Guide on Revolving Funds

This guide explains key concepts necessary to create and operate a revolving fund. It also provides advice and guidance to program managers, financial officers and other interested parties in dealing with many of the issues they may encounter when establishing, operating or winding up a revolving fund.

This guide will help readers to:

- determine what a revolving fund is;

- establish a revolving fund;

- understand the financial statements that are necessary ;

- address specific items;

- address specialized topics; and

- prepare documents required for revolving funds.

This guide was developed on principles stated in the Canadian Institute of Chartered Accountants (CICA) Handbook and the Public Sector Accounting and Auditing (PSAA) Handbook. Revolving fund entities should use generally accepted accounting principles (GAAP) and policies applicable to government departments, unless otherwise stated in this guide.

This guide complements the Treasury Board Policy on Special Revenue Spending Authorities (such as net voting and revolving funds). It is not the intention of this guide to cover subject matter contained in other guides or government policies. Appendix A of this guide includes a chart showing the division of responsibilities and authorities for an organization using a revolving fund.

To help readers understand the abbreviations used throughout the document, there is a list of them included in Appendix B. Appendix C includes a reference to other documents related to revolving funds.

Several individuals deserve recognition for the development and completion of this guide. Members of the team that developed the guide include the following people:

The developers of the guide would also like to thank Norm Everest, John Denis, Treasury Board Secretariat, Government Accounting Policy Division and Ross Christian, Public Works and Government Services Canada, as well as others who have generously provided their advice and specific comments which have greatly improved this document.

A revolving fund is a continuing or non-lapsing authorization by Parliament to make payments out of the Consolidated Revenue Fund (CRF) for working capital, capital acquisitions and temporary financing of accumulated operating deficits. The use of this authority will be granted for an approved purpose and will be subject to such terms and conditions as the Treasury Board may direct. It is an authorization to draw on the CRF, not a segregation of cash. A revolving fund is a means by which Parliament provides continuing authorization for an operation that is funded completely by users, or partly by users and partly by subsidization (the latter usually taking the form of an annual appropriation.

- the rational for using a revolving fund is to provide a funding mechanism which has a business orientation (functions like a line of credit) for units providing goods and/or services on a commercial or quasi-commercial basis. In such and operating environment revolving funds should promote good business practice by: fostering a "going concern" mentality.... managers must continually maintain a medium to long perspective on operations, as operating deficits must be covered off by draw-down that incur interest charges;

- requiring business case for new investment.... the lifecycle cost of fixed assets and other investments should be recovered over the useful life of the assets;

- making managers responsible for the full costs of operations, e.g. employee benefits costs;

- necessitating a business case for subsidy....where less than full cost is recovered the case must be made on "public interest grounds";

- more comprehensive accounting and reporting .... adherence to Generally Accepted Accounting Principles;

- achieve financial targets in a specified period, as outlined in the business plan; and

- monitor and disclose these results using appropriate and meaningful performance indicators.

Revolving funds increase revenue opportunities by consolidating all sources of funding into a non-lapsing authority and by providing drawdown authority so that organizations can better manage their financial requirements. They also optimize resource use, resulting in better resource management and decision making.

When a revolving fund finances a unit that serves the public, it is called an enterprise fund. However, when it finances a unit that primarily provides support services to other units of government, it is called a common services fund.

There is a fundamental difference between revolving fund activities and private sector equivalent activities. A revolving fund unit generally has a mandate to recover full costs⁽¹⁾ and to maintain drawdown levels that correspond to the amounts shown in the business plan. The objective of a private sector entity is to maximize profits.

The Treasury Board Policy on Special Revenue Spending Authority governs the establishment and operation of revolving funds.

Management of the revolving fund unit will provide the Treasury Board with an annual business plan subset of departmental business plan including financial statements and a performance measure report. The revolving fund unit will follow GAAP and related government policy requirements when presenting and disclosing the fund's financial business activity.

To report the amount of the used and unused revolving fund's authority, the revolving fund unit will use accrual accounting to complement modified cash accounting used by the responsible department.

Special operating agencies (SOAs) are operational organizations within existing departmental structures that provide services using a more private sector approach. An SOA quite often negotiates greater flexibilities in administrative and personnel policy matters through written agreements with the host department and Treasury Board Secretariat (TBS). Most SOAs use revolving funds as their financing mechanism.

A revolving fund is a funding mechanism that also promotes a more business-like service delivery. Only business units that recover part or all of their costs may use a revolving fund. For this reason, only organizations that are primarily self-financing will be able to choose a revolving fund as a funding mechanism.

The SOA delivery mechanism is sometimes coupled with a revolving fund as an intermediate step toward the privatization of the organization.

In January 1996, the Canadian Centre for Management Development published a paper called Special Operating Agencies: Financial Issues. This paper provides a comprehensive picture of the SOA in the current government environment.

All the legislative financial rules that apply to a department also apply to its SOA(s).

The financial presentation and disclosure requirements for an SOA will depend on the nature of the economic environment in which it operates. Under a regular appropriation or a net voting authority, disclosure requirements are minimal. However, if the SOA uses a revolving fund as its financing mechanism, presentation and disclosure requirements are more extensive, as described in this guide.

Revenues from goods and services sold or provided are the main sources of funding for a revolving fund business unit.

A revolving fund unit is also granted a certain amount of statutory authority to drawdown on the CRF. The expenditures made out of the CRF shall not at any time exceed the amount of the drawdown authority.

Although Parliament establishes a net drawdown limit for each revolving fund entity, annual expenditures of each fund are approved by the Treasury Board in the Annual Reference Level Update (ARLU). This amount is shown in the Estimates as a statutory item (for information purposes). The managers of the revolving fund unit are responsible for forecasting the fund's net cash requirement—which is the difference between revenues (calculated on a cash basis) and expenditures (calculated on a modified cash basis) of the revolving fund unit—and advising the Treasury Board accordingly.

The approval process will spell out the financial obligations of the host department responsible for the revolving fund, in the following situations, when:

- the revolving fund exceeds the use of the annually approved drawdown authority; and

- the revolving fund is being wound up.

Performance targets will include both quantitative aspects (such as budgets) and qualitative aspects (such as uninterrupted service). Quantitative targets will indicate the financial performance of each business line of the organization. For example, information regarding the cost of self-sufficiency, consisting of revenues from customers less expenses, must be provided for each business line of the entity. The business plan should indicate the reasons why the organization believes the baseline targets are attainable.

In preparing the performance measure report, management will compare the actual amounts shown on the financial statements to the planned or budgeted amounts shown in the financial statements that form part of the annual business plan. Use of financial measurement techniques to track ratios over time will provide data for analyzing trends.

For the first year of operation, performance targets will consist of those contained in the financial and operational projections found in the prospective financial statements. For subsequent years, the measurements to be taken and the targets to be attained should be confirmed with the Treasury Board Secretariat, to ensure that the annually updated business plan reflects these criteria.

The measurements will require interpretation in the context of the overall environment in which they were taken. To keep the measures within management context and operational perspectives, notes on significant information or events will be presented along with the performance measures. For example, references may be made to such issues as

- major business events;

- major acquisitions; and

- seasonal factors.

Departments must have approval to charge fees for their goods or services. The department should have implemented a costing system, before they consider establishing a revolving fund unit. Next, allowing sufficient time before the date set to begin operating a revolving fund unit, the establishment criteria in this guide should be used to focus discussion on the relevant issues. Then, the revolving fund business case will be discussed with the Treasury Board Secretariat.

Once management and the program analyst at the Treasury Board Secretariat agree that a revolving fund unit is the most appropriate funding mechanism for the business lines identified by the department, the following documentation will be prepared by the host department:

- a charter document (the operating charter);

- a business plan covering the financial and business lines' objectives over a period of three to five years;

- a Treasury Board submission seeking approval of authorities related to operating the revolving fund as well as of the terms and conditions related to managing it; and,

- appropriate financial statements, including an opening pro forma balance sheet.

The minister and the deputy head of the host department will be responsible for the management of the revolving fund unit in accordance with the authorities and the terms and conditions approved by the Treasury Board.

The Treasury Board Secretariat has developed various criteria to determine if the organization should be financed through a revolving. fund It will use other criteria to periodically assess and reaffirm the continued appropriateness of the use of a revolving fund entity. (See Section 4400, Operating Environment.)

Responsible departmental management should consider the following list of criteria to help decide whether a revolving fund is the appropriate funding mechanism to support the delivery of the program identified.

The establishment of a revolving fund entity requires an authority to spend revenues collected and the authority to drawdown on the CRF up to a specified amount. The authority to charge a fee to the users of facilities or services, or to the beneficiaries of limited rights and privileges is approved separately from the authority to establish a revolving fund. The authority to charge a fee is generally approved before the authority to establish a revolving fund.

As part of the charter document and business plan, departments must submit requests for the authorities required to operate such a unit to the Treasury Board. The authorities conferred by Parliament continue from year to year until amended. The Treasury Board Policy on Special Revenue Spending Authorities and this guide provide more details on the requirements for establishing and operating a revolving fund.

The organization may obtain the authority to establish a revolving fund unit with a statutory drawdown limit through an Appropriation Act, the Revolving Funds Act or a program departmental legislation. In these instances, the vote wording should specify that the minister must make expenditures out of the CRF in accordance with the terms and conditions approved by the Treasury Board, for the purpose of delivering a specific program under the department's mandate. Furthermore, the vote wording will specify that these expenditures, less revenues shall not exceed the statutory drawdown authority, which is limited to the amount approved in the Annual Reference Level Update.

An Appropriation Act to establish a revolving fund and the Treasury Board's approval of associated terms and conditions, provide spending and management authorities. These authorities relate to the mandate of the appropriate minister and of the Treasury Board. A proposal to establish a revolving fund that would expand a minister's powers, duties or functions, or that would change the meaning of revenue that the revolving fund may claim, must go to Parliament as separate legislation—either as an amendment to the departmental or program legislation.

The initial approved terms and conditions may help the previous entity make the transition to its new status. Consequently, the initial terms and conditions may have to be amended to reflect changes that should take place within the revolving fund. These terms and conditions will require the support of the deputy minister responsible for the revolving fund, as the activities of the revolving fund are always subject to the mandate of the responsible department.

When an authority to spend revenue is obtained through an Appropriation Act, the vote wording should include, as a minimum, the following text:

Vote no. — Name of the Revolving Fund — pursuant to Section 29.1(2)(b) of the Financial Administration Act, to authorize the Minister of (Ministry) to make expenditures out of the Consolidated Revenue Fund, in accordance with terms and conditions approved by the Treasury Board, for the purpose of (short description of the purpose of the revolving fund), including authority for the Minister to spend for the purposes of the fund any revenues received in respect of those purposes …

The drawdown authorization is comparable to a line of credit. This amount is approved in the Appropriation Act or the separate legislation that established the revolving fund.

The measurement of the use of this authority, in accordance with the accounting policies and practices of the Government of Canada, is reported in the Public Accounts in a table titled "Reconciliation of Unused Authority." It is identified in the table by the wording "net authority used, end of year." This net authority used is the accumulated net charge against the fund's authority (ANCAFA) per the balance sheet, adjusted for the accounting policies and practices of the government of Canada.

The ANCAFA is used to record the following:

- the accumulation of net expenditures (expenditures less revenues) charged directly to the CRF,

- the accumulated amounts representing the value of assets placed at the disposal of the fund, less any obligations assumed by the fund; and

- any deficit or surplus amounts that have been authorized for deletion from the fund.

The total amount of drawdown is limited to the spending authority limit approved by Parliament.

The drawdown authority should be established at a level that fully meets the net cash requirements identified in the prospective financial statements of the revolving fund. Management of the revolving fund must inform the Treasury Board Secretariat, early in the process, if it anticipates that the proposed cash requirements may prove to be insufficient. The Treasury Board will then review the actual results and consider alternative sources of financing as identified in the terms and conditions or in the annual business plan. For example, the Treasury Board may require that the host departmental appropriation absorb all or a portion of a revolving fund's operating shortfall.

The vote wording in the Appropriation Act will indicate the maximum amount of non-lapsing drawdown authority chargeable to the CRF. For example, the following wording will be used: "Vote no. … the aggregate of expenditures made for the purposes of the fund shall not at any time exceed by more than (the amount of statutory drawdown authority) the revenues received in respect of the purposes of the fund."

In situations where an authority is amended through an Appropriation Act, the vote wording should include the following text, as a minimum:

"Vote no. — Name of the Revolving Fund — to increase from $ (previous drawdown authority) to $ (new drawdown authority) the amount by which the aggregate of expenditures made for the purposes of the (name of the revolving fund), established by Vote XX, Appropriation Act No. x, 19XX-XX, may exceed the revenues…"

For parliamentary control, departments shall use the ANCAFA derived using government accounting principles. This is reflected in the "Reconciliation of Unused Authority".

User fees help alleviate the tax burden of the citizens of Canada, since those individuals using a particular service pay a proportionate amount for doing so. This in turn, creates a more efficient allocation of resources based on demand. In the application process, an authority to charge fees should be requested when a specific group of users benefits more directly from a particular good, service, use of facility, etc.

The authority to charge fees is obtained through departmental legislation, program legislation, section 19 of the Financial Administration Act or ministerial authority to contract.

The managers of a program or activity who identify an opportunity to introduce user fees, are expected to follow the approval process to establish and modify user fees and charges. (See the Treasury Board Submission Guide, Expenditure Management Submissions, Chapter 8—Fees and Charges.)

Most user charges are established by regulation conferred through legislation. This process requires consultation with clients and approval by the responsible minister, the Department of Justice, the Treasury Board and a special Cabinet committee. User charge initiatives are also subject to review by the Standing Joint Committee on the Scrutiny of Regulations and to audit by the Office of the Auditor General. The business plan of the revolving fund, must indicate the authority to charge or modify user fees. The reference to the authority should indicate the specific applicable sections of relative legislation or ministerial authority to contract.

The Cost Recovery and Charging Policy is based on fully recovering costs for goods and services. Any departures from these terms have to be fully justified.

First, the full cost of providing the service, regardless of broader public benefits, requires identification. Second, to determine how many of the costs are to be recovered from users, management will allocate costs between specific beneficiary groups or individuals (users) and the general public (public purpose). Cost recovery is not appropriate for programs that benefit all Canadians or that are intended to assist those most in need. In situations where there is a mix of public and private benefits, fees should be lower than full cost.

Prices should be based on market value for the sale, lease or licence of public property or for rights and privileges that are, in fact, commercial inputs for users. This will help ensure the efficient utilization of scarce resources coupled with a fair economic return to the public.

A revenue plan should be prepared by business line annually. Ideally, the rate or fee structure should reflect the operational costs of the services provided by the revolving funds the unit will provide over the following three to five year period. These calculations will avoid the expense and public inconvenience of frequent rate changes. The unit should use generated revenues to offset the cost of delivering a specific program. Regulation and inspection activities in this paragraph, are examples of cost recovery activities.

A statement of the fund's position and a forecast of operations for a three to five-year period are needed to support the proposed rate or fee structure that management of the revolving fund unit present to the Treasury Board.

"Rights and privileges" exist when government allows individuals or groups to use publicly owned or managed resources or services. The government confers these benefits through licences, permits, certificates of necessity and convenience, quotas and similar instruments. In all cases, these rights and privileges give individuals or groups special permission from which everyone else is excluded.

"Intellectual property," in the government context, covers ownership and control of ideas, and concepts or processes. In combination with other production inputs such as raw materials, producer goods and physical labour, they allow the creation of goods and services for sale.

Rights, privileges and intellectual property are intangible assets made available by the government in situations where quite often the value of the benefit to the user is usually greater than the cost of delivering the service. Often, there is no direct relationship between the fees set and the costs incurred to provide the service. These services can be classified into three categories:

- rights and privileges of a personal nature (e.g. passports, consular service fees and visas, park entrance fees and camping permits);

- rights and privileges of a more commercial nature (e.g. import/export licences, spectrum fees, commercial fishing licences and mineral rights); and,

- licensing of Crown-owned intellectual property based on its market value in the private sector (e.g. patents and copyrights).

The rights and privileges outlined in the first category are more suitable for revolving fund financing than those in the second and third, categories since their costs are easier to determine and the users are the main beneficiaries. They consist of more cost based services and normally there is a direct relationship between costs and revenues.

The second category represents, for the most part, commercial inputs for users to ensure efficient use of a valuable resource with a fair economic return to the general public. Intellectual property is similar to the second category because the market value dictates the way fees are determined. However, in both cases, these activities are not suitable for revolving fund financing. (In a revolving fund unit, revenues must be used to finance the service from which they are derived, and there must be a direct relationship between the costs incurred and the charges collected.) Accordingly, costs associated with providing these services are normally financed through departmental appropriations, while the fees collected are deposited into the CRF as non-tax revenue.

In special cases, the Treasury Board may allow the revolving fund to include such services within the operation of a revolving fund. If this is the case, the following considerations must be kept in mind.

- Each year, a rate schedule and revenue fee plan must be prepared that clearly delineates the various services by business line. This plan is solely to help manage the revolving fund's financial affairs.

- The actual costs of granting the right or privilege must include the costs of any related activity undertaken by government to provide the service.

- Proposals to spend revenues must be linked to policy objectives (e.g. service improvements, more efficient program delivery or greater equity in financing government programs).

The basis for each revolving fund unit is set out in a framework document as well as a business plan. The framework or charter document represents the unit's "constitution" or "operating charter" and includes the following elements:

- the mandate statement;

- a description of the policy environment and the general business lines and the services that the unit will provide;

- the guiding principles on which the unit will be evaluated;

- methods for ensuring accountability for results, including associated and reporting approaches;

- information on all special flexibilities; and

- a description of the unit's overall relationship with the responsible host department and other organizations.

The framework or charter document describes how managers will be held accountable for results, as well as how often (and in what form) managers will report to the responsible host department. The revolving fund unit and its host department develop this document, and the deputy head and the minister responsible for the revolving fund unit will then recommend it. The Treasury Board will subsequently approve all framework documents and subsequent revisions.

The framework or charter document links accountability to a strategic direction. The framework document will be revised annually to reflect changes that may occur.

The initial business plan covers the financial and business line objectives for a three to five-year period. Depending on the nature of the business, the business plan may cover a longer period of time (for example, when there is an extensive capital requirement). Generally speaking, the business plan should assure the minister that management has a clear sense of direction is dealing with the appropriate issues and is managing the fund's affairs accordingly.

The plan should clearly indicate the goals and objectives that revolving fund management will pursue over the following three to five years, how these goals and objectives will be met, and how progress will be measured. Appropriate financial statements form part of the business plan.

The first business plan submitted to the Treasury Board Secretariat along with the framework or charter document will establish the revolving fund unit. Thereafter, a business plan must be prepared annually. The annual business plan will highlight only areas that have changed significantly. As well, the Treasury Board Secretariat will require financial statements for the year or two prior to the planning period and prospective statements for each of the next three to five years. Requirements may vary, depending on variables associated with the nature of the revolving fund.

The business plan should outline a logical sequence of actions that will help the unit achieve its strategic objectives, as well as those of the host department. A good business plan will include all the management, marketing and operational information that the Treasury Board Secretariat program analyst will need to properly assess the viability of the business proposal and its impact on the fiscal framework. The business plan may also be used to communicate the unit's long-term plan to employees and other stakeholders.

In subsequent years, the business plan will include comparative financial statements covering actual results for one to two years before the start of the planning period, along with prospective financial information for each of the subsequent three to five years.

This information is subject to the Access to Information Act.

The executive summary should highlight strategic issues requiring attention over the planning period, the unit's major objectives and planned strategies to achieve them. It should also address major decisions that management expects to face during the planning period, including key capital projects, new activities and financing plans.

In this section, legislative or regulatory basis for the organization's existence (legislative provisions and related Cabinet decisions) are defined. Be sure to define how the revolving fund mechanism would provide the flexibility needed to undertake these responsibilities.

In this section, clearly identify key assumptions used to prepare the business plan.

After gathering information about the internal and external forces that affect the unit and the way it delivers its goods and services, it will be necessary to describe the present environment and make predictions about the future supported by forecasts based on appropriate assumptions and data. The whole business plan should address possible future risks and the consequences of not preparing for these risks. The financial plans and performance measurement reports must be presented by separate business lines.

A business line is a set of products and/or services provided to a subset of clients. One may use the distinction between client groups as a key variable to distinguish one business line from another. The financial plan (revenues and expenses) should be presented by business line. This will help analysts evaluate performance by business line and help management make decisions. For each business line, the following information should be disclosed:

- Clients/customers: Identify the client group(s) for each major area of goods or services. After consulting with representative bodies or surveying clients, a profile of the client should be prepared to assist identification of their needs.

- Professional skills and the process involved: Describe in specific terms the type of expertise that the unit needs. For example, in a high technology industry, employees may need knowledge of certain computer programming languages.

- Partners/stakeholders: Identify the individuals, groups and organizations that have a vested interest in what the unit does. Briefly describe their activities and their relationship to the unit.

- Market profile: Identify other organizations that are active in the same industry. Indicate potential growth areas or shrinking markets, as well as the basis used to make these projections. Compare strengths and weaknesses of other organizations similar to the unit.

- Location: Identify the potential advantages or disadvantages of your unit's location (e.g. a location closer to clients may save time and transportation costs).

- Regulatory perspective: Describe the political pressures or changes to regulations that might create opportunities or impede the unit (e.g. environmental legislation).

- Government policies and operations: Describe government policies and operations that affect the unit's operations (e.g. higher operating costs that are not borne by the private sector).

- Economic perspective: Describe the economic factors that may affect the goods and services the unit delivers, such as inflation levels, interest rates, exchange rates and international trade agreements.

- Other: Describe any other aspects of the operating environment that would help readers understand the plan better.

This section constitutes the core of the business plan and should clearly indicate the plans for the next three to five years for each business line. This section provides information on objectives, strategies adopted to meet these objectives and performance measures needed to assess progress of the unit.

When developing the following elements of the plan, keep the key planning assumptions and operating environment in mind:

- Objectives: Identify specific objectives for each major business line over the next three to five years, and link them to the strategies identified for the planning period. Objectives may include, for example, statements relating to financial viability, ability to compete or maintain the asset base.

- Strategies: Describe the chosen strategies and explain how they will help achieve the objectives. Quantify the anticipated impact of the following strategies as far as possible for each business line.

- Marketing strategy: Identify initiatives aimed at increasing market share or penetrating specific target markets. For each indicated market, prepare a market forecast covering the planning period.

- Financial strategy: Identify actions aimed at containing or reducing costs and establishing revenues needed to sustain these costs.

- Capital asset strategy: Describe planned major capital expenditures for each business line and their importance in relation to strategic issues and to the objectives identified for the planning period.

- Human resources strategy: Describe the human resources issues that will affect each business line over the planning period.

- Action plans: Each business line should have an action plan that describes what will be done to meet the objectives, when it will be done, who will do it and how much each action will cost. Separate action plans should be included in the business plan for operations, marketing, management and human resources.

The financial statements covering a three to five-year planning period should reflect the financial aspects of the various action plans. The assumptions used to establish unit cost and the cost allocation method should be explained. Identify and forward alternative actions to the initial plan. The financial forecasts should reflect the risks (contingencies) associated with each action plan.

The host department and the management of the revolving fund unit must establish how start-up costs will be shared (e.g. who will buy or develop a financial system to meet the unit's accounting and reporting needs?). Start-up costs can be significant for a small revolving fund, and in a larger revolving fund may also require a significant investment of managers' time. As well, there is a need to clearly identify the assets and liabilities of the department and the unit relating to annual leave, sick leave and termination benefits that employees earned before their transfer to the revolving fund.

Specific operational and financial performance measures and targets should be established for the identified objectives, by business line. These performance measures may include benchmarks and baseline targets. Baseline targets are the standards the business unit will develop based on previous results. Benchmarks, on the other hand, are the targets used by the best performers in the industry. Benchmarks may be useful in building up reasonable baseline targets.

To complete the performance measurement exercise, actual results are compared to target or benchmarks. The performance measure report will cover one to two years of actual results before the start of the planning period and three to five years of predicted results for the planning period. The performance measurement report should encompass the following three aspects.

- Measures or targets: To permit accountability, there should be only one or two performance measures for each strategic objective within each business line.

The degree of uncertainty involved in formulating objectives and performance measures, as well as financial projections, increases in the latter years of the planning period; however, these performance measures should, nonetheless, be distributed throughout the entire planning period.

- Indicators: Performance indicators are used to measure performance against qualitative and quantitative baseline targets for separate business lines. Indicators will provide early warning if the unit has exceeded or not met its targets. The performance indicators are useful to the management of the business unit and to other readers of the financial statements, such as the program analyst from the Treasury Board Secretariat. Management of the business unit should contact their program analyst if there is evidence that the unit will not meet the target the Treasury Board uses to monitor each particular aspect of the unit's performance..

Performance indicators must, at a minimum, relate directly to the quantitative and qualitative targets initially established. Assumptions used must be explained.

- Monitoring: The program analyst at the Treasury Board Secretariat will monitor the unit at least annually by reviewing performance measurement report. This report will explain variances between actual results and baseline targets (e.g. fees, volumes) for each business line. Management of the business unit should also measure performance using the same approach, but showing more details more frequently.

The business plan will identify the revolving fund manager as the person responsible for producing various periodic and ad hoc reports (e.g. annual business plan, updated financial statements, work plans, performance measure reports and other reports). The annual business plan will provide information on due dates and the destination of the planning, operating and performance measurement reports. The production of these reports should coincide with the broader planning requirements of the host department and/or the central agencies. The following reports are important components of the business plan that should be submitted annually to the program analyst.

- Financial statements: At the inception of a revolving fund unit, the financial statements included in the business plan shall cover a three to five year period and shall be presented by business line. In subsequent years, the financial statements should cover a period of one to two years of actual data and three to five years of prospective data. The financial statements will help readers understand the descriptions in the business plan.

The Public Accounts Instructions Manual (PAIM) may be used as a source of information to help prepare financial statements (actual data as well as planned data). Section 4.2 of PAIM provides detailed procedures on the format and content of financial statements. Assumptions identified in the business plan should be used to prepare the prospective financial statements for planning purposes.

- Operating and performance measurement reports: The managers of the revolving fund unit will identify reports to be prepared regularly. These reports will assist management and the Treasury Board Secretariat to measure the activities of the revolving fund.

The financial statements will also provide one or two years of actual data. Each year, the program analyst at the Treasury Board Secretariat will review the performance measurement report. Therefore, explanations of variances between the targets and the actual results must be provided. When the Treasury Board reviews the performance measurement plan, it may add conditions to ensure that the unit meets its targets. For example, the department may be asked to supplement any shortfall experienced by the revolving fund.

A revolving fund business unit is administered within an operational unit of a department and is subject to departmental legislative framework and Treasury Board policies. The deputy head of the department and the manager of the revolving fund unit are jointly accountable for its administration. Revolving fund accounting practices and related requirements for disclosing information are intended to help managers and staff focus on costs of outputs and performance.

The Financial Administration Act and all government policies apply to revolving funds, except where the Treasury Board permits specific exemptions. These exemptions are approved by the Treasury Board in the terms and conditions applicable to the establishment and operation of the revolving fund unit.

GAAP are used to prepare financial statements for your unit. The term GAAP encompasses not only specific rules, practices and procedures relating to particular circumstances, but also broad principles and conventions of general application, including the underlying concepts which are described in the Canadian Institute of Chartered Accountants (CICA) Handbook. Different principles of accounting may be acceptable in limited circumstances, such as when the unit accounts for its ANCAFA. These circumstances will be described later on in this guide.

The revolving fund management will follow instructions issued annually by the Estimates Division of the Treasury Board Secretariat to prepare separate tables as part of the overall Estimates of the host department.

The general costing approach and methodology described in the Treasury Board's "Guide to the Costing of Outputs in the Government of Canada" and the Cost Recovery and Charging Policy applies to all revolving fund units.

The PAIM, supplemented by other Receiver General directives must be followed to report on revolving fund activities at year-end with respect to the preparation of the Public Accounts.

After a revolving fund unit is established, unit management and the program analyst at the Treasury Board Secretariat will monitor subsequent financial and operational performance. At least annually, the program analyst will use the performance measurement report to assess how well the revolving fund unit is complying with its business plan.

The program analyst must determine whether the revolving fund is viable, can maintain its operations and meet its liabilities with the revenues it receives or will receive. The decision to maintain, increase, decrease or wind-up operations of a revolving fund unit will be supported by:

- the revolving fund units history;

- the need for subsidies;

- the unit's capacity to achieve its targets;

- the current or future economic operating environment; and

- realistic and specific plans indicating how operations will be maintained and liabilities will be met in the future.

The program analyst may also use the criteria outlined on the next three pages to annually assess the continuing need for the revolving fund unit.

The initial authority for a revolving fund is approved by Parliament through the Supplementary Estimates process. It is presented as a $1 Vote that identifies the authority limit and the start-up date of the revolving fund. In the subsequent year, the authorized limit is then presented in the Public Accounts. If necessary, this amount is adjusted for the net assets assumed at inception. The opening entries of the revolving fund correspond to the values established for the assets and liabilities transferred to the revolving fund at inception, and tie into the business plan submission sent to the Treasury Board. In the opening and subsequent years of operation, this initial authority will change as a result of yearly operating results or changes in parliamentary authority.

The responsible department will set up a budgetary statutory type central account with a separate internal code vote to separately identify and process the unit's transactions and balances. The specific terms and conditions approved by the Treasury Board for managing the revolving fund must be followed in recording the opening entries.

If accounts receivable and accounts payable are set up at inception, then subsequent receipts and payments should be coded to the revolving fund. The opening balances of accounts receivable and accounts payable will be split under two accounts: "Government of Canada" and "Outside Parties." If the responsible department owes accrued unused annual leave to employees of the revolving fund at the fund's inception, the amount to be received will be shown under "Accounts receivable - Government of Canada." The unit will also set up an "Accounts payable—Outside parties" to record the accrued unused annual leave at the inception date.

The following accounts must be cleared with the responsible department at the fund's inception: accountable advances, petty cash and standing advances, accounts receivable, prepaid expenses, inventories, capital assets, accounts payable and accrued liabilities, employee benefits payable and holdback payable. These assets and liabilities will be offset against the ANCAFA.

The opening value of capital assets used by the revolving fund to deliver programs should be assigned to the revolving fund at historical cost, adjusted for the proportion of the economic life of the assets used at the time of transfer. Where it is not practical to reasonably estimate the value of the assets based on historical cost, management may use the present appraised value or some other appropriate measure of current value. A contributed capital account instead of ANCAFA, will be used only, if approved by the Treasury Board.

The value of termination benefits for employees transferred to the revolving fund unit as of the inception date must be properly determined. This valuation, and the method used to establish it should be in a note to the financial statements. The following wording can be used: "Employee termination benefits earned prior to an employee joining the revolving fund are a liability of the Treasury Board and, accordingly, have not been recorded in the accounts of the revolving fund". Thereafter, the value will require adjustment based on the employees who join or leave the revolving fund each year. (See Section 6140 Termination benefits.)

The approval process in the Accounts of Canada starts with parliamentary approval of the Estimates, as presented below:

Vote 4b — XYZ revolving fund — Pursuant to paragraph 29.1(2)(B) of the Financial Administration Act, to authorize the Minister, effective April 1 of the subsequent year, to make operating and capital expenditures out of the Consolidated Revenue Fund, in accordance with the terms and conditions approved by the Treasury Board, for the purpose of distributing leaflets and, the authority for the Minister to spend for the purposes of the Fund such revenues received for those purposes; and the aggregate of expenditures made for the purposes of the Fund shall not at any time exceed by more than $10,000,000 the revenues received in respect of the purposes of the Fund.

Vote 4b is presented in the Estimates as a $1 item and presented in the Public Accounts as follows:

Ministry summary

The following is an example of the opening journal entries as of the inception date of a revolving fund. This revolving fund received Treasury Board approval for the use of a contributed capital equity account to partly offset the costs of transferring the net assets from the department to the revolving fund.

It is advisable to have the opening balance sheet audited in the first year of operation.

Financial statements of revolving funds include a balance sheet, a statement of operations, a statement of accumulated surplus/deficit, and a statement of changes in financial position. Notes to financial statements should be cross-referenced and are an integral part of such statements. In addition, statements unique to revolving funds include the statement of authority used/provided, and the statement of reconciliation of unused authority.

The contents of financial statements are usually limited to financial information representing the results of financial transactions and events.

Financial statements represent past, rather than future transactions and events. Estimates are often required in anticipation of future transactions and events that need to be accounted for now (e.g. allowances for bad debts).

Financial statements should be presented in such form, use such terminology and provide a classification of items so that significant information is readily understandable to the reader. The financial statements should always compare current period amounts with those of the immediate prior period.

The objective of the financial statements is to communicate information that helps the government and the public to allocate resources and to assess management and stewardship. Therefore, financial statements must provide information about the following:

- the entity's economic resources, obligations and equity/net assets;

- changes in the entity's economic resources, obligations and equity/net assets; and

- the economic performance of the entity.

The balance sheet presents the revolving fund's financial position in terms of its assets, liabilities and equity at the end of an accounting period and helps users evaluate the position of the entity at a specific date.

The key elements are outlined below:

- Current assets

Current assets should include those assets ordinarily realizable within one year of the date of the balance sheet and should be presented in order of descending liquidity.

Current assets should be segregated by main classifications such as accounts receivable from other government departments, accounts receivable from outside parties, inventory and prepaid expenses.

- Long-term assets

These represent assets other than current assets and are segregated by major classifications such as long-term receivables, capital assets and capital leases.

- Current liabilities

Current liabilities include amounts that will be payable within one year of the date of the balance sheet and, again, are presented in order of liquidity. They include only that portion of long-term debts that is payable within one year of the date of the balance sheet.

Current liabilities should be segregated by main classifications such as accounts payable to other government departments, accounts payable to outside parties, deferred revenue and current portion of long-term debts.

- Long-term liabilities

Long-term liabilities represent liabilities other than current liabilities and are segregated by main classifications such as long-term obligations, allowance for employee termination benefits and capital lease obligations.

- Equity of Canada

The equity of the revolving fund is composed of accounts for accumulated surplus or deficit, as well as contributed capital if applicable, and the ANCAFA.

When the basis of valuation of assets is not self-evident from the balance sheet classification titles, the basis of valuation should be explicitly stated on the face of the applicable statements and explained in the notes. (See Section 5500 Notes to the Financial Statements.)

The purpose of this statement is to disclose revenues, expenses, and the net income or loss of a revolving fund operation based on GAAP. This statement must fairly present the results of operations for the year.

The statement should clearly distinguish between the net income or loss before taking into account discontinued operations, the results of discontinued operations, the net income or loss before extraordinary items, and the net income or loss for the period.

Revenues normally arise from the sale of goods, the rendering of services or other sources, such as rent or royalties. Revenues are recognized when services are rendered or when goods are delivered.

Expenses include the cost of sales, where applicable, and significant operating expenses such as salaries, advertising, travel, rentals and amortization. Expenses are recognized when services or goods are received.

The reporting must be in accordance with GAAP and be compatible with the current practice used in the industry sector in which the revolving fund operates. The presentation, in a comparative format, should be aligned with the budget or business plan of the revolving fund.

Extraordinary items must be presented separately. (See Section 6290 Extraordinary Items.)

This statement discloses changes in accumulated surplus or deficit and consists of the following key elements:

- balance of accumulated surplus/deficit at the beginning of the period;

- restatement of previously reported amounts (See Section 6380 Prior Period Adjustment);

- restated accumulated surplus/deficit at the beginning of the period;

- net income or loss for the period;

- Write-off of all or part of the accumulated surplus/deficit to or from the ANCAFA; and,

- balance of accumulated surplus/deficit at the end of the period.

This statement discloses financial information about the operating, investing and financing activities of a revolving fund and the effects of these activities on the ANCAFA.

The financial position of a revolving fund is represented by the current balance in the ANCAFA.

The change in the financial position is the amount of net financial resources provided or used during the year.

The statement of changes in financial position should at least disclose the following items:

(a) cash from operations—the amount of cash from operations should be reconciled to the statement of operations;

(b) cash flows resulting from discontinued operations;

(c) cash flows resulting from extraordinary items;

(d) outlays for acquisitions and proceeds on disposal of assets not included in (a), (b) or (c) above;

(e) the issue, assumption, redemption and repayment of debt not included in (a), (b) or (c) above; and

(f) the contributed capital and surplus/deficit write off.

Cash flows presented in the statement of changes in financial position should normally be classified by operating activities, investing activities and financing activities.

Operating activities include the following:

- net income before extraordinary items;

- items not requiring the use of funds, such as provision for employee termination benefits, amortization, gain/loss on disposal of capital assets and deferred charges; and

- changes in current assets and liabilities.

Investing activities include the following:

- changes in other assets and liabilities related to investing activities such as net investment in leases, gross acquisition of capital assets, proceeds on disposal and contributed assets.

Financing activities include the following:

- items affecting the composition of the capital structure of the fund, both debt and equity, such as a lease obligation, contributed capital, write-off of the deficit, write-off of surplus.

Notes to the financial statements are an integral part of such statements. These notes clarify items in the financial statements. They are as significant as the information in the body of the statements themselves. They must not, however, be used as a substitute for proper accounting and reporting treatment.

Other financial statements are prepared for specific objectives in order to comply with legislation, Treasury Board Secretariat requirements, Receiver General directives or items -peculiar to revolving funds.

Examples of other financial statements include the statement of authority used/provided, the statement of reconciliation of unused authority, and the opening balance sheet statement (that is, the opening balance at the inception of the fund). These statements may or may not be audited. (See Section 7040 Audit.)

(1) Costs comprise the economic value of all resources used to provide a good or service. In addition to annual cash outlays, costs include non-cash outlays such as amortization of capital assets and cost of capital. Expenditures, on the other hand, are primarily cash outlays incurred in a particular period. [Return]