Guide on Revolving Funds

The following sections will help relate certain accounting concepts to a revolving fund.

The following definitions outline the context in which these terms are used.

- "Accountable advance" means a sum of money advanced to a person for which such person is accountable and including imprest funds and working capital advances.

- "Petty cash fund" means cash for making minor payments.

- "Standing advance" means an accountable advance issued in a specified amount for an indeterminate period and replenished to that specific amount each time an accounting for expenditures is made. (e.g. for travel)

Currently, a revolving fund controls its own advances which appear as an asset on the statement of assets and liabilities.

Petty cash and standing advances are accountable advances, used only when immediate settlement is required or when these methods of payment are more cost effective.

The initial set up in the revolving fund and department's account would be as follows:

An accountable advance provides money for a specific purpose such as travel, or to accelerate payment of small amounts. When an advance is made, no expenditure is recognized. The expenses in the revolving fund are recognized only when the vouchers are submitted for refund and the central account is charged.

Accounts receivable represent claims against an individual, a company or another government organization. Any interest accrued on overdue receivables is also considered part of the outstanding receivable. All other receivables are referred to as non-trade receivables (e.g. refundable deposits).

There are no interest charges on overdue receivables from other government departments. The Treasury Board publication "Interest and Administrative Charges Regulations" addresses the practice of charging interest on overdue accounts.

Invoice and record receivables as trade receivables when only the title of the goods is transferred to the client, when the services are provided or when contractual arrangements are in force. Segregate these items between current and long-term assets.

Accounts receivable should be collected according to the terms of the sale or the service provided. The unit should try to resolve problems relating to overdue accounts directly with the debtor.

Receivable adjustments or deletions should be supported by sound management practices. The evaluation criteria used to adjust the receivables for collectibility should be consistent with GAAP. When justified, deletions should be made from the accounts by including a charge on the statement of operations in accordance with "Debt Write-off Regulations."

Reconcile other government department receivables (RAYE) and other government department payables (PAYE) with the debtor/payer departments. This step should be done on an ongoing basis to monitor and control the collection of internal receivables. Either the receivable can be substantiated and must be paid or it cannot be substantiated and should therefore be reversed (i.e. cancelled).

Other government department accounts receivable are not subject to an allowance for doubtful accounts. Corrections are permitted though, when there is an error in invoicing, such as a wrong amount or double payment. (See also Section 6021 Allowance for Doubtful Accounts.)

A control account must be established to reconcile the subsidiary receivable ledgers and to ensure that any report respecting accounts receivable includes all the receivables. Management is responsible to ensure that internal transactions are settled promptly.

The unit should collect and pay internal government transactions promptly throughout the year and maintain appropriate control at all times.

Report other government department accounts receivable separately from those of outside parties.

At year end, the revolving fund reports the accounts receivable to the Receiver General in accordance with PAIM.

An allowance is an estimate, based on facts and opinions, of the losses that could to be incurred in collecting outstanding accounts receivable. The inability to make an exact forecast does not relieve the management of the responsibility of making careful estimates of the allowance required.

The amount of the allowance for doubtful accounts should be calculated by referring to the accounts outstanding at the end of the financial period, after taking into consideration all circumstances known the date of review.

If, after writing off all known uncollectible accounts to bad debts expense, it is expected that some further losses will be incurred in collecting the accounts receivable outstanding from outside parties, an allowance for doubtful accounts should be established.

Once an account receivable has been recorded in the departmental accounts, it cannot be deleted from the accounts unless circumstances include payment, proper authorized remission or it is otherwise forgiven, written off or cancelled.

Receivables from individuals or organizations outside the government accounting entity should be deleted from the fund's accounts in accordance with the "Debt Write-off Regulations".

An adequate allowance for doubtful accounts is assumed to have been made if no statement is made to the contrary.

The allowance for doubtful accounts is recorded by making a charge to bad debts expense in the accounting period being reported. The allowance is included in the net accounts receivable as a decrease in value of the outstanding accounts receivable.

The following entry is made at the time the allowance for doubtful accounts is determined.

Appropriate documentation and an audit trail must be available to support the entries processed for the allowance or the write-off.

Accounts receivable at March 31, represent amounts outstanding as at the end of that accounting period. It is important to note that there are no extended accounting periods allowed for collecting accounts receivable, including the receipt of collections from other government departments. The amounts collected in the extended periods are considered new year transactions for revolving funds.

As a result, the revolving fund expenditure will be adjusted for these collections but the ANCAFA will not be. The receivables and the payables on the statement of assets and liabilities will show the balances as at March 31. The reconciliation will include the extended period collection in the "amounts credited to budgetary appropriation after March 31". The statement of operation is not affected.

At year end, departments have a different policy concerning the handling of cash collected in April. Revolving funds have to consider this difference in the reconciliation of authority used. (See Section 7100 Year-end Reconciliation.)

Inventories are goods held for sale during the course of business or goods that will be used to produce goods for sale.

While inventory is not yet recorded as an asset in the statement of assets and liabilities of the government, Revolving funds must report the existence of inventory on their financial statements in accordance with GAAP.

When accounting for and reporting inventory, revolving funds must:

- identify and quantify the goods that should be included in the inventory; and

- determine the accounting value associated with the physical goods.

Inventory control varies in accordance with the type of operation. Retail operations may need only one type of account, while manufacturing types could have three or more inventory accounts such as raw material, work in process and finished goods. Inventory records can be maintained on a perpetual or periodic basis as well as a combination of the two. A perpetual inventory control system reflects the purchase and use of goods as they occur in the inventory account. A periodic inventory system records the purchase and the inventory value is adjusted according to a physical count at the end of the period.

Regardless of the method selected, the factors entering into the cost of an item will vary according to circumstances. The cost of an item may include acquisition charges, such as transportation fees. For work in process and finished goods, the cost will include the laid-down cost of material plus the cost of direct labour applied to the product. The applicable share of overhead expense properly chargeable to production is ordinarily included in the cost determining process. Where the storage of goods for a significant time is an integral part of the manufacturing process, the cost may also include the applicable share of warehousing expenses and, in a few cases, carrying charges.

Several methods are used in determining inventory value. The following are the most common methods:

- Specific identification —the cost of each item in the inventory is identified on an item by item basis;

- Average—the cost of an item is determined from the weighted average of the cost of similar items purchased at different selected intervals;

- First In, First Out(FIFO)—the cost of the first goods purchased or acquired is the cost assigned to the first goods sold;

- Last In, First Out(LIFO)—the cost of the goods most recently purchased or acquired is the cost assigned to the goods sold. (this method is not commonly used in Canada.);

- Standard costing—this method is used in manufacturing organizations and consist of a determination of costs that should be incurred to produce a service or product under normal conditions and operating circumstances. These standard costs are then compared with actual costs to isolate variances which, in turn provide a basis for study and remedial action;

- net realizable value—this value reflects the net amount that would be received by selling the asset in a normal, arms-length transaction.

The method selected for determining cost should be one that results in the fairest matching of costs against revenues, regardless of whether or not the method corresponds to the physical flow of goods. Inventory should be valued at the lower of current cost or net realizable value at the balance sheet date.

In the financial statements, clearly state:

The basis used to value the inventory and any of its categories, any change from the basis used in the previous period, and the effect of such a change on the net income for the period. Also disclose the value of the amounts of major categories making up the total inventory, such as finished goods, work in process and raw materials.

If the method of determining cost has resulted in a figure that does not differ materially from recent cost, the simple term "cost" can be used to describe the basis of valuation. Otherwise, the method of determining cost should be disclosed.

Record inventory on consignment on the balance sheet as a separate item against an offsetting payable. If significant, support the entry with a note. This type of inventory increases the need for proper internal control and security.

It is preferable that the determination of interim inventory be on the same basis as annual inventory.

In situations where inventory obsolescence is material, management should use best judgement to measure transactions, and acknowledge responsibility for such decisions in the management report.

When valuing inventory, do not deduct reserves for future decline in inventory values, or any similar reserves.

Delete obsolete inventory from the inventory asset account and charge it to an expense account. When charges are material, disclose specific details on the obsolete inventory.

At the end of a fiscal year, appropriations are charged with all outstanding debts arising from work performed, goods received and services rendered on or before March 31.

Where the contract specifies payment on completion or on a specific milestone date, the revolving fund should evaluate the work completed on projects that cannot be billed to the client by March 31. Document the best estimate of the work in progress, as auditors will use the estimate to verify the amount reported on the financial statements. The value of work performed and services rendered is determined on the basis of performance up to and including March 31 and billings or estimates of the debt owing for that performance.

The value of goods received is harder to determine, as it involves ownership of the goods. Ownership can be interpreted as physical control or possession (actual or constructive) of the goods that lead to a legal liability to pay the supplier. If ownership is obtained by March 31, and inspection has determined that the goods were supplied by the accounting date, then the value of these goods must be set up as a debt.

If physical control of, and title to the goods have not passed to the revolving fund, only outstanding payments for work in process completed to March 31 can be accrued as a debt, and then only if the purchase contract provides for the payment(s).

A prepaid expense occurs when an entity has paid for services or supplies that are not used by the end of the accounting period. Such services or supplies may include for example, a subscription, conference attendance or security services.

The present accounting and reporting policies and practices of the government recognize expenditures when they are paid or accrued. Therefore, no prepaid expenses are recorded in the government's financial statements.

At the revolving fund level, prepaid expenses may be recognized when dealing with outside parties. Prepayment must be made according to the Financial Administration Act.

Prepaid expenses are recorded and disclosed in the financial statements according to their classification as current or long-term assets.

Capital assets are accounted for in the same way that many private sector organizations do, by following GAAP and recording assets at historical cost.(see Section 3060 of the CICA Handbook). This cost consists of the consideration given to acquire, construct, develop or better a capital asset including all costs directly attributable to the acquisition, construction, developing or betterment of the capital asset.

Presentation and disclosure by revolving funds must be in accordance with GAAP. Thus, revolving funds unit will have to disclose the following:

- the cost of the asset;

- the accumulated amortization; and

- the amortization method, period and, where applicable, the rate used

N.B. At time of publication of the present guide, a Treasury Board draft policy known as "A Draft policy on Accounting for Capital Assets" was in development, the result of which may affect the current narrative.

Revolving fund units can build in an amortization allowance to cover capital costs, but the scope for retaining the funds needed for major capital expenses over time is limited. The earnings of the revolving fund should cover long-term debt. When a revolving fund needs funds for major capital purchases, an arrangement will be negotiated with either the responsible department or the Treasury Board on an ad hoc, case-by-case basis.

It may be appropriate for a revolving fund to work with its responsible department to plan and develop large projects when their needs are consistent and the timing is appropriate for both parties.

The revolving fund may be able to negotiate an arrangement with the Treasury Board, under which the Treasury Board acts as a banker, by agreeing to provide funds up front in exchange for eventual increased revenues to the CRF or decreased authority levels in future years.

Accounts payable and accrued liabilities represent some of the segregated current or long-term liabilities appearing on a balance sheet. Accounts payable, which usually cover supplier accounts, are liabilities incurred by an organization which are payable immediately or at some future date. Accrued liabilities are for expenses that have been incurred that will require payment in the future.

The revolving fund budgetary account, one of the accounts of Canada, will be subject to payables at year end (PAYE) accounting procedures in the same manner as for annually lapsing budgetary appropriations according to section 37 of the Financial Administration Act. The Receiver General Directive on PAYE outlines detailed procedures that have been developed in accordance with Treasury Board policy.

The revolving fund should account for payables in the manner which is described in the next two sections of the guide.

Other government departments include all entities listed in Schedule I and II of the FAA. Accounts payable pertaining to other government departments include short-term liabilities resulting from the receipt of goods or services from other government departments. Account payable should be set up to establish that liability.

A common example of an accrued liability is the interest on the drawdown authority
(see Section 6270 Interest Expense on Drawdown).

This account will contain all accounts payable or accrued expenses resulting from transactions with non-government entities. When the revolving fund receives goods or services from a non government entity, use the following accounting entries to record the liability and eventually pay the account:

Certain other liabilities, such as vacation pay, retroactive pay, accrued professional fees, may be combined with trade payables. Vacation pay and retroactive pay are recorded at the central agency level for the whole government. However, the unit must also record its own liabilities through an entry in its accounting system. This type of entry, restricted to revolving funds, does not affect the central accounts, thus no duplicate liability exists in central accounts.

Annual leave credits are accumulated by employees in accordance with collective agreements for unionized employees and Treasury Board policies covering terms and conditions of employment for management. Employees accumulate annual leave credits when they are unable to use them during the year or when they have requested a carry over for specific reasons. Normally, these annual credits can only be accumulated for two years.

As employees transfer from one organization to another, any unused annual leave credits they have accumulated are taken with them. Employees can request to receive cash in lieu of leave :

- at their request;

- pursuant to the collective agreement terms and conditions of employment; or

- by direction of the Treasury Board.

When cash in lieu of leave is requested, the organization where the employee is currently working normally pays the employee, even if the accumulated leave applies to time worked in a previous organization. However, the situation may be more complicated in the case of revolving funds. The following sections will explain how to process accumulated unused annual leave credits under differing circumstances.

A written agreement between the revolving fund and its host department should be prepared to indicate which party is responsible for paying the accumulated annual leave for all departmental staff transferred into the revolving fund. Should an employee decide to take a pay out before commencing employment with the revolving fund, the host department will bear the costs of such pay outs. When accumulated unused annual leave credits accompany the employee, the host department will cover their costs, if they are paid out within two years of the employee joining the revolving fund unit. Within this period, the employee should take a pay out or time off for this accumulated leave.

Recognition of this item in the revolving fund will be done through a note to the financial statements. The note will state that the Allowance for Unused Annual Leave liability account does not include $X of accumulated unused annual leave related to host departmental staff transferred to the revolving fund. This amount represents a liability of the host department.

If an agreement between the host department and the revolving fund provides for the full payment of the unused annual leave when the fund is first established, the accounting entry would appear as follows.

During the first two years that the revolving fund is operates, employees receiving payment in lieu of taking unused annual leave will obtain funding from the host department for all unused annual leave earned before they joined the revolving fund unit. The accounting entry could appear in a number of different ways depending on whether the unused annual leave was previously disclosed as a note to the financial statements or the revolving fund was paid up front for the full liability. A few different situations are described below.

Example 1:

Within the two-year start-up period, the employee has elected to take cash in lieu of using some accumulated annual leave. The host department did not pay the revolving fund unit for the leave when the fund was established.

Example 2:

Within the two-year start-up period, the employee has elected to take cash in lieu of using some accumulated annual leave. The host department previously paid the revolving fund unit for the leave.

Example 3:

The employee has decided to take time off instead of a cash payment. This entry might appear only once at year-end and take account of all the leave taken in this manner throughout the year. It is assumed that the host department paid the revolving fund for the liability when the fund was first established.

If the host department has not developed its own query process, the revolving fund should inform the department of the leave in time.

Annually, as of March 31, the revolving fund should calculate the unused annual leave for all of its employees and adjust its liability and expense accounts accordingly. A policy should be developed for managing the accumulation of leave credits and the payment of these to employees. The calculation will be based only on the annual leave carryovers for employee time worked within the revolving fund. As mentioned in the previous section, the host department is responsible for all unused annual leave that employees accumulated while working in its organization. A note should be included with the financial statements that states the amount of the liability of the host department(s) that is not included. The following table shows how to account for such a transaction.

As employees are transferred from the revolving fund, it will be held accountable for the unused annual leave in the same manner that a host department is responsible when its employees are transferred to a revolving fund. The revolving fund will need to maintain liability accounts until the leave is paid in cash or taken in time off.

The financial statements for the entire Government of Canada include a centrally booked liability calculated for employees in all government departments and agencies, including those organizations that administer revolving funds. Since the revolving fund statements are not consolidated with the financial statements of the Government of Canada, the recording of a liability in the revolving fund financial statements does not duplicate the liability recorded in the Accounts of Canada.

The value of work performed and services rendered is determined on the basis of performance up to and including March 31, and billings or estimates of the debt owing for that performance.

The value of goods received is sometime hard to determine, as it involves ownership of the goods. Ownership is interpreted in accordance with terms of the contract and quite often means physical control or possession (actual or constructive) of the goods that leads to a legal liability to pay the supplier. If ownership has been acquired by March 31, and inspection has determined that the goods were supplied by the accounting date, then value of these goods must be set up as a debt.

If you do not have physical control of and title to the goods, only outstanding payments for work in process completed to March 31 can be accrued as a debt, and then only if the purchase contract provides for the payment(s).

At the end of a fiscal year, record expenses for all outstanding debts arising from work performed, goods received and services rendered on or before March 31.

Where the contract specifies payment on completion or on a specific milestone date, you should evaluate the work completed on projects that you cannot bill to the client by March 31.

The holdback payable account, which represents a percentage of a contract amount, is used only if required by the contract. Final payment is made when goods or services are delivered or provided in accordance with the contractual arrangements.

The coding for the holdback related to the revolving fund will reflect the holdback payable at both the revolving fund level and the departmental level. At year end, the government entity through the host department reports all liabilities, including holdbacks of the RF.

As a result of these entries, the department has processed a charge of $100,000 in the revolving fund expenditure account. The revolving fund has only processed $85,000 through the ANCAFA, so the remaining $15,000 is a reconciliation item. The $15,000 is a reconciliation item and is charged against the fund's authority in this reconciliation.

The coding to recognize the holdback transaction should identify the holdback as a departmental holdback payable using the holdback account assigned to the department. The transaction sub-coding will identify the portion attributed to the revolving fund unit.

Since the cut-off dates of the revolving fund and the government are not the same, these transactions could be part of the reconciliation between the ANCAFA and the authority used.

The EBP rates, developed by the Treasury Board Secretariat, represent the forecast cost to the government of delivering various employee benefits and insurance plans. These various rates are amalgamated, expressed as a percentage of the total personnel costs, and are further subdivided into a statutory component and a component reliant on annual appropriations. The amount of statutory and voted EBP costs assigned to a department or other organization are assessments, similar to a property tax assessment.

Revolving fund personnel costs are viewed separately from the rest of the department's personnel costs. Therefore, the revolving fund must account for its own share of the employee benefit costs.

The Expenditure Management Sector at the Treasury Board Secretariat annually confirms the rates to be used by a revolving fund for full-time and term employees. In early March each year, the Secretariat issues a letter to the senior full-time financial officers of departments and agencies that provides information on employee benefit costs and the remittance of amounts to the Secretariat for the upcoming fiscal year.

These rates are estimates of what the cost is likely to be for the government in the upcoming year. In March of the following year, the Secretariat calculates and communicates the actual cost (up to date estimate) to departments and agencies, including revolving funds, which must then make final adjustments to accounting records prior to year end.

Revolving funds will use the percentage factors of salary and wages, found below, to calculate the 1997-98 EBP amounts.Two sets of rates are applicable for computing revolving funds personnel costs: 22.8 per cent and 5.78 per cent. The Treasury Board will advise annually of the rate to use.

The 22.8 per cent rate is applied to the total personnel costs for full-time employees, including terms more than six months. This rate includes the following components:

- an amount to cover the government's contribution as the employer to the Public Service Superannuation Account (PSSA), the Canada Pension Plan (CPP)/Quebec Pension Plan (QPP), the Supplementary Death Benefit Account (SDBA) and the Employment Insurance (EI) Account;

- an amount to cover contributions to employee insurance plans such as the Public Service Health Care Plan, the Dental Plan, other insurance plans and provincial payroll taxes.

The rate of 5.78% is for term and seasonal employees under six months who are not contributors to the PSSA and SDBA and therefore do not qualify for insurance plan coverage.

According to the instruction letter from the Treasury Board Secretariat, monthly interdepartmental settlements (ISs) must be prepared. These ISs serve as the mechanism to make the accounting entry to recognize the employee benefit charges and to remit the amount to the Secretariat. In some cases, revolving funds may establish specific remittance arrangements (e.g. bi-monthly, quarterly, semi-annually) with the Secretariat, although such costs should be recorded monthly. The revolving fund initiates the EBP transaction that results in the accounting entry to its financial system and generates the IS transaction.

The following example shows how employee benefit costs are accounted for within the financial accounting framework of the revolving fund and the government.

The Treasury Board Secretariat contact point for employee benefit transactions is as follows:

Financial Services Division
Corporate Services
Treasury Board Secretariat/Department of Finance
5th floor, East Tower
140 O'Connor Street
Ottawa, Ontario
K1A OR5
Tel.: (613) 995-5231

To ensure personal development opportunities are made available for its employees and to temporarily take advantage of personnel with specialized qualifications, revolving funds may enter into secondment agreements with government departments, Crown corporations and private sector organizations.

The terms and conditions of the secondment agreement should clearly state how the employee's salary and benefits will be handled. The following approaches should be used to record the financial transactions relating to a secondment agreement.

For purposes of understanding the examples, note that the organization where the employee is on strength or the one seconding the employee to another organization is referred to as the home organization. The organization offering the developmental opportunity or requiring the specialized skills is referred to as the host organization.

Generally the home organization will continue to administer the employee pay records and to cover the employee's salary each pay period. Accordingly, the home organization will bill the host for salary and wages.

The accounting for the salary recovery or charging must be in accordance with the Treasury Board Chart of Accounts Manual. Revolving funds shall follow the policy issued by the Program Branch of the Treasury Board Secretariat regarding accounting for secondment agreements. The revolving fund should identify the method that allows the production of the best information in the most timely and cost-effective manner.

The following examples describe the various types of secondment situations.

Example 1: The revolving fund (home) seconds an employee to a department (host)

The two parties sign an agreement which provides for an employee of a revolving fund to be seconded to a department. The revolving fund will continue to administer the salaries and benefits for the employee as the person is still considered part of the revolving fund's payroll. Since the revolving fund is entitled to recover only the gross salary paid to the employee, the revolving fund pays the employee and recovers the gross salary amount from the host department. There is no additional recovery for employee benefits. Recovering the costs from the host department will reduce the revolving fund's salary expenses. The calculation of the statutory benefits and insurance costs for the revolving fund will be based on the revolving fund's net salary expenses. Therefore, the home department does not take into account the salary costs of the employee on secondment. The host department will need to consider the EBP portion of the employee's salary costs when calculating its portion of the employee benefit costs.

Example 2: A department (home) seconds an employee to a revolving fund (host)

The two parties sign an agreement that provides for the secondment of a departmental employee to a revolving fund. This situation will be handled in exactly the same manner as situation 1 with one difference: the roles of the department and the revolving fund are reversed.

Example 3: A revolving fund (home) seconds an employee to a Crown corporation or a private sector organization (host)

The two parties sign an agreement that provides for the secondment of a revolving fund employee to a Crown corporation or a private sector organization. The revolving fund will continue to administer the employee's pay and benefits and recover the total cost to government of the employee's salary and employee benefits. The amount to be recovered must be based on the employee's entitlement, the apportioned rate for the government's costs related to statutory benefits and contributions to employee insurance plans. The amount recovered for the employee's entitlement should be applied as a reduction to the salary cost of the revolving fund. The portion of EBP charged and recovered from the Crown corporation or the private sector organization as non-tax revenue in the accounts of the parent department.

Example 4: A Crown corporation or a private sector organization (home) seconds an employee to the revolving fund (host) (Interchange Canada)

Both parties sign a contract for services. The revolving fund will receive an invoice for the value of services that the seconded employee will render to the host. The debit will be charged to salary expenses of the revolving fund. However, do not apply this amount to the salary base when calculating the EBP remittance to the Treasury Board. The home organization will continue to pay the salary and cover the benefits associated with the employee.

Example 5: A revolving fund (home) seconds an employee to another revolving fund (host)

The two parties sign an agreement that provides for the secondment of an employee between different revolving funds. The home revolving fund will continue to administer the employee's pay and benefits but will only recover the employee's salary from the host revolving fund. As stipulated in example 1, the home revolving fund calculates the EBP cost on the basis of its net salary costs (excluding the salary related to the seconded employee). On the other hand, the host revolving fund will include the seconded employee's salary in its salary base when calculating its portion of the EBP costs.