)* Accounting and Reporting by Venture Capital Organizations (1987)* Professional Judgment in Financial Reporting (1988)* Incorporating the Time Value of Money within Financial Accounting (1988)* Accounting and Financial Reporting by Junior Mining Companies (1988)* Accounting and Reporting Physical Assets by Governments (1989)* The Financial Statement Presentation of Corporate Financing Activities (1989) Approaches to Dealing with Risk and Uncertainty (1990) Reporting the Effects of Changing Prices: A Review of the Experience with Section 4510 (1990) The “Going Concern” Assumption: Accounting and Auditing Implications (1991) Interim Financial Reporting: A Continuous Process (1991)* Information to be Included in the Annual Report to Shareholders (1991)* Value-for-Money Audit Evidence (1991) Environmental Auditing and the Role of the Accounting Profession (1992)* Financial Reporting for Segments (1992) Environmental Costs and Liabilities: Accounting and Financial Reporting Issues (1993) Using Ratios and Graphics in Financial Reporting (1993) Professional Judgment and the Auditor (1995) Accounting and Reporting for Enterprises in the Development Stage (1996) Financial Reporting by Canadian School Boards (1996) Indicators of Government Financial Condition (1997) Financial Reporting by Investment Funds (1997) Full Cost Accounting from an Environmental Perspective (1997) Costing Government Services for Improved Performance Measurement and Accountability (1999) Continuous Auditing (1999) Financial Reporting by Small Business Enterprises (1999)* The Impact of Technology on Financial and Business Reporting (1999) Use of Specialists in Assurance Engagements (2000) Assessing Risks & Controls of Investment Funds (2000) Audit Enquiry: Seeking More Reliable Evidence from Audit Enquiry (2000) Financial Reporting by Rate-Regulated Enterprises (2002) Accounting for Infrastructure in the Public Sector (2002) Electronic Audit Evidence (2003) Stakeholder Relationships, Social Capital & Business Value (2003) Accounting Bases Used in Canadian Government Budgeting (2004)* Electronic Filing and Reporting: Emerging Technologies and Their Implications (2005) Secure IT Infrastructure for E-commerce (2005)* Interactive Data — Building XBRL Into Accounting Information Systems (2007)* Corporate Reporting to Stakeholders (2008) Using Graphics in Corporate Reporting (2008)

*Research Study

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In 2004, the Canadian Institute of Chartered Accoun-tants (CICA) published the Research Report Accounting Bases Used in Canadian Government Budgeting. That report surveyed the accounting standards Canada’s senior governments then used in budgets and appropria-tions documents and compared them to those adopted for summary financial statements. The publication prompted many government budgeting officials to ask for further research on accrual budgeting issues. In response, the CICA commissioned a series of discussion papers, leading up to this overall CICA research report, Accrual Budgeting by Canadian Federal, Provincial and Territorial Governments.

The objective of this Research Report is to address current issues Canadian federal, provincial, and territorial governments need to deal with when preparing appropriations documents (appropriations/estimates) and accrual-based budget documents, including the reconciliation of budgets to financial statements to prepare the budget to actual comparisons required by the CICA Public Sector Accounting Handbook.

The CICA expresses its appreciation to Terry Christie, the principal author of this Research Report. A special thank you is extended to all respondents to the 2008 workshop survey questionnaire on the current status and future outlook of accrual budgeting by governments across Canada. The advice provided by members of the Government Accrual Budgeting Advisory Group, who are listed on the next page, is also appreciated, as is the CICA staff support by J. Paul-Émile Roy, CA, who directed the project and assisted in drafting the report.

The views expressed in this report are those of the prin-cipal author. They are intended to stimulate thought, discussion and debate. Feedback and comments are welcome and should be addressed to J. Paul-Émile Roy, CA ([email protected]).

Toronto, May 2009 CICA Research Studies

FOREWORD

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GOVERNMENT ACCRUAL BUDGETINGADVISORY GROUP

Bill Hogg, CA (Chair)Consultant, Halifax(retired, formerly Deputy Minister of Finance, Province of Nova Scotia)

Bruce Bennett, CAOntario Treasury Board Office, Toronto

Terry ChristieConsultant, Fredericton(retired, formerly Department of Finance, Province of New Brunswick)

Diana Eisenhauer, FCGANova Scotia Treasury and Policy Board, Halifax

Doug Lynkowski, CAAlberta Treasury Board Ministry, Edmonton

Kim MacPherson, CANew Brunswick Office of the Comptroller, Fredericton

Martin Rodrigue, CAMinistère des Finances (Quebec), Quebec City

Ken WheatTreasury Board of Canada, Secretariat, Ottawa

Debra WoodgateManitoba Civil Service Commission, Winnipeg(formerly Treasury Board Secretariat)

CICA STAFF

J. Paul-Émile Roy, CAPrincipal, Research Studies DepartmentKnowledge Development Group

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TABLE OF CONTENTS

Page

Chapter 1INTRODUCTION .................................................................................................................................................... 3

BACKGROUND.................................................................................................................................................................................... 3ADDRESSING ACCRUAL BUDGETING ISSUES ................................................................................................................... 4PURPOSE AND APPROACH TO THIS RESEARCH REPORT ......................................................................................... 5

Chapter 2ABOUT ACCRUAL BUDGETING ....................................................................................................................... 9

INTRODUCTION ................................................................................................................................................................................. 9BASES OF ACCOUNTING FOR SENIOR GOVERNMENTS ............................................................................................. 9IMPACT OF INTERNATIONAL STANDARDS ......................................................................................................................... 10IMPACT OF THE PRIVATE SECTOR .......................................................................................................................................... 11EVENTS LEADING TO THE ADOPTION OF ACCRUALS ................................................................................................ 12ACCOUNTING STANDARDS ........................................................................................................................................................ 13BUDGETING DOCUMENTS ........................................................................................................................................................... 14CONCLUSION ...................................................................................................................................................................................... 16

Chapter 3ACCOUNTABILITY FOR FINANCIAL MANAGEMENT ................................................................................ 19

INTRODUCTION ................................................................................................................................................................................. 19LEGISLATIVE ACCOUNTABILITY FOUNDATIONS ............................................................................................................ 19SUMMARY BUDGETS, ESTIMATES, AND APPROPRIATIONS ..................................................................................... 22GOVERNMENT BUDGETING ENTITY ....................................................................................................................................... 23

Method of Accounting ............................................................................................................................................................................ 23Impact of Full-Accrual Accounting ................................................................................................................................................. 24Transition to International Financial Reporting Standards (IFRS) ................................................................................. 24

LEGISLATORS AND THE PUBLIC............................................................................................................................................... 25ACCRUALS AND THE BOTTOM LINE ...................................................................................................................................... 26CONCLUSION ...................................................................................................................................................................................... 28

Chapter 4BUDGET TRANSPARENCY ................................................................................................................................ 29

INTRODUCTION ................................................................................................................................................................................. 29LEGISLATION AND POLICIES .................................................................................................................................................... 29CONCLUSION ...................................................................................................................................................................................... 31

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Page

Chapter 5ACCRUAL-BASED DECISION MAKING .......................................................................................................... 33

INTRODUCTION ................................................................................................................................................................................. 33FUNDAMENTALS OF BUDGET DECISION MAKING ......................................................................................................... 33CAPITAL BUDGET DECISIONS ................................................................................................................................................... 34OTHER DECISIONS AFFECTED BY ACCRUALS ................................................................................................................. 35PROGRAM MANAGEMENT ........................................................................................................................................................... 36CONCLUSION ...................................................................................................................................................................................... 37

Chapter 6ACCRUAL BUDGETING ISSUES ....................................................................................................................... 39

INTRODUCTION ................................................................................................................................................................................. 39PERFORMANCE AND BUDGETING ACCOUNTABILITY ................................................................................................. 39SERVICE DELIVERY OPTIONS .................................................................................................................................................... 40INTERNATIONAL PRACTICES ..................................................................................................................................................... 41FUTURE RESEARCH NEEDS ........................................................................................................................................................ 42CONCLUSION ...................................................................................................................................................................................... 43

Chapter 7FUTURE CHALLENGES FOR ACCRUAL BUDGETING ............................................................................... 45

INTRODUCTION ................................................................................................................................................................................. 45ACCRUAL BUDGETING CHALLENGES ................................................................................................................................... 45

Legislative Authority ................................................................................................................................................................................ 45Budgeting Entity ........................................................................................................................................................................................ 46Capital Assets .............................................................................................................................................................................................. 47Communications ........................................................................................................................................................................................ 47Innovative Decision Making.................................................................................................................................................................. 49

CONCLUSION ...................................................................................................................................................................................... 50

Appendix AOBJECTIVE AND TERMS OF REFERENCE ................................................................................................... 51

Appendix BGOVERNMENT BUDGETING WORKSHOP QUESTIONNAIRE ................................................................ 53

Appendix CGOVERNMENT BUDGETING WORKSHOP — SURVEY RESULTS ............................................................ 59

Appendix DLISTING OF LEGISLATION ................................................................................................................................. 69

GLOSSARY .............................................................................................................................................................. 71

SELECTED BIBLIOGRAPHY .............................................................................................................................. 75

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1

EXECUTIVE OVERVIEW

Budgeting is considered to be the most important process in government financial management as it ensures that policies are translated into concrete programs by allocating resources to meet the goals and aspirations of the public. It is a political process resulting in documents such as summary budgets, estimates and appropriations. These documents permit budgeting decisions to be communicated effectively, hold the government accountable for those decisions and form the foundation for legislative approval and administrative control.

Government financial management systems have, over the years, been influenced by the economy, the evolution of such systems in the private sector and international developments. Within this context, there has been nothing more far reaching, nor had greater impact, than the adoption of accrual-based accounting and the intro-duction of accountability and transparency obligations.

In fact, the adoption of full-accrual accounting as the standard for financial reporting was the impetus for the introduction of accruals into budgeting practices. An “accounting gap” has, however, appeared between what is actually reported in financial statements and what was in the original budgets. The issues associated with this gap now require urgent attention from senior governments and standard setters.

In recent years, governments introduced statutory obli-gations and policies intended to hold them accountable and ensure transparency for financial decisions flowing from the budgeting process. To meet those goals, governments amended financial administration acts or introduced new legislation on topics such as balanced

budgets, fiscal accountability and transparency and debt management/reduction. Senior governments have little in common, however, when it comes to approaches to and content of such commitments, with most laws, regulations and policies aimed at meeting the needs of a particular jurisdiction.

Over the past decade, governments have made good progress toward balancing budgets, reducing debt and implementing solid foundations for ensuring account-ability and transparency. The results have shown a steady improvement in financial health and overall optimism centered on the continuation of meeting the needs of the public while maintaining a fiscal philosophy of “living within our means.”

Unfortunately, heading into the next several years, a great deal of this optimism has been tempered by recent economic events and the resulting challenges of meeting statutory commitments to balanced budgets and to manage/reduce debt. Time will show that the true test of these obligations is not their effectiveness during periods of economic growth but, rather, how effective they are during economic downturns.

The new challenges have put the future role of accrual budgeting into question. Some jurisdictions will continue to view accruals as an accounting exercise, a requirement to be followed for the preparation of financial statements. Accruals will, however, have little impact on their decision making or budgeting practices. Other jurisdictions will use accruals as a budget plan-ning tool to provide increased information, options and opportunities to address fiscal issues. Which jurisdic-tions will be better positioned to meet the challenges of future years is a matter for history to determine.

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Chapter 1

INTRODUCTION

BACKGROUNDBudget documents connect government policies with the resources necessary to achieve accountability and transparency objectives. Therefore, the budget can be considered the main source for ensuring that governments wisely spend money raised through taxation and meet the goals intended through their expenditures. No other legislative document has such authority, which is why legislators, the press and the public pay so much attention to government budgets.

The government budgeting community recognizes the importance of having congruence in their budgeting and reporting documents and are working toward the adoption of similar accounting policies or reconcilia-tion features that tie the two together. For a number of years, budgeting officials have had an opportunity to reflect on the accounting bases used for financial reporting purposes. They have expressed their opinions on changes to accounting standards and have made an effort to keep up to date on changing accounting practices both within Canada and internationally.

In 2003, the Canadian Institute of Chartered Accoun-tants (CICA) acknowledged the need for research in accounting for budgeting purposes. More specifically, the CICA wanted to analyze the impact of a new finan-cial reporting model scheduled for implementation on or before April 2005. Central to this new model was the transformation of government reporting based on modified accrual accounting to a full-accrual approach. For most jurisdictions, this meant the full recognition of non-financial assets (capital) and the adoption of capi-talization principles for financial reporting purposes.

Of additional significance under the new reporting model was the requirement to compare actual and

budgeted results. For such comparisons, the planned results were to be presented for the same scope of activi-ties and on a basis consistent with those used for actual results (see CICA Public Sector Accounting Handbook, Section PS 1200, for more detail).

This requirement is the driving force for most of the accrual budgeting issues that have developed over the past several years, such as those related to the govern-ment budgeting entity and government transfers. It gives credence to the belief that reporting rules do not always lend themselves to accountability and transpar-ency within budgetary documents.

With this in mind, the CICA, through the Public Sector Accounting Board (PSAB), commissioned the Research Report Accounting Bases Used in Canadian Government Budgeting, which was published in December 2004. This report presents a comprehensive review of senior government budgeting practices, providing information on the accounting relationships between budgeting and financial reporting documents.

It also outlines the scope of pertinent legislation in place at the time and identifies then-current budgeting initiatives. Essentially, the report provided an overview of the current status of accounting practices followed by Canada’s 14 federal, provincial and territorial juris-dictions, with particular emphasis on the features that influence the adoption of full-accrual accounting.

To provide input for that report, all 14 jurisdictions were surveyed, and their budgeting officials interviewed, to ensure the accuracy and relevance of the information collected. Of importance, a number of accrual-based budgeting issues surfaced, with officials suggesting the need for additional research beyond the scope of the

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Accrual Budgeting by Canadian Federal, Provincial and Territorial Governments

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report. Members of the Study Group overseeing the research and preparation of the report shared that view, and proposed a two-year comprehensive review of major accrual issues facing the budgeting community.

ADDRESSING ACCRUAL BUDGETING ISSUESIn November 2005, the CICA commissioned a formal research project to address accrual issues in Canadian government budgeting and approved a draft proposal with accompanying terms of reference (see Appendix A). A Government Accrual Budgeting Advisory Group, comprising current and former senior budgeting officials from across Canada, was established to provide guidance during the various stages of the project.

For purposes of the research project, the budgeting community was canvassed to ensure that all key issues would be addressed, including:

symmetry between budgeting documents and •financial statements;accounting for tangible capital assets;•government budgeting entity and consolidation;•the legislative accountability framework;•government transfers;•environmental liabilities;•public/private partnerships;•First Nations settlements.•

It was acknowledged that it would be impossible to have the project address all of these priorities and it was decided that certain topics would be analyzed in Discussion Papers prior to the preparation of the Research Report.

In June 2006, the CICA published two Discussion Papers: Links between the Budget and the Estimates and Accounting for Tangible Capital Assets. In December 2007, two more Discussion Papers were published: Defining and Accounting for the Government Budgeting

Entity and Legislative Accountability Framework for Preparing Government Budgets and Estimates.

The CICA considered preparing a fifth Discussion Paper on government transfers, but opted not to go ahead because the pertinent accounting standards were about to change. It also chose not to review the impact of envi-ronmental liabilities on accrual budgeting because those accounting standards, too, were about to be revised.

The four Discussion Papers provide a detailed analysis of the top priorities identified and examine the various approaches adopted across Canada for introducing accruals into budgeting practices. The major observa-tions found in each discussion paper can be summa-rized as follows:

Links between the Budget and the Estimates1. The summary budget and the estimates serve y

different purposes.Accruals have created a new way of thinking for y

most governments when they prepare their budget documents.The adoption of accrual budgeting practices has y

resulted in various formats for the presentation of summary budgets and estimates.The government budgeting entity and the basis of y

consolidation play a major role in the presentation of budgets.Documents prepared by the government allow y

readers to make appropriate links between the summary budget and the estimates.

Accounting for Tangible Capital Assets (TCA)2. Senior governments have adopted TCA policies y

and practices that meet their own particular needs, making it very difficult to compare results among different jurisdictions.Accrual information has had minor impact on y

capital decision making.

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Introduction

5

Public understanding of budgeting has been y

affected by the adoption of full-accrual account-ing.

Defining and Accounting for the Government 3. Budgeting Entity

Accountability is a major consideration when y

defining a government’s budgeting entity.Jurisdictions meet their own individual needs y

when determining which organizations and enterprises will be included in the summary budget and estimates.Several jurisdictions have found that their most y

pressing concern is deciding which accounting method to use for organizations and enterprises that will be included in the government budget-ing entity.

Legislative Accountability Framework for 4. Preparing Government Budgets and Estimates

All senior governments have legislative frame- y

works to govern the preparation of budgets and estimates. Most frameworks have been developed to meet the specific needs of individual jurisdic-tions.Statutory obligations have not played a significant y

role in the adoption of accruals. Most jurisdictions rely on policy and practice for guidance.Accountability and transparency commitments y

have become a major feature of the budget devel-opment and communication processes.

The above-noted observations are supported by the indi-vidual survey results presented in the Discussion Papers. Those papers are referenced in this Research Report but the actual data is not repeated. To gain an overall appreciation for the subject matter and supporting documentation, readers should review those discussion papers together with applicable sections of this Report.

PURPOSE AND APPROACH TO THIS RESEARCH REPORTThis Research Report aims to address current issues faced by Canadian federal, provincial and territo-rial governments when they prepare appropriations documents (appropriations/estimates) and accrual-based budget documents, including how budgets are reconciled to financial statements to provide the budget-to-actual comparisons required by the CICA Public Sector Accounting Handbook.

Although this purpose appears to be technical in nature (comparing budgeting documents and their level of symmetry with financial statements), the scope of the review was broadened to also examine the rationale adopted for the presentation of budget material and to address the needs associated with increased government accountability and transparency.

With this objective in mind, it was determined that the Report would concentrate on highlighting the observa-tions found in the Discussion Papers, provide a status report on the adoption of budgetary accountability and transparency practices, comment on current and emerging accrual budgeting issues and provide options for addressing future budgeting issues of interest to senior governments.

The Research Report is divided into the following chapters:

Chapter 2 — About Accrual Budgeting provides a basic definition and a brief description of events leading up to the introduction of accrual-based budgeting practices. It reviews the rationale for the adoption of practices that are distinctly different from those in the private sector and comments on accounting standards that have an impact on the development of budgeting documents. Of importance, it sets out the benefits

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Accrual Budgeting by Canadian Federal, Provincial and Territorial Governments

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and drawbacks of accrual budgeting and provides a transition to the remaining chapters of the Report.

Chapter 3 — Accountability for Financial Manage-ment reviews the meaning of accountability, moves to a legislative framework that obligates this responsibil-ity and comments on the impact it has on budgeting documents. In addition, it examines accountability regarding the government budgeting entity and looks at the overall needs of both legislators and the public. Finally, the chapter reviews the impact accrual budget-ing has had on government bottom lines and comments on the relationship between annual results and debt.

Chapter 4 — Budget Transparency looks at what constitutes “budget transparency” and then describes several statutory obligations on transparency. It concludes with a discussion of major issues that have evolved and comments on future direction.

Chapter 5 — Accrual-Based Decision Making examines the impact of accruals on decision making, particularly for capital assets, which is considered one of the most important aspects in determining the success of accrual budgeting. It also reviews the implications of accruals for program management and considers the future of accruals in decision-making processes.

Chapter 6 — Accrual Budgeting Issues considers the adoption of accrual budgeting practices and examines various emerging issues that require further research. It goes on to review two non-traditional budgeting issues, namely performance measurement/performance reporting and service delivery options, such as public/private partnerships. Because interna-tional experience plays a role in determining the future direction in Canada, the accounting practices adopted by other countries, especially Australia and New Zealand, are discussed.

Chapter 7 — Future Challenges for Accrual Budget-ing summarizes the various elements necessary to “look at the future” of accrual budgeting and comments on certain themes that will require attention over the next several years.

The research for this Report started with a comprehen-sive examination of the literature, including historical information on the introduction of accrual-based bud-geting in selected jurisdictions, studies conducted by independent and government-appointed sources and educational material published by the CICA, senior gov-ernments and international organizations. A listing of this literature is provided in the Selected Bibliography.

“…a wealth of information and opinions was collected during workshops held in Moncton, New Brunswick, Edmonton, Alberta, and Toronto, Ontario in September and October 2008. Representatives of the budgeting and reporting communities from most of Canada’s jurisdictions attended, and the significant aspects of accrual-based budgeting and accountability were discussed at length.”

A national survey of senior governments across Canada was conducted and replies were received from all 14 juris-dictions. Many of the observations found in this Report flow from this survey and the other surveys undertaken to support the observations in the four Discussion Papers (the national survey questionnaire and survey results are set out in Appendix B and Appendix C).

In addition, all the legislation that establishes statutory obligations and/or policies governing accounting and budgeting practices was reviewed, with a special empha-sis on examining accountability and transparency provi-sions. Appendix D provides a listing of this legislation.

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Introduction

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Finally, a wealth of information and opinions was collected during workshops held in Moncton, New Brunswick, Edmonton, Alberta, and Toronto, Ontario in September and October 2008. Representatives of the budgeting and reporting communities from most of Canada’s jurisdictions attended, and the significant aspects of accrual-based budgeting and accountability were discussed at length.

Although the Glossary defines the terms used in this Report, the 14 jurisdictions have not agreed on a common usage of those terms. For example, consider the use of the word “legislature,” which the federal gov-ernment interprets to include parliament. That is not the case for provincial governments. Similarly, the term “department” may be interpreted to include ministries and other agencies/government organizations normally included within the consolidated revenue fund of most jurisdictions.

This document is a Research Report. The overall intention is to provide an educational tool for officials who are responsible for fiscal and budgeting activities within senior governments. In addition, elected officials and the media may benefit from the discussions contained in this Report.

Recognizing the various levels of accounting competency within the budgeting community and government in general, this Report tries to limit technical accounting terminology and, instead, discusses issues on the basis of current budgeting terminology and practices.

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Chapter 2

ABOUT ACCRUAL BUDGETING

INTRODUCTION

Budgeting is considered to be the most important process in government financial management because it translates policies into concrete programs. It is a political process, with budgeting documents providing the venues for effectively communicating a government’s intentions, holding the government accountable and forming the foundation for legislative approval and administrative control.

Over the years, government financial management systems have been influenced by the economy, the evolution of management systems in the private sector and international developments. The most far reaching development, however, has been the introduction of accrual accounting, especially as it relates to the prepa-ration of budgeting documents.

Clearly, the adoption of accrual accounting is not the result of a single standard-setting decision taken or a strategic direction chosen by a few jurisdictions. On the contrary, it has been generally acknowledged over a number of years that an accrual-based approach to recognizing and expensing liabilities as the associated obligations arose was a more suitable method than the historical cash accounting system that prevailed at the time. This became particularly apparent for certain areas such as retirement benefits and capital asset finan-cial administration.

This appreciation of accruals was, however, generally restricted to the reporting and auditing aspects of government financial management. It had not found similar acceptance in the budgeting community which saw the theoretical benefits of adopting accruals but felt it would be difficult to recommend changes to decision-making processes and budget documents without first

fully understanding the impact. The evaluation of that impact is a major part of this Report.

At the same time that governments were dealing with the potential adoption of accruals, they were also feeling the pressure to become more accountable and transpar-ent in their financial management practices. Over a number of years, governments had introduced statutory obligations and policy commitments that reflected this desire for a more open and accountable government. This Report will review the role accruals play in meeting such commitments.

“…Canada is not the only nation dealing with issues resulting from the introduction of accrual accounting. Internationally, there has been a wide range of experience, with several countries still struggling to maintain effective cash-based systems.”

Finally, Canada is not the only nation dealing with issues resulting from the introduction of accrual accounting. Internationally, there has been a wide range of experi-ence, with several countries still struggling to maintain effective cash-based systems while others have success-fully introduced accruals and are considered leaders in the evolution of accrual-based decision making and control. A review of these experiences has a role to play in the examination of the overall use and impact of accruals and will form part of this Report.

BASES OF ACCOUNTING FOR SENIOR GOVERNMENTSEvery financial management process establishes an “accounting structure” to provide a consistent approach to the recording of transactions and events. Essentially, most jurisdictions opt for one of two bases: cash or

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accrual. Variations of these two bases may be referred to as either “modified cash” or “modified accrual.”

The cash basis of accounting is defined as “a method of recording transactions by reflecting revenues and expenditures in the accounts in the period in which the related cash receipts or disbursements occur.”1 With this method, recognition occurs only when the cash (or its equivalent) is received or paid.

Budgeting on a cash basis would trigger a similar accounting event. That is, an amount would be recog-nized in the budget only if cash (or its equivalent) is expected to be received or disbursed during the budget year (normally the fiscal year).

Modified cash is a slight variation of cash accounting. For example, most jurisdictions following cash account-ing practices permit the recording of transactions within a fiscal year for events where cash is expected within a specified period of time (normally of short duration) following the end of that year.

The accrual basis of accounting is defined as: “a method of recording transactions by which revenues and expenses are reflected in the accounts of the period in which they are considered to have been earned and incurred, whether or not all transactions have been finally settled by the receipt or payment of cash or its equivalent.”2

Under this method of accounting, the obligation establishes the recognition rather than the actual flow of cash. This recognition becomes important when accounting for financial transactions related to capital stock, employee benefits (especially pensions, early retirement and other service related benefits), revenue

1 Financial Reporting by Governments (Toronto: CICA, 1980), pp. 4-7).

2 Financial Reporting by Governments (Toronto: CICA, 1980), pp. 4-7).

transfers, service of the debt, etc. Such transactions can greatly influence the results of any fiscal year.

Modified accrual is recognized as the basis of account-ing when accrual accounting is followed with certain exceptions. An example of modified accrual would be the method of accounting where all costs are recorded on an accrual basis with the exception of certain capital assets. Prior to the introduction of full-accrual account-ing, most senior governments tended to follow modified accrual accounting practices.

It is important to note that senior governments are sovereign in terms of accounting standards, policies and practices. In theory, this means each jurisdiction is governed by its own legislation and/or policies estab-lished to guide them through all aspects of financial management. In practice, however, governments in Canada have historically followed accounting principles consistent with domestic generally accepted accounting principles (GAAP), including the adoption of full-accrual accounting for preparing financial statements.

Since April 2005, full-accrual accounting has been the standard established by the CICA Public Sector Account-ing Handbook (PS Handbook) for senior governments and will become a similar standard for local govern-ments in 2009. Essentially, these standards are regarded as public sector GAAP. In this regard, terminology such as PS Handbook and GAAP are interchangeable.

IMPACT OF INTERNATIONAL STANDARDSIt is worth noting that international sources play a role in the development of accounting standards in Canada, and it will be interesting to see the impact of these standards on the public sector over the next several years. Publicly accountable enterprises (PAEs) will be required to file financial statements in accordance with International Financial Reporting Standards (IFRS)

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About Accrual Budgeting

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beginning on or before January 1, 2011.3 Since PSAB has deemed government business type organizations (GBTOs) and government business enterprises (GBEs) to be PAEs, they, too, will follow IFRS. It should be noted that PSAB gave notice (December 4, 2008) that this requirement will be reconsidered.

Although it is not contemplated that the majority of government organizations will be adopting IFRS in the near future, the International Public Sector Accounting Standards Board (IPSASB) recently concluded that: “Governments that already apply full accrual account-ing standards and apply accounting standards that are broadly consistent with IPSAS requirements [are]: Australia, Canada, New Zealand, United Kingdom and United States of America.”4

IMPACT OF THE PRIVATE SECTORWithout a doubt, private sector accounting practices have played a major role in governments moving toward adopting accrual-based accounting. Having been an accepted standard in the private sector for a number of years, the “spillover” effect into the public sector was inevitable.

Literature suggests that this was mainly encouraged by legislators and officials who had concluded that the commercial model could be modified to meet the needs of government, essentially creating a universal accounting standard across all sectors. This quest for uniformity, albeit a long-term goal, is perhaps one of the most contentious issues facing accounting in the public sector today, and will require a significant amount of attention over the next few years.

3 For information and resources on Canada’s transition to IFRS, including the comparison of IFRS to Canadian GAAP, visit the CICA IFRS Transition Website and also refer to the online news at Migrating to IFRS.

4 Survey and research conducted by IPSASB in September 2008.

A number of published articles provide commentary on the benefits and drawbacks of governments moving toward a commercial model. Essentially, two points of view have arisen: one prefers a “sector-neutral” model (Australian system) while the other wants to see two separate and distinct models — one for the private sector and the other for government.

“Without a doubt, private sector accounting practices have played a major role in governments moving toward adopting accrual-based accounting. Having been an accepted standard in the private sector for a number of years, the “spillover” effect into the public sector was inevitable.”

Proponents of the first model argue that the basic fea-tures and nature of accounting practices are the same irrespective of whether they occur in the profit or not-for-profit sectors. Definitions such as those for an asset, liability, revenue and expenses are interchangeable from one sector to another and the accounting fundamentals are the same. Although there may be different report-ing requirements, certain reports can be provided as an “add-on” to meet specific obligations of a particular sector. Supporters of this position would suggest that one universal (across sector and jurisdictions) account-ing standard is a strategic objective worth pursuing and eventually adopting.

On the other hand, others insist that governments differ from the private sector and should be treated differently for accounting purposes. Although the differences have been enunciated on a number of occasions, the US Gov-ernmental Accounting Standards Board (GASB) study Why Governmental Accounting and Financial Reporting Is — And Should Be — Different says it best.5

5 Why Governmental Accounting and Financial Reporting Is — And Should Be — Different (Washington: Governmental Accounting Standards Board, 2007).

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In summary, the study concludes:The primary purpose of for-profit business is to create y

wealth and provide a return for its shareholders. Gov-ernments, on the other hand, strive to contribute to the wellbeing of the public in general through public policy and the delivery of services.

The major source of revenue for business comes from y

the free exchange of goods between willing parties. Governments acquire a majority of their revenue from the imposition of taxes.

The primary method of accountability for govern- y

ments is the budget, whereas business considers a budget more as an internal analytical tool for improv-ing profitability.

Governments, by their nature, have a propensity for y

longevity whereas the existence of for-profit businesses is subject to the desires of their shareholders and the market in general.

“It is important to recognize that governments have accepted accruals as a fundamental accounting practice for a number of years.”

All of these differences place a higher degree of account-ability on governments, which is the fundamental reason why this side argues for separate and distinct accounting standards. As the GASB study clearly stated in its conclusion:

Governments are fundamentally different from business enterprises. As a result, separate accounting and financial reporting standards for government are essential to meet the specific needs of the users of governmental financial reports. The standards for governments need to reflect the unique environment of government, including different

organizational purposes and special legal powers, and to effectively address public accountability issues inherently related to the unique government environment.

Current Canadian practice reflects a number of account-ing similarities between the public and private sectors. It is generally accepted, however, that governments need distinct and separate accounting standards.

EVENTS LEADING TO THE ADOPTION OF ACCRUALSThese above viewpoints may account for the length of time and the difficulties encountered in the adoption of full-accrual financial reporting standards for senior governments. In retrospect, the concern over continu-ing the modified accrual basis as opposed to adopting full-accrual accounting was centered on issues related to the recognition of non-financial assets and the impact on annual financial results. A summary of several major events over the past several decades may provide a better understanding of the eventual adop-tion of full-accrual accounting.

It is important to recognize that governments have accepted accruals as a fundamental accounting practice for a number of years. Year-end expenditures such as employee benefits, service of the debt and other expenses had moved from cash to an accrual basis following extensive review and without significant difficulty or concern expressed by senior governments.

In the 1990s, however, there was an international move-ment toward the adoption of full-accrual accounting. In Canada, specifically, the release of a proposed new reporting model in 1997 provided the foundation for the final adoption of a commercial model for the treat-ment of tangible capital assets. A number of jurisdic-tions had received public reports and recommendations from their legislators supporting the changes, although

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some issues still needed to be addressed before general approval could be obtained.

Most of these issues centered on the need to introduce capitalization practices and reporting requirements. The arguments in favour of the changes rested on the belief that:

Under the old model, capital decision making was y

based on the overall bottom line. In situations where a balanced budget was required, capital projects would be approved only to the extent that they did not have a negative impact on this obligation. Many jurisdictions found that ignoring infrastructure was the easiest way to address a budget shortfall, resulting in the deterioration of capital stock over the years.

Because capital projects were expensed in the year of y

acquisition, government decision-making processes often failed to compare alternative delivery systems, such as privatization, public/private partnerships, contracting out or introducing user fees.

The adoption of full-accrual accounting would dem- y

onstrate a clear government stewardship responsibil-ity for all capital assets.

Although several jurisdictions argued against these ratio-nales, Canada’s senior governments agreed that change was required and that the reporting model adopted in 2003 (full-accrual accounting) was acceptable.

The adoption of accrual-based budgeting took many forms across Canada. Some governments chose the “big bang” approach, implementing full accruals in all of their financial management practices concurrently and addressing emerging issues on a system-wide basis. Others adopted accruals on a step-by-step basis, making the required changes over a number of years and addressing issues on either a reporting or budgeting basis.

ACCOUNTING STANDARDS The new reporting model adopted in 2003 had one overlying objective, as clearly stated in the CICA’s 20 Questions about Government Financial Reporting:

PSAB’s goal is better information for decision-making and accountability. The new requirement to use full accrual accounting, and the approval of the new model that provides a comprehensive set of indicators that describe a government’s financial position and results, are significant improvements in government financial reporting.6

These comprehensive indicators are presented in the four government financial reporting statements: State-ment of Financial Position, Statement of Operations (Annual Results), Statement of Change in Net Debt and Statement of Cash Flow. Each statement has a specific objective in terms of describing the status of government finances and, for the most part, the overall impact of their observations is more important than any one conclusion.

The Statement of Financial Position is substantially the balance sheet of each jurisdiction, showing the current status of financial assets and liabilities leading to a net debt position. The net debt is adjusted for the impact of non-financial assets and results in a “bottom-line” position expressed in terms of accumulated surplus/deficit. This bottom line provides a strong indication of the government’s ability to provide future services.

The Statement of Operations provides, on a fiscal year basis, the impact of all expenses and revenues that occurred during a period, expressed in terms of either a surplus or deficit position, and how this position affects the overall accumulated surplus/deficit position indi-cated in the Statement of Financial Position. For most

6 20 Questions about Government Financial Reporting (Toronto: CICA, 2004), p. 20.

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jurisdictions, public attention is centered on the annual surplus or deficit since this provides an indication of the government’s ability to meet its balanced budget com-mitments or obligations found in legislation.

The remaining two statements — Change in Net Debt and Cash Flow — provide additional measures impor-tant for examining the impact of the annual results, especially capital expenditures.

The Statement of Change in Net Debt provides an over-view of the difference between spending and the revenue received during the year and how this will affect the overall debt position. Generally, during periods of strong economic growth and balanced budgets, an increase in net debt reflects expenditures made to acquire tangible capital assets.

The Statement of Cash Flow provides an indication of the amount of expenditures that can be supported by revenue received during the fiscal year, the net impact of financing transactions and the overall cash position at year end compared to the beginning. This statement provides important information on the capital expendi-tures made in a given fiscal year.

These statements will give readers an appreciation of a particular government’s overall financial health. The difficulty arises, however, when a reader arrives at this financial health by looking at only one statement without reviewing the impact of the others. For example, it is possible to have a series of years producing an annual surplus, resulting in an overall decrease to the accumu-lated deficit while, at the same time, seeing significant increases in net debt. In such a situation, is it fair to conclude that the decrease in the accumulated deficit indicates a healthy financial situation without looking at the impact increased debt may have on future genera-tions and decisions?

Most observers and PSAB have concluded that no one statement can be read in isolation and that the true mea-surement of financial health has to take into account the overall impact of all of the indicators. In fact, to rely on only one is a disservice to the public. As shown later in this Report, however, this has not restrained some jurisdictions from relying on one measurement (surplus/deficit) as the principal means for communicating fiscal performance and financial health.

BUDGETING DOCUMENTS

The adoption of full-accrual accounting for financial reporting has been the impetus for the introduction of accruals into budgeting practices. Although Canada’s senior governments produce similar budgeting documents, they follow a variety of accrual-based accounting policies when preparing those documents, making inter-jurisdictional comparability a difficult task.

Although each government places particular impor-tance on one or more of the different budget documents, the public realizes that the budget overall is a reflection of all of its parts. For clarity, a budget can be defined as “documents that portray public policy, present a government’s forecast of its expenses/expenditures and revenues, and disclose financing requirements for oper-ating and capital spending for a fiscal period.” (See the Glossary at the end of this Report.)

Government budgets comprise three major documents: the summary budget, the estimates and appropriations. In most jurisdictions, the summary budget provides an overview of the government’s fiscal policy and can include additional papers detailing spending, revenue and taxation highlights. The summary budget includes the financial impact of the government budgeting entity and may provide forecasts for additional years. The main

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budget speech delivered in the legislature normally provides an overview of the summary budget.

The estimates are a set of expenditure plans (sometimes including revenue) that provide details on selected information found in the summary budget. They are considered the legislature’s working documents and provide source material for the breakdown of forecasts for the individual organizations the budget covers. In several jurisdictions, the summary budget and the estimates may be contained in a single presentation while, in others, separate comprehensive documents are prepared that can be linked through common financial tables and explanatory notes.

The appropriations, a set of legal documents normally referred to as “money bills,” set out the maximum authorized expenditures approved by the legislature. Normally, there are two types of appropriations: the first are authorized expenditures that require approval under the money bill for the fiscal year; the second are statutory appropriations for expenditures that have been, or will be, authorized under another act.

Although the above provides a representative overview of each document, each jurisdiction may have features that differ from these examples. For specific reference to an individual jurisdiction, see the explanatory notes attached to its estimates and/or summary budget.

Budget documents are the main source of information connecting government policies with the resources nec-essary to achieve objectives. The budget can, therefore, be considered the main source of accountability for ensuring that governments wisely spend money raised through taxation and meet the goals intended through their expenditures. No other legislative document has this amount of authority, which is why legislators, the press and the public pay so much attention to govern-ment budgets.

The numbers contained in all budget documents are forecasts, although appropriation legislation makes it clear that the budget amounts represent the maximum amount available for expenditure. As forecasts, the numbers are subject to change at any point in the fiscal period. They may decrease, resulting in adjustments in the overall budget. If expenses or expenditures increase, governments are normally required to seek additional approval from the legislature through mechanisms such as supplementary estimates. The original estimates approved by the legislature may, therefore, be subject to adjustments and it is important to track these adjustments to ensure transparency and accountability throughout the fiscal year.

Jurisdictions tend to subdivide their estimates into two main categories: operating and capital accounts. Operating accounts normally refer to the resources that will be consumed during the fiscal period to meet the day-to-day provision of services and goods. Major expenditures include: salaries and employee benefits, contracted services, office equipment and rentals, main-tenance costs, grants and contributions, etc. Most spending on non-capital related matters is considered operational spending.

The definition of a capital account is somewhat more complex. Prior to the introduction of the new reporting model and full-accrual accounting, the capital account showed what was expected to be spent on capital invest-ments during a fiscal period. With the advent of full-accrual accounting, the capital budget may continue to do that and be approved on the basis of the investments (cash) projected.

When translated into accrual-based accounting for the summary budget, however, capital is expressed as an expense related to the portion of investments (past and present) that will be consumed during a fiscal year. In other words, instead of expensing the cost of capital in

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the year of acquisition, capital costs are now amortized over the useful life of the asset involved.

Although accrual accounting has been adopted for capital budgeting purposes, cash remains an important basis for legislative decision making and communication purposes. As explained in more detail in this Report, all elected officials can more readily identify with the implications of decisions made on a cash basis, and the public is mainly interested in the dollars spent and the taxation consequences that may result.

Finally, the term “fiscal period” denotes the timeframe used to capture expenses/expenditures and revenue and provides the basis for comparison over time. All senior governments define a fiscal year as commencing on April 1 of each year and concluding on March 31. For planning purposes, most jurisdictions — as a result of a statutory obligation or a policy decision — provide fiscal forecasts for more than one year, and these forecasts have to be updated on a regular basis.

CONCLUSIONMany articles have expounded on the benefits of accrual accounting. They speak in terms of improved information bases, better comparative data, improved accountability and transparency, and the overall improvement to management practices. Essentially, if all of the benefits had to be stated in one sentence, the following would likely encompass the essentials: “Accrual accounting provides tremendous scope for organizations to manage their finances more effectively.”7 If accrual accounting has the potential to “provide tremendous scope,” the implications for budgeting practices must be far reaching.

As stated in the 2002 OECD paper Accrual Accounting and Budgeting — Key Issues and Recent Developments

7 Fédération Des Experts Comptables Européens, “Accrual Accounting for More Effective Public Policy,” Alert (February 2006).

and summarized in the CICA Discussion Paper Links between the Budget and the Estimates, “Supporters cited various benefits as a rationale for implementing it (accrual-based budgeting).”

“Accrual accounting provides tremendous scope for organizations to manage their finances more effectively.”

Accrual accounting:Provides government decision makers with improved y

information and understanding of the cost of activi-ties while allowing for rigorous budget monitoring. For example: accrual budgeting helps decision makers to better grasp the long-term effects of current policies on public finances.Helps to better plan capital asset requirements. y

Acts as a catalyst for large-scale administrative reform. y

Ensures comparability with other public accounts y

prepared on an accrual basis.

The same OECD paper and the Discussion Paper observe, however, that:

Detractors argue that accrual budgeting introduces unnecessary complexity into the budgeting process. Indeed, accrual budgeting necessarily calls for professional judgment, particularly through the use of estimates, which can include allowances for doubtful accounts, the revaluation of assets, whether or not to capitalize a capital expenditure and choosing amortization methods. Furthermore, the implementation of accrual budgeting entails considerable costs to train staff and upgrade the systems and processes — costs that detractors view as outweighing the benefits — while cash budgeting normally calls for a single type of estimate, that is, a forecast of receipts or disbursements.

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To a degree, these perceived drawbacks are compelling reasons for jurisdictions to carefully examine their ratio-nales for introducing accrual accounting and develop workable budgeting practices that meet the needs of elected officials and the public.

This Research Report examines issues that have evolved over several years, with special emphasis on the role accruals have played in accounting and budgeting practices:

Does accrual-based budgeting lead to more govern- y

ment accountability?Does accrual-based budgeting increase transparency y

of decisions and financial information?Does accrual-based budgeting offer a better mecha- y

nism for making decisions?

Does accrual-based budgeting improve management y

practices?Does accrual-based budgeting meet the needs of y

legislators and the public?

Finally, it is very clear that each jurisdiction is at a certain point in its accrual-based budgeting “journey.” Some governments have introduced comprehensive legislation and adopted broad, accrual-based budgeting practices and accountability requirements. Others have introduced selective changes only. What they all have in common is the recognition that accrual-based budget-ing must meet their own particular needs.

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INTRODUCTION“Accountability” is one of the most overused and least understood terms in government today. Most speeches and articles are peppered with this word. It appears to be used to justify any action that may eventually be subject to evaluation and is intended to reassure readers and the public in general that decisions are not made in isolation. Governments have done their due diligence and someone, whether it is an organization and/or government as a whole, will be required to justify the results at some point in the future.

What is accountability? For financial management purposes, it can be defined as follows: “A broad concept that requires an entity to answer to elected officials and the public they represent to justify the raising of public resources and to explain the purpose for which they are used.”8

Accountability, as defined above, should be part of every budget framework. Canada’s senior governments need to come to a consensus on how to judge commit-ment to accountability obligations. In practice, there appears to be no overriding common interpretation and most governments have developed their own means for meeting these requirements. In some jurisdictions, accountability is associated with financial reporting functions. In others, it includes budget decision making. Performance objectives may also be included.

Developing an understanding of how governments have approached budget accountability and the role full-accrual accounting has played requires a review of

8 PSAB Statement of Recommended Practice 2, Public Performance Reporting (Toronto: CICA, 2006).

significant legislation, budget documents, the govern-ment budgeting entity, the needs of legislators and the public, and the overall impact on the bottom line. The following discussion reviews each of these subjects and provides a summary of their impact on accountability.

LEGISLATIVE ACCOUNTABILITY FOUNDATIONSAll senior governments have enacted legislation that establishes the foundation for financial management, commonly referred to as the Financial Administration Act (FAA) – it is called the Provincial Finance Act in Nova Scotia. With regard to accountability, the FAA provides the essential statutory obligations affecting the budget process, expenditure management and docu-mentation required for approval by the legislature. For a comprehensive description of financial administration acts, refer to the 2004 CICA Research Report Account-ing Bases Used in Canadian Government Budgeting and the 2007 CICA Discussion Paper Legislative Account-ability Framework for Preparing Government Budgets and Estimates.

“The 2008 cross-Canada workshops made it clear that there continues to be debate on the subject of accounting policy in legislation.”

Most of Canada’s FAAs have not been modified to reflect current financial reporting standards and prac-tices. Although three jurisdictions have included direct reference to accounting standards in the legislation and several others have made minor modifications to defini-tions, a majority of senior government jurisdictions do not address accounting policy in their legislation.

Chapter 3

ACCOUNTABILITY FOR FINANCIAL MANAGEMENT

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The 2008 cross-Canada workshops made it clear that there continues to be debate on the subject of account-ing policy in legislation. Some officials believe that accounting policy should not be subject to statutory obligations but, rather, should be well defined through financial policies and accompanying explanatory notes. They feel that accounting differences arising in financial management documents can be explained and recon-ciliations provided for continuity. Other officials have concluded that accounting policy defined in legislation ensures continuity and the use of common terminol-ogy in financial management documents. As well, it provides a foundation for better comparative data from year to year and among jurisdictions.

Regarding accounting policy for preparing budgets, there is no consensus in terms of adopting standards that are applicable to all jurisdictions. The results of the workshop survey (see Appendix C, responses to Ques-tion 3) support the following conclusions.

Financial accountability is an important function practiced by all Canadian senior governments. Funda-mental to this accountability is the transparency and communication of budget decisions through documents supported by legislation and policy commitments. As part of this budget accountability and transparency commitment:

43% of the respondents (6 of 14 jurisdictions) thought y

that standard accounting practices should be adopted which are applicable to all jurisdictions;

43% (6 of 14 jurisdictions) thought that accounting y

practices should be adopted which meet the needs of each individual jurisdiction;

14% (2 of 14 jurisdictions) expressed no concern over y

accounting practices, provided reconciliation can be made between budgeted numbers and results con-tained in the financial statements.

This matter was discussed at length at the workshops. Officials who have worked under a regime that included either legislation and/or policies that specifically required budget and other financial management documents to be consistent with GAAP supported the use of standard accounting practices for all jurisdictions. Although several survey respondents (as well as a number of the workshop participants) generally agreed with the adop-tion of standard accounting practices, they also thought that these practices would need to be adjusted to reflect the jurisdictional realities for different accountability structures and legislation.

On the other hand, there were some survey respondents and workshop participants who adamantly believe that senior governments should establish budget account-ing practices that meet the particular needs of their jurisdiction. Since the various jurisdictions have little in common when it comes to the administration of programs or relationships between organizations included in the budgeting entity, they believe the need for budgeting standards applicable to all jurisdictions is neither practical nor warranted.

Although it appears that officials do not agree on establishing budget accounting standards applicable to all jurisdictions, they do accept that full-accrual accounting for budgeting purposes should be applied consistently within each jurisdiction with recognized reporting standards.

In response to the workshop survey (see Appendix C, responses to Question 2):

64% of the respondents (9 of 14 jurisdictions) thought y

that, for the purposes of budget preparation, including the summary budget, estimates and appropriations, full-accrual accounting should be applied consistently with the CICA Public Sector Accounting Handbook;

29% (4 of 14 jurisdictions) thought this consistency y

should not be compulsory, but should be consid-

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ered when providing budget information for decision making;

7% (1 of 14 jurisdictions) thought accrual account- y

ing for budget preparation purposes should be subject solely to legislation authorizing its use.

It is clear that most officials see a need for consistency between accrual accounting practices adopted by their jurisdiction for the preparation of budgeting docu-ments and the accounting standards used for reporting financial results. It is recognized, however, that each jurisdiction has legislative and accountability nuances that would make it impracticable to follow common budget accounting practices at this time.

In addition to legislation, such as financial administra-tion acts, senior governments have introduced budget accountability obligations in recent years, either through amendments to these acts or through passage of specific legislation designed for this purpose. Although each jurisdiction has given these legislative initiatives specific names to meet policy objectives, they can be categorized into one of the following categories: bal-anced budget, fiscal accountability, fiscal stabilization and debt reduction (or management). The Discussion Paper Legislative Accountability Framework for Preparing Government Budgets and Estimates reviews these catego-ries, especially balanced budget, fiscal accountability and debt reduction, examining the major differences among jurisdictions more fully and identifying issues for future discussion.

The most pressing issue revealed in this Discussion Paper centres on the lack of common definitions among jurisdictions and the difficulty encountered when com-paring accountability obligations. An example would be the definition adopted by a number of jurisdictions to determine a balanced budget.

For GAAP purposes, the term “balanced budget” is neither used nor defined. In fact, it is not considered an accounting term for either the budget or the financial statements. The results are presented as a “surplus” or “deficit” position, and governments use the term “bal-anced budget” to interpret the results when total expenses for the year are equal to or less than total revenue.

The definition becomes cloudy in cases where the calculation of a balanced budget is modified through legislation to exclude categories of expenses or revenue. Examples of these modifications can include: the costs of natural disasters or war, changes in transfer entitlements, and certain accounting adjustments. The rationale for these exclusions appears to be based on the difficulty in accurately budgeting for events resulting from a force majeure or an external decision outside the control of the government.

“…there is a need for greater clarification when governments create their own definitions for matters that either directly or indirectly affect the application of accounting standards.”

As the Discussion Paper indicates, five of the seven jurisdictions with balanced budget legislation do not calculate a balanced budget in accordance with GAAP. This creates a level of confusion and, in some cases, a lack of confidence in the numbers provided, especially when a balanced budget is touted but cannot be veri-fied against the audited financial statements. For some observers, the term “balanced budget” is considered to be a political statement rather than a position founded on accounting tenets.

A number of the workshop participants argued that it is reasonable to define a balanced budget using criteria determined by legislation. In summary, the rationale is as follows:

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No accounting standard has been modified since the y

definition of a “balanced budget” is not considered an accounting policy under GAAP;

Provided governments can explain the differences y

between the audited financial statements and the results achieved under balanced budget legislation, confusion should be limited and confidence in the numbers retained;

Normally, the difference in the numbers is not mate- y

rial.

Nevertheless, there is a need for greater clarification when governments create their own definitions for matters that either directly or indirectly affect the application of accounting standards. By creating their own defini-tion of a balanced budget, governments have, in fact, modified accounting standards for defining a “surplus” or “deficit” and the calculation of an “accumulated surplus or deficit” position. There is a possibility that the public receives two different financial performance numbers — one based on legislation and the other on accepted accounting principles — requiring an explana-tion for the derivation of these numbers.

SUMMARY BUDGETS, ESTIMATES, AND APPROPRIATIONS The Discussion Paper Links between the Budget and the Estimates examined the fundamental relationship among major documents prepared as part of the overall financial reporting cycle and provided a review of Canada’s juris-dictional accounting policy differences. In summary, senior governments have not adopted common account-ing standards for preparing budget documents, although most follow the accounting standards that apply to the preparation of the summary financial statements. In addition, the Discussion Paper reviewed the impact of the budgeting entity and the basis of consolidation when tracking numbers provided in the summary budget back

to those presented in the estimates and appropriations. It found that most jurisdictions either provide direct links between documents or prepare reconciliations.

The workshop participants reviewed the underlying purpose for each document and discussed the impact on accountability. There was general agreement that the summary budget was the principal document govern-ments use to indicate the funding they need to meet policy objectives, and it provides the starting point from which a government can be held accountable for its overall financial performance for the fiscal year and into the future.

The role of the estimates as an accountability document was discussed in great detail. On the one hand, some participants saw a need to ensure consistency between the summary budget and the estimates (including appropriation bills). They observed that the estimates provide more details on the budget and establish the linkage between the numbers contained in the summary budget with those requiring statutory authority through the appropriation process.

In their view, difficulties in presenting costs on a cash versus accrual basis requires explanation and this can best be shown through the estimates and accompany-ing explanatory notes. In their view, the estimates are a primary source for accountability, especially when comparisons are required with the financial statements.

Other participants did not agree that the role of the esti-mates is to serve as an accountability document linked to the summary budget. The principal role, they sug-gested, is to support the appropriation process that deals exclusively with those parts of the budget that require direct approval by the legislature.

Because the estimates must detail the information nec-essary to make informed decisions on items provided in

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the appropriation bills, it was not necessary to ensure consistency with the summary budget. In fact, several participants insisted that the inclusion of financial matters in the estimates that do not require approval through appropriation bills tends to lead to accounting policy explanations that often produce confusion and create unwarranted accountability issues.

GOVERNMENT BUDGETING ENTITYThe term “government budgeting entity” is relatively new and has only recently been used to describe the organizations that are part of the government structure included for the purpose of preparing the summary budget and, in some cases, the estimates.

In many jurisdictions, the government reporting entity forms the foundation for establishing the budgeting entity. Since budgeting is not governed by the PS Hand-book, however, several senior governments have taken their own approach to selecting accounting practices for preparing the budget documents.

The 2007 CICA Discussion Paper Defining and Accounting for the Government Budgeting Entity pro-vides a comprehensive review of the different ways of including organizations within budget documents and the different methods of accounting for them. The fol-lowing discussion reviews three important issues that merit further attention: the method of accounting, the impact of full-accrual accounting and the transition to international financial reporting standards for certain organizations.

Method of AccountingThe method of accounting for organizations within budget documents has been a contentious issue for many years. For government jurisdictions that use the new reporting model for budget presentations, the fol-lowing table depicts the current situation:

Organization Method of Accounting

General Revenue Fund (GRF) (Departments)

Consolidation

Government Business Type Organizations (GBTO)

Consolidation

Government Business Enterprises (GBE)

Modified Equity

Other Government Organizations

Consolidation

Elementary/Secondary Schools Consolidation

Colleges Consolidation

Universities (only three jurisdictions include universities in the budgeting entity)

Consolidation

Hospitals Consolidation

There appears to be little concern over the use of consolidation for GRF departments and government organizations, and modified equity for GBEs. Several jurisdictions do, however, have reservations about using line-by-line consolidation for schools, colleges and hos-pitals. The issue is not about grants that governments provide to fund the organization’s operations but on the source of, and related expenditure of, funds outside the direct control of government.

“…although line-by-line consolidation is considered an arduous process and the benefits are questionable for schools, colleges and hospitals, most jurisdictions have, or are in the process of adopting, consolidation in budget documents.”

Most jurisdictions have legislation guiding the opera-tion of schools and hospitals. That legislation normally gives those organizations the autonomy to raise and spend funds outside of the direct grants provided by the government. Those organizations guard this autonomy very closely and governments tend to have very little control in these areas.

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In this regard, a number of jurisdictions are of the opinion that line-by-line consolidation is not an appro-priate method for including these organizations within a government budgeting (or reporting) entity, and consider either an equity approach or the transactional method more suitable for demonstrating government accountability.

It is important to note that, although line-by-line consolidation is considered an arduous process and the benefits are questionable for schools, colleges and hos-pitals, most jurisdictions have, or are in the process of adopting, consolidation in budget documents. Several jurisdictions have placed a high priority on having the standards re-visited by PSAB. Ultimately, this may provide an opportunity to exclude schools, colleges and hospitals from line-by-line consolidation for reporting purposes.

Impact of Full-Accrual AccountingThe impact of accrual accounting on the government budgeting entity is evident in instances where line-by-line consolidation has been implemented. To provide consistency, accounting policies need to be compatible for organizations included under the consolidation method. Where there has been such consistency, the preparation of the budget and the estimates has not been difficult nor required extensive changes to presentations. Where there is no such consistency, the need for transi-tional periods and reconciliations has been evident.

Full-accrual accounting for capital makes this very clear. Jurisdictions with a history of direct involvement in the planning and implementation of major capital projects for all organizations, accomplished the transition to full-accrual accounting on a government-wide basis either through the introduction of a common account-ing policy or the ability to reconcile differences among organizations fairly easily. The implementation of line-by-line consolidation is achievable in these instances.

Jurisdictions not directly involved in the planning and implementation of capital projects in all parts of the government entity face greater resistance to changes necessary for a government-wide approach to full-accrual accounting. As stated earlier, many organiza-tions, especially educational and health care facilities, have a significant amount of autonomy (in some cases protected by statute) and guard it very closely. They have adopted capital accounting policies that meet their individual needs, and consistency with other organiza-tions is not a priority.

The summary budget and estimates documents in these cases require either a reconciliation of the different capital accounting policies used, or the numbers are simply presented on the basis of the policy in effect for each organization. The benefit of consolidation on a line-by-line basis is questionable for these jurisdictions, providing further credibility to the argument that consolidation may not be the best means for ensuring budgeting (or reporting) accountability for a number of organizations included in the budgeting entity or reporting entity.

A number of jurisdictions have, however, been able to consolidate these organizations on a line-by-line basis, and do not appear concerned with the issues raised above.

Transition to International Financial Reporting Standards (IFRS)The final government budgeting entity issue relates to the accounting standards used by government business enterprises (GBEs) and government business-type orga-nizations (GBTOs). As PSAB has deemed them to be publicly accountable enterprises (PAEs), they will have to conform to IFRS by 2011. At present, these organiza-tions are examining the changes necessary to make the transition to the new standards. Since both GBEs and GBTOs are considered part of the government reporting

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entity, however, the impact of the new standards on the overall government budget, especially the projected bottom line, is uncertain and requires attention.

This may be especially evident with the inclusion of government rate-regulated utilities that will be required to move to IFRS. Reviews conducted to date show that the adoption of IFRS will have a significant impact on the bottom line of these utilities. It is difficult, however, to determine the actual impact, mainly because of the lack of historical data and the lack of experience most jurisdictions have in the application of IFRS. As stated earlier, PSAB decided in December 2008 to re-evaluate the decision to require GBEs and GBTOs to conform to IFRS by 2011.9 It is expected that stakeholders will provide additional insights on this issue and, it is hoped that a decision will be made expeditiously.

LEGISLATORS AND THE PUBLICDoes accrual-based budgeting meet the needs of legisla-tors and the public? To answer this question requires budgeting officials to explain the benefits and impacts of accounting changes clearly, precisely and on a non-accounting basis. It is no longer acceptable to present accounting policies based on the premise that it is solely an “accounting standard that must be followed” without providing explanations that bridge the technical nature of the change with accountability structures that are far more easily understood.

In this regard, elected officials require budget documents to fill several basic needs. They must:

be easy to understand; •assist in the effective use of legislative time; •link policy objectives with resource requirements; •and provide accountability structures to judge results.•

9 Refer to the PSAB Invitation to Comment, Financial Reporting by Government Organizations (February 2009).

The introduction of full-accrual budgeting has not had a major impact on the first two objectives to date. The participants at the workshops believe it is still too early to pass judgment on whether or not the summary budget or the estimates are more easily understood today than in the past. For some participants, the introduction of a new accrual accounting method, especially as it relates to tangible capital assets, has added more complexity to these documents.

“…there is a general belief that accountability structures within budgeting documents have the potential to be more effective with the use of full-accrual accounting.”

For other participants, the provision of explanatory notes and educational sessions can increase the under-standing by legislators. In addition, most participants are of the opinion that accrual-based budgeting has not had an impact on the effective use of time in legisla-tures and doubt that this would ever be a factor over the long term.

When it comes to linking policy objectives with resource requirements, a majority of participants believe that the introduction of accrual-based budgeting has given legislators a greater appreciation for the long-term costs associated with capital. They believe that, as legislators become accustomed to using accrual-based informa-tion, more informed decision making (especially related to capital) will result.

Finally, there is a general belief that accountability structures within budgeting documents have the potential to be more effective with the use of full-accrual accounting, especially in areas such as the status of capital infrastructure and the impact on debt and balanced budget obligations. Every jurisdiction is working toward this objective.

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Overall, budgeting officials recognize that there is a need to provide better explanations to legislators on accounting practices in general. When asked in the workshop survey if legislators generally understand accrual information, officials did not believe that this was the case. And, to assist in addressing this concern, 71% of the survey respondents (10 of 14 jurisdictions) believe that it would be beneficial to have budget release information sessions with legislators that provide educational material on the accounting practices that influence the budget (see Appendix C, responses to Question 6).

Generally, the public has accountability needs similar to those expressed by elected officials:

The public wants to understand the information •contained in the budget.The public wants information that ties objectives to •accomplishments. It wants information that links resources required •to planned outputs and outcomes.It wants assurances that the public’s money will be •spent effectively and efficiently.

These can be considered fairly broad requirements and, for the most part, budgeting documents have not been designed to meet these needs. In fact, the public tends to evaluate budgetary material according to how it is interpreted by the media.

Most senior government jurisdictions use ministerial statements, budget information documents and media briefing material as the primary sources for educating the public on the content of budgets and the explana-tions for major changes in accounting policy. The actual forecasts, tables and statements found in the budget and estimates have never been considered “public friendly” and reflect, for the most part, legislative requirements necessary to guide both elected and government officials in carrying out their responsibilities.

ACCRUALS AND THE BOTTOM LINEThe determination of a government’s bottom line or its overall financial health has been the most significant change introduced by the new reporting model. Whereas a change in the level of debt, as expressed through a surplus or deficit position, was fairly easy to understand under the former model, the reporting requirements established to measure financial health are now much more difficult to comprehend.

Under the current reporting model, the direct relation-ship between the annual results and the overall financial position is mainly influenced by the method of record-ing capital investments and costs. Regarding the annual impact of capital, the surplus/deficit position reflects only the amortized portion of an investment’s overall cost, whereas debt (net debt) reflects the full expendi-ture on the capital investment. Since there is no direct relationship between the annual results and the level of debt, as under the former reporting model, governments are expected to provide a number of indicators in their financial statements to demonstrate accountability.

The five measurements of financial health under the new reporting model are:

the net debt position; y

the accumulated surplus/deficit position; y

the annual surplus/deficit; y

the change in net debt; and y

cash flows. y

Although these measurements are required for financial reporting, there is no obligation for governments to include forecasted results in their budgeting docu-ments. A number of jurisdictions do, however, provide budgeted forecasts as part of their accountability and transparency commitments.

PSAB’s 20 Questions about Government Financial Report-ing examines each of these reporting requirements and

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is an excellent source for describing the relationships among these indicators. Although governments have incorporated these measurements into their financial statements, and provide an analysis of the results, they appear to rely more on the surplus/deficit position to indicate the state of their financial health to the public.

In this regard, the workshop survey asked participants to give their opinion on the following (see Appendix C, responses to Question 7):

Measurements of financial health have been significantly modified over the last several years. The former reliance on equating a surplus/deficit position with either an increase/decrease to net debt (in some cases, accumulated deficit) has been replaced with more emphasis on the projected annual results. Essentially, surplus/deficit is now the primary focus and debt is secondary.

The survey revealed that:93% of the respondents (13 of 14 jurisdictions) y

agreed or generally agreed with these observa-tions.10

7% (1 of 14 jurisdictions) totally disagreed with y

the observations.

This issue and the responses to the survey produced a lot of discussion at the workshops. It was suggested that the change in focus is the direct result of govern-ments implementing balanced budget legislation or policy obligations. Governments appear to be more preoccupied with meeting these objectives because the media and the public use the surplus/deficit position to evaluate financial management success.

In addition, it was suggested that the new reporting model allows government to tackle major capital

10 Although 93% of the respondents agreed or generally agreed with these observations, a significant number of officials (including those at the workshops) believe that debt is still considered an important measure-ment of financial health for both the legislators and the public.

infrastructure needs and still have the capability to meet balanced budget objectives. Although, in many instances, major capital investments will increase debt, this is overshadowed by the benefits derived from the investments and the ability to reach a surplus (or a manageable deficit) for the fiscal year.

In several government jurisdictions, the level of debt is still a major topic in legislatures, and some governments have adopted debt reduction or debt/GDP ratio obliga-tions in addition to balanced budget requirements to provide accountability within the budget process. These two approaches to debt were the subject of the follow-ing question in the workshop survey (see Appendix C, responses to Question 8):

For some jurisdictions the goal of reducing net debt or accumulated deficit has been modified with more emphasis placed on managing the level of debt through attachments with economic growth indicators — Gross Domestic Product (GDP). This de-emphasis on reducing net debt/accumulated deficit has opened opportunities to make significant advancements in meeting the needs for new or renewed capital infrastructure; however, the peril of such an objective is the affordability of future services and/or reduced long-term budget flexibility.

The survey revealed that:79% of the respondents (11 of 14 jurisdictions) y

generally agreed or somewhat agreed with this observation.21% (3 of 14 jurisdictions) totally disagreed with y

the observation.

These observations were discussed at the workshops. It was generally agreed that debt was a significant problem that required government attention. For a number of participants, attaching debt to the health of the economy (GDP) is the most appropriate means for governments to control indebtedness. If the economy

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is growing, governments can support a higher level of debt. If the economy is contracting, the level of debt requires attention to ensure the affordability of future services. To make sure this objective is followed, gov-ernments have instituted policy or statutory commit-ments requiring that the ratio of debt to GDP is either maintained or reduced.

“It is evident that all senior governments take financial accountability responsibilities very seriously in their financial management processes, including budgeting practices.”

Other participants, however, believe that governments should focus on the reduction of debt as a major objec-tive. During periods of prosperity, governments have the ability to significantly reduce the level of debt, and should do so. These participants realize, of course, that governments may not be able to reduce debt during eco-nomic downturns or may, in fact, have to increase their debt to address the economic problems. Nevertheless, the stated objective continues to focus on reducing debt over the long term as a means to ensure the sustain-ability of future services.

CONCLUSIONIt is evident that all senior governments take financial accountability responsibilities very seriously in their financial management processes, including budgeting practices. They have established statutory obligations to govern the preparation of budgeting documents and most jurisdictions have, in fact, enacted obligations to meet financial objectives such as balanced budgets and the management or reduction of debt. They also rec-ognize the need to include in budgeting documents all entities that they control and ensure that information is presented in a format that both legislators and the public can understand.

Governments also realize that, before they implement changes for reporting and budgeting purposes, they must first thoroughly analyze all of the issues involved and look for satisfactory solutions to any problems raised. Accounting issues cannot be solved solely on the basis of achieving the objectives of the reporting community; they must also consider the accountability obligations of governments and provide useful informa-tion for evaluation and decision-making purposes.

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INTRODUCTION

As stated in Chapter 3, accountability is one of the most overused words in government today. “Transparency” may rival that usage and certainly has a number of interpretations depending on where and when it is used. What is budget transparency? According to the OECD, it is “The full disclosure of all relevant fiscal information in a timely and systematic manner.”11

Although “full disclosure” is a nebulous concept, it is used to ensure that all matters under the control of a government are contained in budgetary documents. This becomes especially important when reviewing the government budgeting entity, which is assumed to include all government-controlled organizations.

It does not imply that full disclosure must occur in each budget document but, rather, full disclosure lies in reviewing them in their totality. That is, the summary budget may present material that covers everything on a comprehensive but summarized basis while other documents, such as the estimates, may present details on a selected portion of the budget overall.

The term “relevant” modifies “full” by permitting a level of discretion on what is considered important in terms of presentation to ensure a level of understanding and appreciation of the matters covered by a budget. Governments struggle to ensure that documents support this concern for relevancy, and this may be the central rationale for some jurisdictions insisting that budget documents reflect their own needs rather than striving for comparability with other jurisdictions.

11 Best Practices for Budget Transparency (Paris: Organisation for Economic Cooperation and Development OECD, 2001).

Providing information when required is fundamental to defining “in a timely manner.” Although legislative obligations may require the budget to be prepared and presented to the legislature on an annual basis, it is apparent that full transparency requires a broader approach. In this regard, multi-year fiscal forecasts, budget updates during the fiscal year and special reports are now considered methods for ensuring the timely provision of budgetary information.

Finally, providing information in a systematic manner is an obligation that ensures information can be readily compared from one period of time to another. The method of presentation in budgetary documents must provide a basis for comparison between documents, as well as provide linkages with budget updates and financial statements. Therefore, it is important that accounting policies used to prepare the budget are complementary to those for financial statements, either through the application of consistent terminology or some form of reconciliation.

LEGISLATION AND POLICIES Canada’s senior governments have introduced commit-ments for most aspects of budget transparency, with each jurisdiction determining which obligations will be subject to legislation and which will be governed by policy. The following discussion provides an overview of major commitments within the context of the overall issues surrounding “transparency,” making comments on the impact of full-accrual accounting:

budget consultations; y

multi-year fiscal forecasts and appropriations; y

in-year financial reports (forecasts); y

independent evaluation of budgetary information. y

Chapter 4

BUDGET TRANSPARENCY

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Budget consultations with interest groups and the public occur on a regular basis across Canada. Where legis-lated obligations exist, governments normally establish a timetable for meeting them as well as a means for evaluating the results (for example, see Part 1, Sections 2 and 3 of the Budget Transparency and Accountability Act in British Columbia).

Jurisdictions without such legislative commitments conduct consultations on an ad hoc basis and implement processes to meet their own particular needs. In both cases, consultations offer the government an opportunity to receive informal evaluation of their progress to date, solicit recommendations on the direction ahead and review funding options and fiscal objectives (balanced budgets, etc.). The benefits of full-accrual accounting can become evident during these consultative processes, especially in the areas most visible, such as the planning and rollout of capital infrastructure projects and their impact on the fiscal plan.

“The independent evaluation of budgeting information is the most recent transparency obligation introduced in several jurisdictions.”

Multi-year fiscal forecasts offer an opportunity for gov-ernments to provide details on the financial implications of policy objectives established as part of their mandate. Most governments have established forecasts as part of their overall budgeting documentation, although several jurisdictions have decided to reflect multi-year objec-tives in special documents outside the budget process or through departmental reports. In terms of multi-year appropriations, there appears to be no major movement toward approving expenditure plans on more than a fiscal year basis, although most jurisdictions nominally approve expenditure plans (especially capital) that will require funding over a number of years.

The most significant budget transparency develop-ment over the past decade has been the introduction of statutory obligations to provide in-year financial reports (forecasts). These reports give governments the opportunity to update the public on the status of the budget and the overall financial position at certain points in the fiscal year.

They also permit governments to address issues that may have arisen, providing a forum for explaining the actions taken and the expected results. Although the adoption of full-accrual accounting may have raised the complexity of providing reliable information for these reports, it gives the readers of these documents better information for evaluating the progress government is making in achieving its stated goals.

The independent evaluation of budgeting information is the most recent transparency obligation introduced in several jurisdictions. Independent evaluators are asked to comment on the economic indicators used in the annual and multi-year forecasts that will, in some instances, be restricted to the revenue estimates while, in others, the expenditure forecasts may also be subject to review. The passage of the new Federal Accountability Act (December 2006) provides an example of this new approach to transparency and accountability and will, in time, reveal the extent to which independent evalua-tion has progressed.

More information on these transparency initiatives is provided in the Discussion Papers, including examples of legislative obligations and policies adopted. In addi-tion, a review of literature published by governments and organizations across Canada provides further details on several new initiatives, including the establishment of the Federal Budget Officer under the Federal Account-ability Act and the pre-election financial reports of the

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Government of Ontario, which are reviewed by the province’s Auditor General.12

CONCLUSIONOverall, Canada’s senior governments have concluded that budget transparency is an important factor in ensuring financial management accountability. Some jurisdictions have introduced legislation designed to establish comprehensive obligations that ensure infor-mation is presented on a timely basis and, in some cases, is subject to independent evaluation. Other jurisdictions have not found it necessary to enact statutory require-ments to ensure transparency.

“…governments must strive to make all budget documents more user friendly for the public.”

Changing economic and social conditions can have an impact on the budget at any point in the fiscal period. It is important that governments keep the public informed through updates and provide the rationale for any actions taken to address issues as they arise. In addition, it is important for governments to provide financial information that forecasts the costs of meeting strategic objectives and to release regular progress reports on achievements, including the potential impact on their overall financial health.

12 For more information, see the Government of Ontario’s 2007 Pre-Election Report on Ontario’s Finances, released on April 23, 2007, and the Auditor General’s review signed on June 8, 2007.

It is not correct, however, to conclude that statutory obligations are essential to ensure budget transparency. Each jurisdiction has to judge the level of information necessary to meet its obligations, and it is not crucial to strive for standardization or consistency across jurisdictions. Legislation may spell out fundamental requirements that remain constant from one mandate to another, but most governments have developed proven communication processes over the years that can also ensure that information is presented correctly and in a meaningful way.

Finally, governments must strive to make all budget documents more user friendly for the public. Although estimates and appropriations are essentially designed for the legislature and the passage of supply bills, govern-ments have a responsibility to provide easily understood explanatory notes on the more technical accounting sections of budgeting documents, providing an oppor-tunity for the public to fully participate in all aspects of the budget process.

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INTRODUCTION

Although full-accrual accounting has resulted in a better appreciation of capital asset and liability obligations, the same cannot be said when accruals are used as part of the decision-making process. In this chapter, the benefits and drawbacks of using accrual-based decision making are examined, along with its future role.

FUNDAMENTALS OF BUDGET DECISION MAKINGMost budget decision-making processes can be defined as either “bottom-up” or “top-down.”

Bottom-up approaches commence with issues that normally reflect the current delivery of services. Propos-als originate within a department or organization, are vetted through a number of internal government deci-sion points and are finally incorporated into an overall budget proposal for government review.

Top-down approaches originate from election platforms, consultative processes and public announcements, such as throne speeches, and concentrate on issues considered important for addressing a government’s mandate. They are usually prioritized by the government, costed by departments and a final proposal becomes part of the overall budget.

The final budget is a composite of decisions flowing from both of these approaches and is finalized by Cabinet for presentation to the legislature. The overall decision-making process requires the examination of options and the setting of priorities to determine the funding necessary to meet a government’s objectives while respecting the overall fiscal responsibility, such as balanced budget obligations.

Full-accrual accounting benefits the decision-making process by providing information on the total costs of producing outcomes, rather than solely reflecting the immediate cash requirement for the fiscal year. Accru-als provide the foundation for long-term forecasting, assist in timing the introduction of new initiatives and validate actions that may be required to meet fiscal objectives, such as changes to taxation and fee policy, levels of service and human resource requirements.

In theory, therefore, accrual-based budget decision making should offer an opportunity to utilize better costing information, provide improved comparative information to evaluate options and offer more opportu-nities for governments to meet their mandate objectives on a multi-year basis.

Most participants in the budget decision-making process are not, however, very familiar with the use and benefits of accrual-based budgeting. The cross-Canada workshops survey results indicated that, although most of the respondents believed that the public and even many government officials don’t really understand accounting practices, they also thought that budget officials in central agencies and departmental financial officials did understand accrual information. Most departmental managers, legislators and the press, on the other hand, are not thought to be familiar with accruals (see Appendix C, responses to Question 5).

These results illustrate the general belief that accounting policies and practices are the fundamental responsi-bility of financial officials, especially those with an accounting background. The other participants in the budget process rely heavily on accounting advice from these officials, and this has been especially true for accrual-based budget decision making. The onus is on

Chapter 5

ACCRUAL-BASED DECISION MAKING

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these officials to ensure that decision makers, especially legislators, have a basic understanding of accruals and appreciate the benefits derived from their use.

CAPITAL BUDGET DECISIONSNo other budget area has been more affected by accruals than capital budget decision making. The introduction of capitalization principles offers good opportunities for examining options for improving the overall state of capital infrastructure (such as major highway networks and military assets) and determining what impact these decisions will have on a government’s immediate and long-term financial position.

Currently, two major capital budget processes use a mixture of cash and accrual accounting in their decision-making process, with the importance of accruals being the distinguishing feature.

“Most participants at the cross-Canada workshops believe that cash will continue to be an important aspect of the capital decision-making process for the foreseeable future.”

The first decision-making process relies heavily on investment decisions to determine the composition of the capital budget. All budget information is pre-sented on a cash or modified cash basis and projects are evaluated against each other to establish priorities. In most instances, a separate capital budget consisting of investment proposals is presented to the legislature for approval. In several jurisdictions, the legislature may approve the capital budget at a time (Fall Session) prior to the finalization of the summary budget (Spring Session). Under this scenario, translating cash (or modi-fied cash) to an accrual basis becomes an accounting exercise for the purpose of the summary budget and, normally, the impact of capital on the overall financial position is evaluated as a separate process.

The second decision-making process may also rely on investment decisions. Capital decisions are not, however, made in isolation. They form part of the overall evalu-ation of service delivery options. In this case, a capital budget is not considered a distinct and separate budget for approval but is incorporated on a cash and/or accrual basis for the estimates and on an accrual basis for the summary budget. Accruals become an important evalu-ation tool and provide a linkage between an anticipated level of service and the mixture of capital and opera-tional inputs necessary to meet objectives. In addition, the government can better determine the impact on the bottom line for each delivery option, including the future impact on the multi-year fiscal plan.

Most participants at the cross-Canada workshops believe that cash will continue to be an important aspect of the capital decision-making process for the foreseeable future. Government officials, legislators and the press are more comfortable dealing with these issues on a cash basis and, overall, the communication of capital contin-ues to be expressed on this basis. It is also important for decision makers to understand the impact of capital on debt, which is more easily explained in terms of cash and does not require extensive knowledge of accounting terminology and practices.

A majority of the participants do, however, see the potential of accrual-based information in capital decision making. Those working in jurisdictions with a history of providing accrual-based information generally agreed that the decision-making process has improved and offers more opportunities to fully understand the impli-cations of decisions on the overall financial position. Participants from jurisdictions that have only recently introduced capitalization practices, on the other hand, believe that decision making on an accrual basis will continue to be of secondary importance to cash for the immediate future, and that it will be a number of years

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before decision makers feel comfortable with adopting new practices.

OTHER DECISIONS AFFECTED BY ACCRUALS

It is generally acknowledged that capital is the major budget component affected by accrual accounting. It is also recognized that matters such as retirement and other employee benefits, provisions for losses, service of the debt and revenue have been similarly affected by accruals (see Appendix C, responses to Question 4). Historically, these items have been subject to accrual-based accounting principles for a number of years.

Most governments have relied heavily on accounting officials to provide the appropriate information and advice on the amounts that should be included in the budget. Since many of the calculations are technical in nature, decision makers are more interested in the net results rather than the inputs. The following discussion reflects on some of these subjects. There is a significant amount of information available in the CICA Discus-sion Papers and other sources.

How do accrual-based accounting principles affect pension expense budgeting, especially in jurisdictions that have a significant amount of defined benefit plan liability? In general, defined benefit plans are subject to legislation and are founded on providing a guaranteed level of pension benefits calculated on the basis of salary level(s) and the number of years of contribution to the plan. The funding is provided through payments from contributors and the government and includes market returns from investments.

Accrual accounting provides a better presentation of projected pension expenses, especially the liability impact resulting from increased or decreased pension investment returns. Since these liabilities are projec-tions of pension payments over a long period of time,

the expense is considered a non-cash requirement for inclusion in the budget. In periods of high investment returns, pension expenses tend to affect the expected annual results in a positive manner. The opposite is true in periods of low or negative investment returns. The net result of accrual-based pension budgeting may be a false sense of increased or decreased financial health that could result in jurisdictions increasing or decreas-ing expenses (cash based) for other services provided in the budget.

Accounting standards require that pension expenses be recorded on an accrual basis. For budget purposes, it is important that the impact of pension expense be explained on a non-technical basis to decision makers to ensure that there is no overreaction to projected changes in liability. Pension expense is based on long-term funding requirements. Likewise, budgeting for pensions must be viewed over the long term, rather than just under current conditions.

Over the past decade, governments have gone through various programs of offering early retirement to employ-ees as part of their plans to meet fiscal objectives. The important factor for decision makers is the long-term financial impact of these programs and the projected off-setting savings. It is essential that a full costing model be prepared to ensure that the net result of these programs meets the objectives. The use of accruals provides better information for making these types of decisions.

In addition to early retirement programs, several jurisdic-tions are participating in benefits programs (especially health related) for persons who have either retired early or at the normal time. Again, since the costs of these benefits are calculated on an accrual basis, the liability and long-term funding obligations must form part of the decision-making process to ensure appropriate costing of the programs.

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To understand the financial implications of all of these benefit programs requires a cadre of financial officials and actuaries who have extensive knowledge of accounting standards and practices and have the ability to explain to decision makers the impact of decisions in a non-technical manner. There is a need for more educational tools in the whole area of costing employee benefit programs, especially in budgeting and account-ing practices.

PROGRAM MANAGEMENTGenerally, most government managers do not consider accruals and other accounting policies to be particularly important, especially in terms of the day-to-day respon-sibility to deliver services. Although managers are asked to provide financial information that will be included for budget decision-making purposes, they normally rely on financial officials either within their department or from central agencies to identify the proper account-ing treatment.

With the introduction of full-accrual accounting for capital assets, government officials have come to under-stand that accruals, especially amortization expenses, may have a significant impact in the overall daily management of programs. Across Canada, governments seem to be using two approaches to the administration of amortization expense. These can be categorized as either a direct department responsibility or a government-wide responsibility.

In jurisdictions where amortization expense is the responsibility of each department, a failure to place sufficient importance on accruals can have a negative

impact on the overall department budget. For example, if an asset is neglected and/or becomes unusable, it may be necessary to increase its rate of amortization, which can result in the diversion of funding from another departmental responsibility.

In such instances, it is important that information on asset condition be kept up to date and that amortization expenses be treated the same way as other operational costs requiring regular evaluation. Managers faced with these issues are more inclined to take an interest in the impacts of accrual-based information on the budgeting exercise. They recognize that a failure on their part to have a budget allocation that provides an accurate level of amortization can lead to pressure on the overall department budget.

Jurisdictions that have decided to centralize amortiza-tion expense in a government-wide account will see a tendency for program managers to view amortization as a matter outside of their responsibility. Since changes to the amortization charge do not affect the departmental budget, the importance of keeping accrual-based infor-mation up to date and accurate is less of a priority than other expenses under their control.

Under a government-wide program, central agencies play a leadership role in developing budgeting information and in the administration of amortization policy. They view this centralization as a better means of ensuring that accounting policies are applied consistently across government and allow a degree of flexibility in manag-ing the overall amortization expenses.

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CONCLUSIONThere is mixed opinion on the value of accrual-based decision making by senior governments. In some juris-dictions, the government sees accruals as an opportu-nity to provide enhanced costing information, thereby improving the overall quality of decisions that will have an impact on budgets over a number of years. In other jurisdictions, the government sees the need to continue making decisions on a modified accrual basis, whereby accruals account for most decisions with the exception of capital, which continues to rely on modified cash for decision making and communication purposes.

On a historical basis, it is difficult to come to the conclusion that accruals have resulted in better decision making, especially in terms of capital budgeting matters. As governments become more familiar with the benefits derived from accrual-based accounting, there will be some comfort in applying costing models and evaluating options as part of their budget process, ultimately leading to better informed decisions. A general movement to accrual budgeting for capital decision-making purposes will, however, likely not be realized for years to come.

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INTRODUCTION

Like other financial management responsibilities, budgeting faces ever increasing demands for more financial and non-financial information. Non-traditional budgeting sources, international practices and public pressure on governments to introduce new accountability and transparency practices have all contributed to these new demands.

This chapter examines the major emerging issues and identifies future research that can benefit the budgeting community. Although accrual budgeting practices are not the main emphasis in this section, they will have an impact on future accounting and policy direction.

PERFORMANCE AND BUDGETING ACCOUNTABILITYPerformance measurement and performance reporting have become central issues in government accountabil-ity. Some senior governments have established statutory obligations and developed processes for ensuring that policy objectives can be measured and performance reports provided on achievements. Others have estab-lished measurement policies, providing performance updates in department/agency annual reports. Overall, there is a positive movement by governments to connect the things they say they will do with what they actually have accomplished.

To assist governments in meeting the objectives of performance reporting, PSAB published the State-ment of Recommended Practice for Public Performance Reporting (SORP-2) and the accompanying Guide to Preparing Public Performance Reports. The overall emphasis is as follows:

PSAB expects that performance reports using the guidance in the SORP will result in a more accountable, rigorous and disciplined public sector management, and that reporting will move beyond inputs and outputs to outcomes. The most signifi-cant benefit will be that the users of the government reports will be able to assess the impact of govern-ment activities.13

Governments now have the tools for conducting a self-assessment of achievements and producing accompany-ing documentation that demonstrates accountability. Measuring Up reports prepared by the Government of Alberta and the Federal Government’s Canada’s Performance are examples of accountability documents designed to help taxpayers judge achievements.

What is the relationship between financial account-ability and performance accountability? Whereas performance evaluation follows a path from establish-ing goals to achievement reviews, financial evaluation moves from the budget to audited financial statements. The actual link between financial accountability and performance accountability is not clear. Most jurisdic-tions operate two processes, running parallel to each other, seldom intersecting, nor capable of answering the central concern of the public: “Is my money being spent wisely on the services I need?”

Several jurisdictions have requirements to link resources with results achieved. This may include disclosing the direct costs needed to reach a level of achievement, efficiency efforts and multi-year funding requirements to meet specific goals. The difficulty lies in the reliabil-ity of the financial information required to determine

13 Refer to Judy Ferguson, FCA, Deputy Provincial Auditor of Saskatch-ewan and Karim Pradhan, CA, Audit Principal, Alberta OAG, Member Advisory (April 2007).

Chapter 6

ACCRUAL BUDGETING ISSUES

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the achievements. For example, it may be easy for a government to disclose the amount of money it spent on health services and also have a stated objective to increase life expectancy over a set number of years. The government will be able to measure the rate of achiev-ing the objective, but it would be difficult to place an accurate price tag on this goal or the cost of achieving the annual results.

Summary budgets are the main communication tool used to inform taxpayers about expected achievements and funding required to achieve objectives. The budget and related communication notes are not normally technical in nature and provide brief, precise explana-tions of the major features, objectives and costs associ-ated with meeting a fiscal plan.

On the other hand, the estimates are technical, provide tables and expenditure plans that are difficult for most non-accountants to understand, and are often voluminous. It is understandable that the content of budget plans and explanatory notes receive consider-able press coverage and public scrutiny, whereas other working documents, such as the estimates, receive less attention.

It may be useful, in the future, to design budget docu-ments that directly connect performance goals and objectives with fiscal plans, giving both the public and legislators information they can track on a regular basis. Just as multi-year forecasts provide guidance on a government’s long-term fiscal objectives, performance measurement documents provide useful information about the proposed impact of policy decisions. Coupling the two processes on a government mandate basis (over four to five years) would provide a clearer and more visible means for judging the success of that govern-ment’s commitment to meet objectives and maintain its overall financial health. In addition, the introduc-tion of evaluation processes, such as that contained in

the Public Performance Reporting SORP, would provide more meaningful information that could readily be linked to the discussion and analysis sections of the financial statements.

SERVICE DELIVERY OPTIONSThe delivery of government services is one of the top priorities for ensuring that the needs of the public are addressed in the most effective and efficient manner. Over the past three decades, most jurisdictions have introduced options for providing service delivery, notably privatization and public/private partnerships (P3) initiatives. These delivery models have resulted in governments undertaking major projects, such as highway/bridge construction and maintenance, and building or upgrading facilities for the provision of education, health, justice and correction services.

The evaluation of service delivery options is an impor-tant function not only for recommending the best delivery mechanism, but also for providing meaningful costing/budgeting information in the decision-making process. Accrual accounting practices play an important role in ensuring that proposals are evaluated against each other and for determining whether an option has a cost-effective advantage over traditional in-house delivery practices.

Senior governments that are heavily involved in alter-native service delivery practices have spent considerable effort developing protocols, policies, best practices and evaluation methodologies. Since the private sector already has options for evaluating different ways of delivering services, private sector accounting policies for developing delivery proposals should be reconciled with those of the public sector. The adoption of full-accrual accounting in the public sector has provided the link for comparing costs over a period of years and is fundamental for analyzing the most cost-effective proposal.

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INTERNATIONAL PRACTICES

As stated earlier, accrual budgeting has not been universally accepted by most developed nations. Similar to the Canadian experience, some countries have introduced accrual accounting for reporting purposes but few have adopted accrual accounting for all budgeting documents including the estimates and appropriations.14

Australia and New Zealand have, however, used accrual-based budgeting practices for several years. An overview of their experiences provides useful informa-tion and future guidance to public sector organizations in other countries.

Australia introduced accrual budgeting in the late 1990s while New Zealand implemented it as part of the Public Finance Act of 1989. The current literature suggests that the experience of both countries was similar to that of Canada’s senior governments during the first few years after accrual accounting was intro-duced. The budgeting changes were only part of an overall package of government reform and it is difficult to determine if the successes and issues stemmed from the accounting changes specifically or the implementa-tion of reforms generally.

The worsening fiscal situation of the late 1980s and the negative projections for the early 1990s prompted New Zealand’s financial reform. The new government elected in 1990 decided:

…this fiscal situation would not be managed through increases in tax revenue. It therefore focused on expenditure in a three-pronged strategy: to reduce government spending; to channel resources to high

14 For a review of the current situation, refer to Organisation for Economic Co-operation and Development (OECD) 9th Annual OECD Public Sector Accruals Symposium, March 2-3, 2009.

priority areas and away from low priority areas; and to seek greater value for money.15

This direction has remained fairly constant over the years, although areas such as the accounting treatment of capital and government enterprises have been updated at regular intervals.

Budgeting in New Zealand during this period was not immune from the impact of government reform. The focus by legislative decision makers moved from a fairly comprehensive evaluation of all inputs on a program basis to one where attention was placed on “output classes” and their impact on outcomes. The inputs necessary to reach these outputs became a departmental responsibility and required the evaluation of options and other efficiency/cost-cutting efforts to meet govern-ment objectives. Accruals became an essential feature in the department decision-making process, especially for evaluating options and determining the long-term cost implication of decisions. This had a spillover effect on the management of assets, whereby managers realized the importance of accrual information to the overall future of programs and delivery systems.

Australia adopted accrual-based financial reporting in 1984. The first accrual-based budget was released in 1999. The country’s governments experienced several “growing pains” during the initial years (identified in the 2006 CICA Discussion Paper Accounting for Tangible Capital Assets. Nevertheless, accruals are now fundamen-tal to the output-based budget decision-making process. Similar to New Zealand, legislators are more interested in the overall costs of meeting objectives and leave the input costs decisions associated with service delivery to each government department or agency.

15 Ken Warren and Cheryl Barnes, “The Impact of GAAP on Fiscal Deci-sion Making: A Review of Twelve Years’ Experience with Accrual and Output-based Budgets in New Zealand,” OECD Journal on Budgeting, 3, 4 (2003).

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In 2002, Australia adopted “sector-neutral” accounting standards that reflect, for the most part, IFRS. Sector-neutral denotes the use of the same (or similar) stan-dards in the public, not-for-profit and private sectors, thereby providing a common approach to accounting treatment and policy evaluation. There has been some debate recently over the benefits of recognizing different objectives and reporting needs for the public and not-for-profit sectors, which now questions the foundation of sector-neutral accounting. Although there is no immediate movement to change the current approach, it will be interesting to follow this discussion in the future, especially given Canada’s current movement to requiring certain public sector organizations to follow IFRS.

FUTURE RESEARCH NEEDSThe government budgeting workshop discussions and survey results indicate that most budgeting officials want to see further research and sharing of information if they are to meet their responsibility of providing informed advice to the government. This is especially relevant for changing economic outlooks and increased attention to financial accountability requirements.

Most budgeting officials do not consider accrual account-ing issues to be high on the priority list of future research activities, except perhaps with regard to the impact it may have on current contentious issues, such as inter-government transfers, unresolved government budgeting entity concerns and environmental liabilities.

The survey asked budgeting officials to comment on emerging budgeting issues (other than accrual related) that they believed require further research and review (see Appendix C, responses to Question 9 and Question 10). Survey respondents had some common requests — further review of budget accounting practices, looking at the impact of IFRS, accounting for government transfers and accounting for financial instruments. Other research requests included:

multi-year and in-year fiscal forecasting; y

use of fair market value measurements in govern- y

ment;a review of “control” criteria for the government y

reporting entity.

It is clear that budgeting officials see an overall need for more interaction among budgeting officials across Canada. Suggestions such as maintaining an up-to-date directory of budgeting officials, the provision of copies and summaries of national and international budget-ing reviews and more independent research on current and emerging issues were discussed (see Appendix C, responses to Question 11). To achieve any of this, the officials suggested establishing a support mechanism to oversee these activities and to maintain continuity from year to year.

“Most budgeting officials do not consider accrual accounting issues to be high on the priority list of future research activities, except perhaps with regard to the impact it may have on current contentious issues, such as inter-government transfers, unresolved government budgeting entity concerns and environmental liabilities.”

Finally, discussions by workshop participants made it clear that budgeting practices have been affected by changes in accounting standards on government finan-cial reporting. The most controversial budgeting issues emerged during the discussion of those standards, and the ensuing frustration centres on the lack of perceived acknowledgement of budget and fiscal policy concerns identified during these discussions.

Although budgeting practices are not subject to accounting standards, the budgeting community has an opportunity to comment on proposed changes in accounting standards. Providing useful comments on

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such changes requires a focus on budgeting practices and fiscal issues, and making an effort to establish a forum to address concerns prior to the implementation of new or revised standards.

In July 2007, Canada’s senior government Deputy Ministers of Finance set up a Joint Working Group (JWG) with the CICA’s Public Sector Accounting Board (PSAB) to review common interests and prepare papers on key issues. In January 2009, several papers were issued by the JWG. These papers represent the culmination of a year-long collaboration among Deputy Ministers from senior Canadian governments and PSAB representatives.

In accordance with the terms of reference of the JWG, the papers cover the following issues:

the Conceptual Framework and its alignment with y

sound public policy, fiscal accountability, and trans-parency in financial reporting; PSAB’s governance structure and standard-setting y

processes; and proposed changes in accounting standards in specific y

areas including government transfers and financial instruments.

The papers were compiled by sub-teams comprising staff from both PSAB and representative governments and reflect the feedback and comments received from officials representing all senior Canadian governments.

The specific recommendations in the papers are strongly supported by all the provincial Deputy Ministers on

the JWG. Due to the urgent timing considerations, the Deputy Ministers requested immediate action by PSAB with respect to its existing guidance related to government business enterprises (GBEs), government business-type organizations (GBTOs) and consolidation of schools, universities, colleges and hospitals (SUCH sector organizations) in order to allow full consideration of the recommendations in these areas. The Deputy Ministers on the JWG further urged PSAB to introduce new mechanisms to respond to urgent emerging issues in a more timely manner, given today’s rapidly changing economic and financial environment.

CONCLUSION

As we move into the next decade, budget-related accounting practices will continue to be dominated by accountability and transparency obligations. It is anticipated that current issues, such as the evolution of the government budgeting entity, the adoption of full-accrual accounting for decision-making purposes and accounting for government transfers will be resolved, perhaps replaced by budgeting issues centred on providing increased accountability for program performance results and overall financial stability and health.

Senior government budgeting officials have a key role to play in the development of appropriate responses to accountability and transparency issues. They need to keep up to date on emerging issues and budget account-ing policies and practices to ensure that they can offer appropriate advice on the options available for govern-ment consideration.

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INTRODUCTIONCanada’s senior governments have witnessed periods of significant growth in the economy during the past several decades. That growth provided opportunities for increasing employment and reducing taxes, as well as improving services to the public.

From a financial management perspective, governments have made steady progress toward balancing their budgets, reducing debt and implementing solid founda-tions for meeting their accountability and transparency commitments. This led to a steady improvement in financial health and overall optimism in continuing to meet the needs of the public while maintaining a fiscal philosophy of “living within our means.”

Over the next few years, however, a great deal of this optimism will be dampened by recent financial events. With a contraction of the economy, major layoffs are occurring on a regular basis and governments are refo-cusing their fiscal objectives to meet current economic realities. The immediate future will be marked by the introduction of measures intended to reverse this down-turn and revitalize the economy.

Under this scenario, financial management practices have a key role to play. The public and other interested parties want governments to develop new ways of ensur-ing that public money destined to stimulate the economy and create employment is available as expeditiously as possible, while continuing to provide safeguards that maintain accountability. Additionally, governments need to provide assurance that major stimulus programs will not lead to structural deficits that will impair the affordability of future services to the public and transfer indebtedness to future generations.

Whether the context is economic growth or economic downturn, there are many challenges to accrual budgeting and accountability. An overview of the major challenges is provided in this chapter, including those related to:

legislative authority;•budgeting entity;•capital assets;•communications; and •innovative decision making.•

ACCRUAL BUDGETING CHALLENGES

Legislative AuthorityFinancial administration acts are the foundation of legislative obligations and will continue to prescribe the basic content of financial management documents ranging from the budget to performance reports. Gov-ernments will, however, need to review these obligations and compare them to the current financial management policies and practices in each jurisdiction.

As part of their review, governments should ensure that accounting policies are not compromised or in conflict with statutory definitions and obligations. This is especially important where accruals are used for both budgeting and financial reporting purposes but govern-ing legislation solely reflects cash (or modified cash) as the basis of accounting. Providing clarity through legislative amendments would reduce confusion over the role accrual accounting plays in financial management practices.

Perhaps, the greatest challenge in the immediate future will be ensuring the effectiveness of statutory commit-ments to balance budgets and to manage or reduce

Chapter 7

FUTURE CHALLENGES FOR ACCRUAL BUDGETING

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debt. It is widely believed that the true test of financial management legislation is not its effectiveness during periods of economic growth but, rather, how effective it is during economic downturns. Are these commit-ments achievable? As an alternative, do governments need to revise these obligations or at least suspend them for a while?

Governments have two choices. Should they decide to meet existing legislative requirements, they can budget for the downturn by introducing recovery programs offset by reduced expenditures in other areas and, perhaps, increased taxation. The problem is that most governments not only find it difficult to reduce expen-ditures on services the public traditionally expects but are also reluctant to increase taxes.

“The whole concept of financial accountability legislation will be tested over the next few years. Governments will need to examine their commitments within the context of the current situation as well as the long-term objectives they want to achieve.”

The second option is to recognize that it may not be possible to achieve balanced budgets and to manage or reduce debt during the recovery period. Under this option, governments can prepare a multi-year fiscal forecast projecting deficits and increases in debt to meet the economic challenges. They can also amend legislative commitments for an interim period to reflect recovery objectives. Alternatively, they can issue a statement to the legislature that the objectives expressed in legislation will not be achieved during the forecasted period.

It is likely that the second option will be the path most governments will choose to follow despite certain draw-backs, especially with regard to the long-term validity of the statutory commitments. If balanced budgets and

debt management or reduction can be achieved only during periods of stable economic growth, the value of making such commitments is questionable. It may be more appropriate for governments to view balanced budgets and debt reduction as strategic objectives, rather than obligations defined through legislation.

The whole concept of financial accountability legisla-tion will be tested over the next few years. Governments will need to examine their commitments within the context of the current situation as well as the long-term objectives they want to achieve. Accountability remains crucial and legislation continues to be the principal format for demonstrating accountability commitments. On the other hand, legislation should be able to with-stand the test of time.

Budgeting EntityAccounting standards set out in the CICA Public Sector Accounting Handbook apply only to financial state-ments, not to budgeting documents. Since there is a requirement to present budget to actual comparisons, accounting standards can have an impact on budgeting documents, including information on the government budgeting entity. Two issues are unresolved:

Which methods of accounting are appropriate for y

including government organizations in either the reporting entity or the budgeting entity?

Which accounting standards are appropriate for the y

budgeting process?

As previously stated, the Public Sector Accounting Board (PSAB) is currently reviewing the requirement that government business enterprises (GBEs) and gov-ernment business-type organizations (GBTOs) adopt IFRS by 2011. This creates an opportunity to address the concerns various governments have expressed, leading to a satisfactory solution following due process.

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Second, the inclusion of organizations such as colleges, schools and hospitals using the line-by-line consolidation method remains an issue for some senior governments. The Deputy Ministers of Finance/PSAB Joint Working Group (JWG) has offered some recommendations that may provide a basis for addressing this concern. In addi-tion, PSAB has recently extended the implementation deadline to allow an opportunity for further review.

Without limiting the need for an acceptable solution to these issues, it must be recognized that several jurisdic-tions accepted the accounting standard on consolidation when it was issued and made the appropriate adjustments to both their financial reporting and budgeting docu-ments. If the objective is to achieve consistency within a government and also across jurisdictions, then allowing too much flexibility to accommodate the concerns of selected jurisdictions runs counter to this objective. Accordingly, new or amended accounting standards must be based on a comprehensive due process which ensures that no government jurisdiction is left in a dis-advantaged position because standard setters have had to revisit certain issues.

Capital AssetsAs previously discussed, accrual accounting plays an important role in budgeting for capital acquisitions over a multi-year period. This role may be tested over the next few years, especially during the economic recovery period, but it has the potential to lead to significant changes to future budgeting and financial reporting practices.

The usefulness of capitalization as a planning tool will soon become evident, especially in government juris-dictions whose economic stimulus packages contain major infrastructure components. Although govern-ments are prepared to introduce a number of “shovel ready” projects to create employment opportunities over a short period of time, other initiatives will require

appropriate planning and evaluation before construc-tion can commence.

Governments that take a multi-year approach to capital projects and review alternative funding opportunities, such as public-private partnerships, will benefit from accrual budgeting. It should ensure that public money is allocated in the most effective and efficient manner.

One drawback of accrual accounting for capital is the perception that the financial impact of these capital projects is understated. Because amortization becomes the basis for expensing the costs, the charges for capital projects will not be recognized until an asset is actually in use. As part of their accountability and transparency obligations, governments need to provide multi-year information on the impact these capital projects will have on amortization expenses, as well as on any costs (such as interest) charged to debt. This information should be comprehensive, easily understood and be part of capital impact statements provided to the public on a regular basis.

In addition, the impact on debt becomes a crucial factor in describing the financial health of each government jurisdiction. As stated earlier, the interpretation of “debt” is not consistent from one senior government to another, sometimes being described as “accumulated deficit” and other times as “gross debt.” The definition of “net debt” is the most reasonable for indicating levels of liability and tracking the debt growth rate. It may be beneficial for all jurisdictions to use net debt as the foundation for discussions on financial health and the impact on future generations.

CommunicationsBoth nationally and internationally, accounting stan-dards are constantly changing. Accordingly, there is a need for more cooperation, sharing of information and development of technology. This applies not only across

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government jurisdictions, but also among senior gov-ernments and other levels of government, accounting standard setters, the media and the public in general. In fact, the sharing of information is a major form of communication among senior governments.

Most financial management issues are not confined to a small number of jurisdictions. On the contrary, they are matters that normally have an impact on all senior governments. Jurisdictions faced with implementing new or amended accounting standards on a regular basis have a need for more dialogue among themselves to determine the most effective means for making the necessary changes in their reporting documents. Of added importance, especially to the budgeting com-munity, such dialogue offers a way to assess the impact these changes will have on budgeting documents, as well as accountability and transparency obligations.

Canada’s community of senior government financial comptrollers has made a great deal of progress in sharing information. It has established a secretariat that provides information on national and international accounting developments to all the comptrollers and assists this community in developing common approaches to issues that arise. A similar secretariat would benefit the bud-geting community by ensuring that budgeting officials receive, in a timely manner, non-technical and easily understood analyses of the budgeting impact of pro-posed accounting changes and other pertinent issues.

Senior governments also need to share information and experiences with local governments. This may be particularly relevant with regard to public sector accounting standards for valuing capital assets and determining amortization rates, matters for which all senior governments have had to develop appropriate policies and practices. Such information would assist local governments that have neither the resources nor the knowledge needed to deal with these issues.

“Both nationally and internationally, accounting standards are constantly changing. Accordingly, there is a need for more cooperation, sharing of information and development of technology.”

To ensure positive future relationships between senior governments and accounting standard setters are established and maintained, the standard setters must consider the implications of accounting standards on government budgeting practices. The current gap between the numbers in a government’s budget and what is ultimately reported in the financial statements must not be allowed to widen. Accomplishing this goal requires a concentrated effort by the standard setters and every senior government jurisdiction in Canada.

The standard setters must ensure the participation of the budgeting community on every accounting task-force so that policy and budgeting concerns receive full attention before new or revised accounting standards are introduced. On the other hand, without questioning the sovereignty of each jurisdiction, senior government officials must become more engaged in the discussion of accounting standards. Furthermore, they must rou-tinely respond to accounting exposure drafts and other documents for comment to ensure that their viewpoints are considered.

To facilitate better communication between senior governments and the standard setters, it may be beneficial to review the outcomes of recent meetings by the Deputy Ministers of Finance/PSAB Joint Working Group. This will assist both senior governments and PSAB in dealing with pressing accounting issues. Also, it may be appropriate for senior governments and PSAB to develop a more permanent structure through which accrual budgeting issues can regularly be discussed and addressed in a mutually satisfactory way.

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The public relies on media reports to evaluate most eco-nomic information and fiscal conditions. Therefore, it will be paramount for governments to provide compre-hensive and easily understood information on the status of multi-year budget plans. It is essential for governments to discuss this information with media representatives and the public on a regular basis. The budget information they release must include not only program and project details, such as employment, service improvement and associated costs, but also the budget’s impact (especially of short and long-term deficit and debt forecasts) on a government’s overall financial health.

Finally, communications must also include references to information technology (IT). Most information today is generated through extensive IT systems that have the ability to provide up-to-date information on many, many topics. IT is the backbone of all financial management processes. Without IT, it would be impossible to produce most of today’s budgeting and reporting documents.

Accrual accounting has increased the use of these IT systems, especially when it comes to cataloging capital assets and recording amortization charges. Some consider the additional costs and resources required to effectively introduce accrual accounting into these systems to be a drawback. They do not see the benefits outweighing the costs. With the general acceptance of capital asset accounting as both a planning and report-ing tool, however, governments have made an effort to ensure that information systems remain relevant and continue to provide the information needed for prepar-ing the budget documents and for financial reporting.

Innovative Decision MakingIf there is a silver-lining to the economic downturn, it is the potential to develop innovative approaches to deci-sion making that could have long-term application to budgeting practices and processes. A review of the major infrastructure programs suggests that governments are

interested in building into their budgeting activities speedier, multi-year applications and more effective accountability mechanisms.

In addition, the ability to effectively monitor and report performance results has become an essential feature of every recovery program. This will be the impetus for governments to ensure that they can accurately measure results on a regular basis and provide assurance that taxpayers are receiving value for their money.

“If there is a silver-lining to the economic downturn, it is the potential to develop innovative approaches to decision making that could have long-term application to budgeting practices and processes.”

Accrual-based decision making offers an opportunity for governments to evaluate capital plans on a multi-year basis. It also provides a foundation for a more accurate and speedier evaluation of service delivery options to determine the appropriate and most effective means of completing major capital projects.

To take full advantage of these benefits, governments and elected officials must begin using accruals for capital decision making and feel comfortable that they add to the quality and effectiveness of the budgeting process. It will be important for financial management officials to provide leadership in the development of budgeting and reporting documentation that reflects the benefits of accrual-based decision making and provide appropriate accountability structures.

Finally, from a performance accountability perspective, the next few years will provide an increased oppor-tunity to experiment with the addition of forecasted performance results within budget documents. Initially, coverage may be limited to matters such as projected

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direct and indirect employment opportunities, the rate of project completion and resulting service impacts. The lessons learned during this time will provide a founda-tion for future accrual budgeting to be more transparent and more responsive to the needs of the public.

CONCLUSIONCanada’s senior governments are now concentrating all their efforts on the development of initiatives aimed at minimizing the impact of the economic downturn. Budgeting is no longer a once-a-year headline in the media. Instead, the budget is of ongoing interest, pro-ducing information on a regular basis used to hold the governments accountable for their economic stimulus efforts and the creation of employment opportunities.

The public’s attention is focused on how governments develop their recovery programs and on how they com-municate the effectiveness of those programs.

To assist them through these difficult times, govern-ments have developed the necessary budgeting and accountability tools. They have the foundation of leg-islative and policy experience to ensure that the accrual accounting aspects of financial administration assist rather than impede them in reaching their objectives. It is clear that accrual budgeting has a role to play in the future plans of senior governments. They will recognize the beneficial aspects of accruals and they will find increased opportunities in these challenging times to be better positioned for success in future years.

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The objective of this research project is to address the current issues Canadian federal, provincial and territorial governments face when they prepare appropriations documents (appropriations/estimates) and accrual-based budget documents, including how budgets are reconciled to financial statements to provide the budget to actual comparisons required by the CICA Public Sector Accounting Handbook.

For the Canadian federal, provincial and territorial governments, the research project:

Summarizes the benefits and drawbacks of using y

accrual-based accounting for preparing budgets and appropriations documents.Determines whether and, if so, how accrual informa- y

tion can be meaningfully factored into the budget decision-making process.Identifies and assesses the implications of moving to y

an expense-based reporting model for the way govern-ments operate, the impact on how they manage and how the move might motivate them to act, as well as the changes that might result in government account-ability.

Summarizes current and planned initiatives with y

respect to:legislative provisions on accrual-based ï

accounting in budgets and appropriations;the basis of accounting, the budgeting entity, the ï

basis of consolidation and the significant accounting policies used in budgets and appropriations;budget numbers presented in the ï

summary financial statements;numbers from appropriations/estimates that are ï

presented in the summary financial statements.Identifies and analyzes alternative approaches to y

addressing emerging accrual accounting issues that are likely to receive divergent treatment in government budgets and appropriations documents.

Appendix A

OBJECTIVE AND TERMS OF REFERENCE

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Appendix B

GOVERNMENT BUDGETING WORKSHOP QUESTIONNAIRE

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Appendix C

GOVERNMENT BUDGETING WORKSHOP — SURVEY RESULTS

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ALBERTAFinancial Administration Act – y www.canlii.org/ab/laws/sta/f-12/Fiscal Responsibility Act – y www.canlii.org/ab/laws/sta/f-15/Government Accountability Act – y www.canlii.org/ab/laws/sta/g-7/

BRITISH COLUMBIAFinancial Administration Act – y www.qp.gov.bc.ca/statreg/stat/f/96138_01.htmBalanced Budget and Ministerial Accountability Act – y www.qp.gov.bc.ca/statreg/stat/b/01028_01.htmBudget Transparency and Accountability Act – y www.qp.gov.bc.ca/statreg/stat/b/00023_01.htm

MANITOBAFinancial Administration Act – y www.canlii.org/mb/laws/sta/f-55/Balanced Budget, Debt Repayment and Taxpayer Accountability Act – y www.canlii.org/mb/laws/sta/b-5/Fiscal Stabilization Fund Act – y www.canlii.org/mb/laws/sta/f-85/

NEW BRUNSWICKFinancial Administration Act – y www.canlii.org/nb/laws/sta/f-11/Fiscal Responsibility and Balanced Budget Act – y www.canlii.org/nb/laws/sta/f-14.03/Fiscal Stabilization Fund Act – y www.canlii.org/nb/laws/sta/f-14.05/

NEWFOUNDLAND AND LABRADORFinancial Administration Act – y www.canlii.org/nl/laws/sta/f-8/index.htmlTransparency and Accountability Act – y www.canlii.org/nl/laws/sta/t-8.1/index.html

NORTHWEST TERRITORIESFinancial Administration Act – y www.canlii.org/nt/laws/sta/f-4/

NOVA SCOTIAProvincial Finance Act – y www.gov.ns.ca/legislature/legc/statutes/provfinc.htm

NUNAVUTFinancial Administration Act – y www.canlii.org/nu/laws/sta/f-4/

ONTARIOFinancial Administration Act – y www.canlii.org/en/on/laws/stat/rso-1990-c-f12/latest/rso-1990-c-f12.htmlFiscal Transparency and Accountability Act – y www.canlii.org/on/laws/sta/2004c.27/Treasury Board Act – y www.canlii.org/on/laws/sta/1991c.14/Ministry of Treasury and Economics Act – y www.canlii.org/on/laws/sta/m-37/

Appendix D

LISTING OF LEGISLATION

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PRINCE EDWARD ISLANDFinancial Administration Act – y www.canlii.org/pe/laws/sta/f-9/

QUEBECFinancial Administration Act – y www.canlii.org/qc/laws/sta/a-6.001/Balanced Budget Act – y www.canlii.org/en/qc/laws/stat/rsq-c-e-12.00001/latest/rsq-c-e-12.00001.htmlAn Act To Establish A Budgetary Surplus Reserve Fund – y www.canlii.org/qc/laws/sta/r-25.1/An Act To Provide For Balanced Budgets in the Public Health and Social Services Network – y www.canlii.org/qc/laws/sta/e-12.0001/An Act to Reduce The Debt and Establish the Generations Fund – y www.canlii.org/qc/laws/sta/r-2.2.0.1/

SASKATCHEWANFinancial Administration Act – y www.canlii.org/sk/laws/sta/f-13.4/The Growth and Financial Security Act – y www.canlii.org/en/sk/laws/stat/ss-2008-c-g-8.1/latest/ss-2008-c-g-8.1.html

YUKON TERRITORYFinancial Administration Act – y www.canlii.org/yk/laws/sta/87/Taxpayer Protection Act – y www.canlii.org/yk/laws/sta/214/index.html

GOVERNMENT OF CANADAFinancial Administration Act – y www.canlii.org/en/ca/laws/stat/rsc-1985-c-f-11/latest/rsc-1985-c-f-11.html Federal Accountability Act – y www.canlii.org/en/ca/laws/stat/sc-2006-c-9/latest/sc-2006-c-9.html

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The following definitions for terms used in this Research Report are based on the Glossary in the 2004 CICA Research Report Accounting Bases Used in Canadian Government Budgeting. References have been included for definitions not originating from the above document.

Accountability: a broad concept that requires an entity to answer to elected officials and the public they represent to justify the raising of public resources and to explain the purposes for which they are used. It includes provid-ing useful information for assessing an entity’s perform-ance. (CICA, Statement of Recommended Practice 2 (SORP-2) Public Performance Reporting, 2006)

Accrual basis of accounting (also known as accrual-based accounting and accrual accounting): a method of recording transactions whereby revenues and expenses are reflected in the accounts of the period in which they are considered to have been earned and incurred, whether or not all transactions have been finally settled by the receipt or payment of cash or its equivalent.

Accumulated Surplus/Deficit: the residual that remains when the government’s total liabilities are deducted from its total assets. (CICA, 20 Questions about Government Financial Reporting, 2004)

Amortization or amortization expense: the writing off, in a rational and systematic manner, over an appro-priate number of accounting periods, of a balance in an account. Depreciation accounting is a form of amortiza-tion applied to tangible fixed assets.

Annual appropriation: an appropriation authorized for the current fiscal year that lapses at the end of the year even if the expenditure has not been made.

Appropriation: legislative budgetary authority for the expenditure of public funds for the purpose and in the amount specified. The appropriation of funds does not normally, by itself, constitute authorization to make the actual expenditures.

Basis of accounting: the prescribed method of accounting (such as cash or accrual) that specifies when revenues, expenses/expenditures, assets and liabilities should be recognized in the financial statements.

Budget or summary budget: documents that portray public policy, present a government’s forecast of its expenses/expenditures and revenues, and disclose finan-cing requirements for operating and capital spending for a fiscal period. See budgetary documents.

Budgetary documents: all documents submitted to a legislature to disclose a government’s planned or fore-cast financial activities whether or not legislative action is required to authorize them. They normally include budget documents, estimates and budgets of separate accounting entities, such as Crown corporations.

Budgeting: the inclusion of amounts in a budget.

Budget transparency: the full disclosure of all relevant fiscal information in a timely and systematic manner. (OECD, OECD Best Practices for Budget Transparency, 2001)

Cash basis of accounting (or cash-based account-ing): a method of recording transactions by reflecting revenues and expenditures in the accounts in the period in which the related cash receipts or disbursements occur.

GLOSSARY

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Consolidated revenue fund: the primary fund through which most duties and revenues are accounted for and from which most expenditures are made.

Consolidation: a method of combining, on a line-by-line basis, the assets, liabilities, revenues and expenses/expenditures of a government entity with those of its overall government. The accounting policies are adjusted to conform to those of the government and any inter-entity transactions are eliminated.

Debt: Gross Debt describes the total debt a government owes to outsiders (i.e., issued debt), usually through debentures or bonds. Net Debt is the difference between the sum of all of a government’s financial assets and the sum of all of its liabilities. (CICA, 20 Questions about Government Financial Reporting, 2004)

Disbursement: an outlay of cash. Also see Expenditures.

Equity basis: a method of combining the net assets and net income of an organization with those of the govern-ment after adjusting the accounting policies to conform to those of the government.

Estimates: a government’s expenditure proposals for the next fiscal year presented to the legislature for its approval. The comprehensive set of estimates initially presented is referred to as the “Main Estimates.” In the course of the year, additional or revised estimates, referred to as “Supplementary Estimates,” may be presented.

Expenditures: the cost of goods and services a govern-ment acquires in a period. Expenditures include transfer payments due where no value is received directly in return.

Expenses: including losses, expenses are decreases in economic resources, either by way of outflows or

reductions of assets or incurrences of liabilities, resulting from the operations, transactions and events of an accounting period. Expenses include transfer payments due where no value is received directly in return.

Financial resources: include cash, claims to cash, investments and any other resources of the government that are not for consumption in the normal course of operations and are expected to contribute to net cash inflows (such as inventories for resale). A government’s financial assets comprise the financial resources of a government.

Fiscal policy: a government’s economic policy con-ducted via the government’s budget, based on decisions respecting public spending and taxation, intended to steer economic activity by influencing such factors as growth and employment.

Fiscal year: the financial period of one year, beginning April 1 and ending March 31, that is used by the federal, provincial and territorial governments.

Generally Accepted Accounting Principles (GAAP): for governments, the standards set out in the CICA Public Sector Accounting Handbook are the primary source of GAAP. GAAP for governments have con-centrated mainly on government summary financial statements. (CICA, 20 Questions About the Government Reporting Entity, 2007)

General revenue fund: See Consolidated revenue fund.

Government budgeting entity: for the purposes of preparing a government’s Summary Budget and Estimates documents, the phrase “budgeting entity” describes which departments, funds, agencies, boards, commissions, Crown corporations and not-for-profit organizations assets, liabilities, revenues, expenses and

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cash flows are part of a government in accordance with established government accountability and transpar-ency structures. (CICA Discussion Paper Defining and Accounting for the Government Budgeting Entity, December 2007)

Government business enterprise: an organization that has all of the following characteristics: (a) it is a separate legal entity with the power to contract in its own name and can sue and be sued; (b) it has been delegated the financial and operational authority to carry on a busi-ness; (c) it sells goods and services to individuals and organizations outside of the government reporting entity as its principal activity; and (d) it can, in the normal course of its operations, maintain its operations and meet its liabilities from revenues received from sources outside of the government reporting entity.

Government business-type organization: an organ-ization that has all of the following characteristics: (1) it is a separate legal entity with the power to contract in its own name and can sue and be sued; (2) it has been delegated the financial and operational authority to carry on a business; (3) it sells goods and services to individuals and organizations as its principal activity. Unlike government business organizations, this type of organization usually sells goods and services within the government or gets significant government subsidies to help carry on operations. (CICA, 20 Questions About the Government Reporting Entity, 2007)

Government financial statements: the summary finan-cial statements published by a government reporting entity that report on its financial position and changes in financial position. Financial statements include the notes and schedules supporting the statements.

Government organization: an organization controlled by a government.

Government partnership: a contractual arrangement between a government reporting entity and a party or parties outside of the government that has all of the fol-lowing characteristics: (a) the partners cooperate toward achieving significant clearly defined common goals; (b) the partners make a financial investment in the gov-ernment partnership; (c) the partners share control of decisions related to the financial and operating policies of the government partnership on an ongoing basis; and (d) the partners share, on an equitable basis, the signifi-cant risks and benefits associated with the operations of the government partnership.

Government reporting entity: comprises the organiza-tions controlled by a government. Control is the power to govern the financial and operating policies of another organization, with expected benefits or the risk of loss to the government from the other organization’s activities.

Government transfers: transfers of money from a government to an individual, an organization or another government for which the government making the transfer does not: (a) receive any goods or services directly in return, as would occur in a purchase/sale transaction; (b) expect to be repaid in the future, as would be expected in a loan; or (c) expect a financial return, as would be expected in an investment.

Lapsed funds: the balance of an appropriation author-ized for a particular fiscal year that remains unspent at the end of that year, subject to conditions regarding the settlement of outstanding payables at year end.

Modified equity basis: a method of combining the net assets and the net income of a government busi-ness enterprise with those of the government without adjusting the accounting policies to conform to those of the government.

Operating fund: see consolidated revenue fund.

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Performance: what the entity did with its resources to achieve its results and the assessment of those results against what the entity intended to achieve. Perform-ance is often described in terms of effort, capacity and intent. (CICA, Statement of Recommended Practice 2 (SORP-2), Public Performance Reporting, 2006)

Performance measure: the metric used to directly or indirectly measure a particular aspect of performance and can include measures of input, output and outcome. To be meaningful, performance measures must be specific, measurable, achievable, results oriented and time-focused. (CICA, Statement of Recommended Practice 2 (SORP-2), Public Performance Reporting, 2006)

Public accounts: the document that contains a gov-ernment’s audited financial statements and such other information as is presented to the legislature to provide information and show compliance with legislative authorities.

Public administration: all of the services under a government and its agents that serve to ensure the application of laws and the ongoing operation of the public services.

Public sector: all public administrations and enterprises of senior and local governments.

Risk: refers to factors that may affect inputs, outputs and the achievement of outcomes either adversely or posi-tively. Risk is often assessed in terms of the probability

of a negative event occurring or opportunities missed, and the likely associated impact of that event. (CICA, Statement of Recommended Practice 2 (SORP-2), Public Performance Reporting, 2006)

Statutory appropriation: an appropriation authorized by statute on a continuing basis without the need for annual approval.

Summary financial statements: financial statements that report on the financial position and results of oper-ations of the government reporting entity through the consolidation of all government organizations except government business enterprises, which are included on a modified equity basis.

Tangible capital assets: non-financial assets having physical substance that: (a) are held for use in the production or supply of goods and services; (b) have useful economic lives extending beyond an account-ing period; and (c) have been acquired to be used on a continuing basis.

Transaction basis: a method of recording transactions between a government and an organization that is not included in the government budgeting entity. (CICA Discussion Paper Defining and Accounting for the Gov-ernment Budgeting Entity, December 2007)

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The principal source of information for this Research Report was the financial management and account-ability legislation adopted by Canada’s 14 senior governments. These statutes are listed in Appendix D and can be accessed through the hyperlinks provided. In addition, the recent budget documents, estimates, public accounts, auditor general reports and com-mentaries also examined for this Research Report are available on each government’s website. Other selected reference materials include the following:

Canadian Institute of Chartered Accountants. Accounting Bases Used in Canadian Government –

Budgeting. Toronto, 2004.Accounting for Tangible Capital Assets – , 2006.20 Questions about Government Financial Reporting – , 2004.20 Questions about the Government Reporting Entity – , 2007.Defining and Accounting for the Government –

Budgeting Entity, 2007Legislative Accountability Framework for Preparing –

Government Budgets and Estimates, 2007Links between the Budget and the Estimates – , 2006.Public Performance Reporting, A Guide to Preparing –

Public Performance Reports, 2007.Public Sector Accounting Handbook – – selected Sections.Statement of Recommended Practice (SORP-2), –

Public Performance Reporting, 2006.

Challen, D.W. “Review of the Policy of Sector-Neutral Accounting Standard-Setting in Australia.” Oral presentation. CPA Australia – Tasmania Conference 2006, November 2006.

Champoux, Mark. Accrual Accounting in New Zealand and Australia: Issues and Solutions. Federal Budget Policy Seminar, Briefing Paper No. 27. Boston: Harvard Law School, April 2006.

Fédération des Experts Comptables Européens.Accrual Accounting for More Effective Public Policy – . Brussels, February 2006.Accrual Accounting in the Public Sector – , January 2007.The New Public Management – A Perspective for –

Finance Practitioners, December 2006.

Governmental Accounting Standards Board. Why Gov-ernmental Accounting and Financial Reporting Is – And Should Be – Different. Washington, 2007.

Government of Canada. Treasury Board Secretariat. Increased Use of Accrual Accounting in the Budget and Expenditure Cycle. Ottawa: PricewaterhouseCoopers, LLP, March 2006.

International Federation of Accountants.International Public Sector Accounting Standard –

(IPSAS24) Presentation of Budget Information in Financial Statements. New York, December 2006.Developments in Performance Measurement –

Structures in Public Sector Entities. Information Paper, November 2008.

International Monetary Fund.Guidelines for Public Expenditure Management – . Washington, 1999.Manual on Fiscal Transparency – , Washington, Revised 2007.

SELECTED BIBLIOGRAPHY

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Performance Budgeting – Is Accrual Accounting –

Required? Working Paper. Prepared by Jack Diamond. December 2002.

Organisation for Economic Co-operation and Develop-ment (OECD).

9th Annual OECD Public Sector Accruals –

Symposium, 2009.Accrual Accounting and Budgeting – Key Issues and –

Recent Developments, 2002.Issues in Accrual Budgeting – , 2004.OECD Best Practices for Budget Transparency – . Paris, 2001.OECD’s International Database of Budget Practices –

and Procedures.

McCormack, Lee, “Performance Budgeting in Canada” OECD Journal on Budgeting, Volume 7 – No. 4 (2007), pp.49-66.

Province of Ontario, Office of the Comptroller, Fiscal and Financial Policy Division. A Guide to Financial Management Policies and Practices in Ontario. Toronto, 2004.

Schick, Allen, “Performance Budgeting and Accrual Budgeting: Decision Rules or Analytic Tools?” OECD Journal on Budgeting, Volume 7 – No. 2 (2007), pp. 109-138.

Warren, Ken, and Cheryl Barnes. “The Impact of GAAP on Fiscal Decision Making: A Review of Twelve Years’ Experience with Accrual and Output-based Budgets in New Zealand.” OECD Journal on Budgeting, Volume 3 – No. 4 (2003), pp. 7-40.

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Accrual Budgeting by Canadian Federal, Provincial and Territorial GovernmentsAccounting Bases Used in Canadian Government Budgeting was published in December 2004. That research report provides a comprehensive review of senior government budgeting practices and the accounting relationships between budgeting and financial reporting documents, with particular emphasis on the adoption of accrual budgeting.

At the budgeting community’s request, four discussion papers were prepared in 2006 and 2007 on key accrual budgeting issues:

Links between the Budget and the Estimates• ;Accounting for Tangible Capital Assets• ;Defining and Accounting for the Government Budgeting Entity• ;Legislative Accountability Framework for Preparing Government •Budgets and Estimates.

In 2009, the CICA published a final report on Accrual Budgeting by Canadian Federal, Provincial and Territorial Governments. It reviews budgetary accountability and transparency practices, highlights current and emerging accrual budgeting issues and provides options for addressing future budgeting matters.

Links between the

Budget and the Estimates

discussion paper series

Principal AuthorMartin Rodrigue, CA

June 2006

ACCRUAL BUDGETING

ISSUES

Insights for a Changing World

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ACCRUAL BUDGETING ISSUES

discussion paper series

Defi ning and Accounting for the Government Budgeting Entity

Principal AuthorJohn St. Pierre, CGA

December 2007

Insights for a Changing World

TheCanadianInstituteofCharteredAccountants277WellingtonStreetWestToronto,ON,CanadaM5V3H2Tel:416-977-0748Toll-free:1-800-268-3793Fax:416-204-3416

www.cica.ca www.knotia.ca