Guide on Revolving Funds

The deputy head of the department has been delegated authority to add, delete from or make any other amendments to the "Government of Canada Reporting Entities Register" for the purposes of sub-section 239(1) of the Excise Tax Act, as may be appropriate with respect to that portion of the Public Service for which the deputy head is responsible. Consequently, a revolving fund unit may be established as a separate GST reporting entity within the department.

For information on applying GST, consult the Policy on the Application of the Goods and Services Tax and the Harmonized Sales Tax in the Departments and Agencies of the Government of Canada.

The GST is assigned a source object but not a standard object in accordance with the government's chart of accounts coding structure. Record the GST portion of each transaction involving the purchase or the sale of a taxable good or service, respectively, as an account payable or an account receivable. Record payment of GST on a separate line of coding on each payment requisition. Do not include GST as part of the liability set up under PAYE.

The management of a revolving fund will choose one of the following two methods to record and report GST:

- record the GST expenditures and revenues to the department's accounts directly; or

- maintain unit records and audit trails for GST expenditures and revenues and journalize these GST expenditures and revenues to the department's accounts monthly.

When an invoice for a taxable transaction is paid to a GST registrant, the GST portion should be coded to the Refundable Advance Account (RAA) in the responsible department's general ledger. The expense exclusive of the GST will be recorded to the applicable expense account.

The Receiver General has assigned each department a central account, which is used to record the GST revenue collected directly on taxable sales. The responsible department reports all of its GST revenues, including those of the revolving fund, to Revenue Canada each month. At the end of a fiscal year, the Receiver General offsets centrally the GST Expenditure Accounts (Refundable Advance Account) to the Revenue Canada GST Revenue Accounts.

6320 Common service costs

Common service costs may include direct costs (e.g. accommodation, materials and supplies) or indirect costs (including overhead expenses) charged by either the host department or other government department(s). These costs should be included as part of the operating costs of the revolving fund. The governing principle is that revolving funds will include in their costs of operations the same type of costs that similar operations in the private sector incur.

Each year, fund managers should review any agreements or memoranda of understanding relating to the allocation of common service costs. Closely analyze the overhead cost of common services. Overhead costs should not include the costs of the structural overhead of departments (such as the minister's office and deputy minister's office) which serves a broad public purpose. Such costs should instead be paid out of the departmental appropriation. To the extent that a revolving fund uses or shares the costs of departmental overhead, it should only bear that portion of the costs directly attributable to the goods or services being provided (e.g. accounting services, materiel and contract services, personnel services).

As a revolving fund is normally expected to recover the full cost of operations, common service costs must form part of the cost structure used to determine user fees for goods and services.

A subsidy is funding received or provided by a revolving fund that does not require the recipient to do or provide anything in return. Fully disclose each subsidy received in the financial statements and state its source of funding.

Examples of subsidies include the following:

- mandated services that are provided at less than full cost recovery, with non-users of the service (usually the department) making up the difference; and

- payments made by the department to offset losses in revenues, such as municipal grant equivalents.

Since subsidies affect the financial position and costing structures of a revolving fund, appropriate disclosure is necessary to help interested parties evaluate the impact of this assistance on the viability of the fund's operations. The disclosure should contain the following information:

- the amount of the subsidy; and

- the relevant terms and conditions of the subsidy.

Record each subsidy in the books of the revolving fund and disclose particulars it in the operating statements as revenue. Explain details of these subsidies in a note to the financial statements.

Situations may arise where revenue received in a previous year must be refunded. Record such refunds as reductions of revenue in the current year.

However, if the information on revenue received in the current year becomes available before the revolving fund's year-end financial statements are finalized, you would make an accrual entry to record an account payable in the current year and reduce the revenue reported for the year accordingly.

Situations occasionally arise where the financial statements include gains or losses that pertain to the income or expenses of prior periods.

Prior period financial results should be adjusted only to reflect a change in an accounting policy applied retroactively or to correct a fundamental error (CICA Handbook, Chapter 1506 Accounting Changes).

To account for a change in an accounting policy, the adjustment is based on the date that an item was first recognized or accepted in the financial statements, not the date that the item was first discovered. For example, an item recognized in the current fiscal year beginning April 1, 1996 or after would be treated as a current period item and not as a prior period adjustment.

Gains or losses that qualify as prior period adjustments happen infrequently. For comparative purposes, prior periods are to be restated as necessary to reflect the retroactive application of a prior period adjustment.

The current period statements, should:

- exclude any prior period adjustments from the determination of net income for the current period; and

- describe the prior period adjustment and the effect the correction has on the current period as well as prior period statements, and a note that the financial statements of prior periods have been restated.

Depending on the nature of the adjustment, it may be appropriate to disclose the effect of this correction on significant items such as net income and working capital.

In the case of a historical summary of income for a number of periods, prior period adjustments should be applied retroactively to correspond to the appropriate periods.

(See the Public Accounts Instructions Manual (PAIM) for more information on the presentation of prior period adjustments.)

In the government's policy, moneys received on April 1 and on or before the cut-off date for period 13 must be credited to the old fiscal year if they comprise receipts covering refunds of old-year budgetary expenditures. These cash refunds are known as category "B" receipts in the Receiver General's year-end directive. If it does not represent a recovery of a prior period expenditure than the revolving fund must record cash received after April 1 as a new year transaction.

Revolving funds will account for financial transactions in accordance with the current PAYE policy. Credit or debit any difference between a settled PAYE and the PAYE amount accrued to the revolving fund's expenditure account.

In the revolving fund's March 31 financial statements, credit the refund to new year expenses. The timing of the item will affect the reconciliation between the ANCAFA and the revolving fund's expenditure vote.

Bid deposits are security deposits received from contractors following a request for tender and are deposited as received. They may be represented by a certified cheque or government-guaranteed bonds receipt of which must be accounted for as assets of the department and the revolving fund.

Revolving funds may also tender and bid to obtain contracts. Bids made to obtain a contract outside the government must be made in accordance with the Financial Administration Act.

Responsible departments monitor these deposits in order to provide data for the Public Accounts of Canada.

7000 Specialized areas

There are topics that require consideration relating to the operating and reporting practices for revolving funds and these are included in this section.

Normally costs are recorded on a direct basis (e.g. supplies, inventory items, employee expenses), except for assets that are amortized. There are many unique methods for arriving at costs (refer to the Treasury Board Guide to the Costing of Outputs). Whichever method is used (e.g. activity-based costing, standard costs), explain why the method was selected as a note to the financial statements. Overhead cost allocation requires unique handling and is explained below.

"Direct costs" are costs that would only be incurred to produce or provide the good or service in question and can be precisely attributable to that good or service. Typical direct costs include the following:

- direct labour (salary and all benefits of those working directly to provide a service or produce a good);

- direct material costs (material and supplies used to provide a service or produce a good); and

- direct operating costs (e.g. accommodation, professional services, travel) used to deliver the goods or services.

"Indirect costs" are the overhead costs incurred at least in part, to deliver the goods or services in question. Indirect costs are allocated to the services they support. However, the costs of central agencies are excluded from the calculation of indirect costs. Indirect, or overhead, costs typically include the following:

- a portion of program support such as supervisory and management staff;

- a portion of corporate-wide functions such as personnel, finance, informatics, legal services, audit and communications;

- a portion of departmental costs such as accommodations and utilities. (such costs may have direct and indirect lines); and,

- a portion of departmental senior management costs.

When the revolving fund has its own corporate structure and does not receive services from the responsible department, the responsible department will not recover a charge for corporate services. When the revolving fund operates within the responsible department infrastructure, the department will fully recover administrative, management and other costs incurred on behalf of the revolving fund on a prorata basis. Examples of these recoverable corporate overhead costs include the following:

- administration services costs (e.g. finance, personnel, materiel, real property); and

- management and support services costs (e.g. security, travel, corporate planning, information management, audit and evaluation).

Representatives of the responsible department and the revolving fund need to establish a corporate cost allocation model (CCAM) that best represents the overhead costs to be charged to the revolving fund by the responsible department.

Corporate overhead costs should be paid to the responsible department at least quarterly. The responsible department may choose to bill the revolving fund unit based on budgeted expenditures during the year. Any difference between the amounts billed on a budgetary basis and the actual charge will be adjusted when the actual charges are determined.

The revolving fund unit will require an accounting system that can offer typical business entity functionality (e.g. inventory and capital asset management, accounts receivable, full accrual accounting, cost accounting). The activities financed by the revolving fund unit must be accounted for separately from the activities financed by other appropriations.

Since the revolving fund unit must recover its full or almost full costs, the details of its departmental overhead charges will be important. These costs represent expenses under the fund. As well, they affect the revolving fund unit drawdown authority and, potentially, the amount of interest payable. Include all overhead charges incurred by the revolving fund (e.g. costs associated with inventory management activities, contracting, personnel and accommodation) in the fund's accounting system.

As a minimum, the accounting system must provide for the following:

- the preparation of both periodic and year-end financial statements on a full accrual and cost basis of accounting in accordance with GAAP; and,

- the preparation and submission of both periodic and year-end data to the Receiver General on a modified accrual basis of accounting in accordance with Receiver General directives to meet all accounting requirements for the revolving fund's budgetary appropriation.

The accrual method of accounting records a number of non-cash transactions, such as termination benefits and the amortization, gain or loss on the disposal of capital assets.

Revolving funds must also schedule their cash requirements out of the CRF. As a result, the accrual records must be reconcilable to the records kept on a modified cash basis of accounting for the purpose of the Main Estimates and the Public Accounts. The financial systems of the revolving fund should be well coordinated with those of its responsible department.

The revolving fund unit must submit its financial statements to the Receiver General (RG) of Canada annually, as required in the PAIM.

The PAIM describes the formats, contents and due dates of the reports that must be prepared. As well, other financial information required by the PAIM will be submitted through various departmental reporting channels.

The financial statements of revolving funds are published annually in Section 1 of Volume II (Part II) of the Public Accounts of Canada.

Revolving funds were subject to external audits until approximately 1984. At that time, the Auditor General of Canada stated that he did not need to audit revolving fund statements since he could do his review by applying statistical sampling techniques against transactional activity at the central account level. In any event, his audit engagement was with the Government of Canada and relative to its financial statements, not the specific results and financial position of revolving funds.

Departments should however, schedule annual audits on the financial statements of their revolving fund(s). This action provides the departmental management team with supporting information on revolving fund operations to help them prepare the annual departmental letter of representation sent to the Deputy Receiver General for Canada and the Auditor General of Canada. The audit will provide support for the various representations that the department must make on its financial and other activities. Eventually, this information forms part of the Public Accounts of Canada. Accordingly, a number of departments have opted to conduct internal or external audits regularly on their revolving funds.

In addition to an audit of the revolving fund's financial statements, financial attest audits should be done to obtain observations on internal control weaknesses, together with recommendations for improvement.

Some of the criteria used to decide whether to use internal or external auditors include the following:

- availability of qualified internal audit resources;

- size and complexity of the revolving fund; and

- the need for arm's length verification

The costs of conducting an audit are part of the operating costs of the revolving fund.

If the financial statements of the revolving fund have been audited, then the auditor's complete opinion statement must be included with submission material forwarded to the Public accounts coordinating group.

Audits must review the revolving funds compliance to relevant Treasury Board policies and Receiver General directives covering the financial accounting and reporting practices of revolving funds, which govern disclosure and presentation in the Public Accounts of Canada.

The following model outlines a standard set of terms of reference for an audit engagement which was favourably reviewed by the Auditor General in a chapter of his November 1995 annual report:

- audit title—indicates the name of the fund and the fiscal year;

- summary of requirements—includes instructions to complete the audit and provide opinion; and

- background information—describes the operation and function of the fund (this may be especially useful for external auditors).

- The auditor should conduct a financial audit and express an opinion on whether the financial statements present fairly, in all material respects, the financial position, results of operations and changes in financial position of the revolving fund in accordance with the basis of accounting described in the note to the financial statements and with the policies applicable to a revolving fund.

- Present a management letter containing observations made during the attest audit describing any observances of weaknesses in internal control and system processes, along with recommendations for improvements.

- Assess compliance with GAAP, specific Treasury Board policies and Receiver General directives (specify selected policies and directives).

Auditors are expected to do the following:

- review related central agency policies and internal instructions governing financial statements and reporting by a revolving fund for inclusion in the Public Accounts;

- review and evaluate the financial systems and internal controls in order to be able to express an audit opinion on the financial statements prepared in accordance with GAAP;

- verify the accuracy, completeness, valuation and presentation of assets, liabilities, income and other financial figures in accordance with generally accepted auditing standards;

- review the adequacy of financial statement disclosures including, such as, the entity's complete or segmented financial position, in order to assess the revolving funds continued viability; and

- review the established management control framework in relation to any policy or directives for which compliance is to be assessed.

The role of the Auditor General is outlined in the Auditor General Act. The following is a brief summary of the verification and reporting activities that the Auditor General's representatives may conduct on any revolving fund:

- verify the legislative authority and mandate of the revolving fund;

- review the structure, activities, and purposes and objectives of the revolving fund;

- ensure that an audit (internal or external) was conducted and review the findings;

- ensure that the revolving fund maintains essential and complete records;

- ensure that the revolving fund has spent money with due regard for economy and efficiency;

- ensure that procedures are established to measure and report on the effectiveness of the revolving fund;

- ensure that there are proper controls to safeguard and control public funds and that these funds have been spent only where authorized; and

- conduct the review by statistically sampling any transactions deemed necessary.

When the Treasury Board and the department responsible for a revolving fund's operation decide to cease its operations, it is necessary to rescind the authority of the revolving fund as of a specific date.

The Treasury Board will approve the decision to close a revolving fund. The decision will identify a closing date in the fiscal year immediately following the fiscal year in which the operations ceased.

When authority to operate a revolving fund has been obtained from Parliament pursuant to the Revolving Funds Act, an Appropriation Act or other legislation, authority to discontinue operations of the fund must be obtained through an Appropriation Act or an amendment to other legislation.

The management of the revolving fund unit are required to provide the financial statements as of the closing date of the revolving fund unit.

The responsible department will be the first source of funds for any costs associated with winding up the revolving fund unit.

A submission to the Treasury Board seeking approval to discontinue revolving fund operations should disclose the following:

- the alternatives available, with a recommendation to continue the services provided, if appropriate; and

- information and recommendations necessary for the orderly closing out of the fund in particular, for the disposition of the assets of the fund.

The required vote wording to terminate a revolving fund should reflect the following:

Vote No. — Name of the revolving fund — to terminate the operations of the (name of the revolving fund) and to repeal (name of ministry) Vote no. X, Appropriation Act No. X, 19XX-XX as at March 31, 19XX; or,

Vote No. — Name of Revolving Fund — In accordance with section 12 of the Revolving Funds Act, 1985 R.S. c. R-8, to repeal section x of the said Act, as of March 31, 19XX.

The government, as a "shareholder," of two (or more) revolving fund entities, may decide to combine the resources, talents and risks of these under one revolving fund entity.

The term "merger" may be used in the legal form to describe the combination of two or more revolving fund entities into one single entity. For accounting purposes, the result will consist of a pooling of interests. Under a pooling-of-interest accounting concept, the combined revolving fund entity continues to be valued in accordance with established book values, subject to whatever adjustments may be required to assure a reasonably uniform application of GAAP.

The pooling-of-interests accounting treatment is supported by a reasoning that no new basis of accountability is required, since the two (or more) entities are continuing operations as one entity in a manner similar to the situation which existed in the past. The presumption is that there has been no purchase or sale of assets, but merely a merging of two (or more) formerly separate business entities.

Refer to the CICA Handbook, Chapter 1580, Business Combinations for a complete description of the application of the pooling-of-interests method.

The merger of revolving fund units must be authorized through an Appropriation Act or through some other legislative change approved by Parliament.

The combined revolving fund entity should reflect the assets and liabilities at the total book values recorded by the combining revolving fund entities at the time of merger. To ensure that the combined entities report on a reasonably uniform basis of accounting, retroactive adjustments may be needed. As well, the financial statements of the combined revolving fund entity will require a restatement for prior periods.

The ANCAFA of the combined revolving fund entity should of course, be equal to the equities of the combining entities. As well, the accumulated surplus/deficit and the contributed capital of the combined revolving fund entity must reflect the consolidation total accumulated surplus/deficit and contributed capital of the combined entities.

The statement of operations for the period in which the combination occurs and for prior periods should be reflected on a combined basis.

The method of accounting for the merger of two (or more) revolving fund entities should be disclosed in the financial statements of the combined entity at the end of in the accounting period in which the combination took place.

The results of operations are reflected only from the date of the merger. Consequently, financial statements showing the results of operations as though the entities had combined at the beginning of the fiscal period will help the reader understand and assess the financial statements of the entities that are going to merge or have already merged.

The combined revolving fund entity will be responsible for disclosing the information required by Chapter 1580, Business Combinations of the CICA Handbook.

A statutory appropriation authorizes the revolving fund to make expenditures for specific purposes. This authority is a non-lapsing authority approved for such amount and time as provided for in the specific statute.

The Treasury Board manages a small operating reserve which is primarily used as a line of credit. The Treasury Board functions as a banker and gives the highest priority to bridge-finance projects with significant productivity payback. The department responsible for a revolving fund entity functions as a borrower who uses this line of credit (drawdown on the authority). The management of the revolving fund unit is responsible for repaying the advances made from this line of credit and with associated interest.

In rare circumstances, the Treasury Board may allocate funds from the operating reserve to establish a capital asset base.

The deputy head of the revolving fund's host department is responsible for controlling the statutory drawdown authority. Financial authorities will be delegated to the management of the revolving fund unit who are responsible for fulfilling statutory requirements.

Whenever the cash requirements of a revolving fund unit exceed the annual drawdown authority agreed with the Treasury Board through the ARLU process, the deputy head of the department responsible for the revolving fund unit will be accountable for providing a report to the Estimates Division of the Treasury Board Secretariat. This report will be provided thirty days after the period that shows a use of funds exceeding the estimated annual drawdown authority and will include the reasons for this situation as well as an action plan to correct it. The Treasury Board Secretariat may require that a material shortage in the annual cash requirements be recovered from the departmental appropriation.

The Estimates will reflect the starting date for the operation of a revolving fund following the approval by the Treasury Board. The revolving fund unit must make estimates to determine a legislative authority limit for spending money out of the CRF. To reiterate, the Treasury Board has to establish a drawdown authority value. The full costs of services or individual products must be known and used as a basis for budgeting and preparing the Main Estimates.

The Estimates Division of the Treasury Board Secretariat issues annual instructions on how to present revolving funds in the Estimates. These instructions are included in the Main Estimates call letter sent to the senior full-time financial officer of each department.

A revolving fund unit may be used to finance programs, activities within programs or sub-activities. If an entire program is funded through a revolving fund, supplement the basic program by activities table with another table that shows the operating surplus or loss of each activity of the program. A footnote to this table will reconcile the overall surplus or loss to the Estimates' cash requirements and make an appropriate reference to Part III of the Estimates for further information.

If an activity of a program is entirely financed through a revolving fund, that activity will be shown on a cash basis (for information purpose) in the program by activities table. This display will then be footnoted to relate the expected operating loss or surplus to the Estimates' cash requirements and to make proper reference to Part III for further information.

When part of an activity is funded through a revolving fund, a footnote to the table will disclose the expected operating surplus or loss, relate that balance to the Estimates' cash requirement or make suitable reference to Part III for further information.

The revolving fund entity must provide adequate financial data annually to the responsible department. Conversely, the responsible department must provide the revolving fund unit with appropriate feedback concerning the department's expenses, controls and other elements.

The Treasury Board Secretariat analyst will review the revolving fund plan and determine whether there is a projected increase in the use of the drawdown authority (in which case there would be a charge against the operating reserve) or whether there is a positive bottom line (in which case there would be a credit to the operating reserve). Any large in-year increases in the use of the drawdown authority would be included as an information item in the Final Supplementary Estimates, with a corresponding charge against the operating reserve. The Treasury Board is concerned about the implications of the revolving fund business plan for operating reserves.

A "performance bond" guarantees the performance of work under a contractual arrangement.

The particulars surrounding the use of performance bonds are covered in the Government Contracts Regulations and Treasury Board's policies on contracting. The revolving fund must comply with all appropriate contracting regulations and policies.

Performance bonds are normally required from contractors to ensure that there is money to pay subcontractors and to complete the job in the event of a default. The Crown self-insures, as defined in the statutory payment authority in the Crown Liability and Proceedings Act, so no additional insurance or deposit is required. Therefore, the Crown should not buy performance bonds.

The ANCAFA information presented in the financial statements using the accrual basis of accounting has to be reconciled with the information based on the accounting policies and practices of the Government of Canada.. In the Accounts of Canada, transactions for revolving funds impacting the CRF are reported with departmental expenditures.

Two reconciliation tables are published with the financial statements in the Public Accounts. The first reconciliation is titled "Statement of authority provided (used)" in the current year. The following items make up the main categories involved in this reconciliation:

- net income (loss) for the year as reported in the statement of operations; and

- adjustments required to reconcile from the accrual basis to the modified accrual basis of accounting used in the Accounts of Canada, including the following:

- items not requiring the use of funds (cash), such as amortization and provision of termination benefits;

- net capital acquisitions that are accounted for as expenditures in the Accounts of Canada;

- reversal of the working capital change; and,

- any other gross sources and uses of funds reported in the statement of change in financial position (excluding those included above).

The reconciliation at this stage, has been converted to the Government of Canada accounting basis that is, the net of the revolving fund central account (expenditure), before year-end adjustments. The following transactions are processed in the Accounts of Canada, but not in the ANCAFA account, due to different the cut off accounting principles followed by revolving funds:

- the difference between current year's and previous years' net PAYE charges against the appropriation account after March 31; and

- the net of amounts credited to the appropriation account after March 31.

A second reconciliation table is also published in the Public Accounts of Canada called the "Reconciliation of unused authority." This table reconciles the balance in the ANCAFA account according to the financial statements with the amount of unused authority reported in the Public Accounts in each ministry summary. The ANCAFA account, as per the balance sheet, records the net amount of the revolving fund's non-lapsing authority that has been used. It does not reflect PAYE charges against and amounts credited to the appropriation account after March 31; however, such charges are included in the measurement of unused authority.

This reconciliation contains, where applicable, two types of transactions.

- PAYE charges against the appropriation account during the post-year-end period, in accordance with the Receiver General Directive on PAYE. These include amounts discharged after March 31 and recorded in the Accounts of Canada in the current reporting year.

- Amounts credited to the appropriation account after March 31, in accordance with Receiver General directives on year-end procedures and PAYE. These include amounts received and recorded in the Accounts of Canada by cash receipt, IS receipt, source 0050 journal vouchers and PAYE source 0042 journal vouchers.

The reconciliation must also report the amounts of authority granted by legislation (including any increase or decrease approved in subsequent Appropriation Acts) to ascertain the amount of unused authority to be carried forward to the following year.

Each month, you must do a reconciliation between the revolving fund expenditure account (central account in the responsible department's books) and the ANCAFA balance. At year end, this reconciliation will be published in the Public Accounts.

"Prepare" means to develop the submission or propose action for approval.

"Approve" means, in the case of the Treasury Board, to approve with the submission presented by the preparer (generally the responsible department) before the fact. In the case of Parliament, it means to approve by a vote in the House.

"Receive" means to have knowledge by virtue of the matter being tabled; for instance, Parliament receives the annual statements of each revolving fund as part of the Public Accounts each year.

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