1000 Foreword
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:
From Public Works and Government Services
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From Treasury Board Secretariat
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Government Operations Services Branch
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Financial contract and Assets Management
Sector
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Jean-Daniel Hubert Frank Tkalec (Project Manager)
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Mike McNamara Bernard Ouellet (Project Manager) Len Polsky Les Pratt Lise Prévost
Students: Alan Richter and Patricia Trudel
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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.
2000 What is a revolving
fund?
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.
2100 Special operating
agencies that use a revolving fund
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.
3000 Financing a revolving
fund
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.
3100 Measuring the
performance of a revolving fund
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
4000 Establishing a revolving
fund
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.
4100 Criteria
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.)
Establishment criteria
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.
Criteria
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Issues to consider
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Purpose of the fund
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Identification of multiple business lines Full or almost full cost recovery Full financial disclosure (all costs direct and overhead, whether charged or not, are to
be reported against the revolving fund. Non-costed items are to be shown as a note to the financial statements) Extra flexibility (e.g. purchase of capital assets) Increased efficiency in operation Autonomy of service (optional vs. mandatory) Transition to commercialization In the public interest and public mandate
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Mandate
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Stable mandate or continuous operation Support of established objectives of the program
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Clients
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Identifiable clients and activities (internal and external to
government) Goods and services that are provided primarily for the benefit of specific individuals or
groups who pay the full or almost full cost of the services provided Opportunity to influence costs - Market Consultation Review
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Funding sources
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Department has legal authority to charge fees Portion of the operation that relates to the public purpose mandate which may be funded
through appropriation Subsidies (types and justifications for each) Revenues that do not always relate directly to expenses (e.g. royalties and licence
fees are generally not appropriate as a funding source) Proceeds from disposal of asset (subject to agreement with TB)
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Revenues and expenses by business lines
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Revenues and expenses that are closely related and used for
intended business lines Absence of cross subsidization between business lines Well-established cost and pricing structures to ensure stable fees Full costing or capitalization
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Cost effectiveness and optimal resource use
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Best value for money for government and users Mechanisms for controlling costs within mandatory services or monopoly positions e.g.
performance indicators, price and volume variance analysis
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Optimization of good business practices
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Client-oriented environment to meet current and future
demands Better management of revenue (a surplus in one year can offset a deficit in subsequent
years or future capitalization) Strategy to meet the projections of the approved business plan within a given time frame Capacity to meet cash requirements as indicated in the business plan Full disclosure of costs (direct, overhead) Clear management accountability Improved cash management through timely pay back of the drawdown authority on the CRF,
which is interest bearing
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Better decision making on major capital expenditures
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Ability to access funds in the year when it is more cost
effective to acquire capital assets
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Size
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Resource requirements that are large enough to warrant the
administrative and accounting costs of such an operation
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4200 Authorities required
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.
4210 Authority to
spend revenue
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 …
4220 Authority to drawdown
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".
4230 Authority to charge
fees
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.
4235 Cost recovery for goods
and services
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.
4240 Special
considerations related to rights, privileges and intellectual property
"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).
4300 Business plan
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.
4310 Executive summary
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.
4320 Mandate statement
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.
4330 Planning assumptions
In this section, clearly identify key assumptions used to prepare the
business plan.
4340 Operating environment
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.
4350 Objectives,
strategies and action plans by business line
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.
4360 Performance measures
and targets
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.
4370 Reporting
requirements
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.
4400 Operational
environment
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.
4410 Continuous
requirements
Criteria
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Issues to consider
|
Program objectives or legislative authority
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Implementation of new decisions affecting the business unit
|
Multi-year business plan (three to five years) presented
annually
|
Mission statement Depending on the type of business lines, a business plan covering three or more future
years Financial statements covering two years prior to the start of the planning period showing
actual results for the first year, projections for the current year, and prospective
financial statements for each of the subsequent three to five years Client demand surveys Private industry competition information (core role of government) ANCAFA requirements Performance indicators and targets Assumptions used Relationship to host department Rate disclosure
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Business lines
|
Revenues and expenses reported by business lines
|
Performance measurement report
|
Service standards and targets to meet the needs of the
department, the managers of the revolving fund unit, the Treasury Board Secretariat, the
government and the general public Annual frequency Measure of cost self-sufficiency Long-term capital plan, assets value, age of assets, maintenance costs Disclosure of at least three years to provide a basis for comparison Assumptions used Major contingencies Methods for measuring performance Analysis of results Corrective action
|
Responsibilities of the departmental deputy minister (DM) and
the revolving fund manager
|
Business plan approval from the minister or deputy minister
responsible for the revolving fund business unit Absorption by the departmental appropriation of all or part of the overspending of the
annual ANCAFA projected balance, if identified in the business plan Liability of the department for any outstanding balances identified in the business plan
when the revolving fund unit is wound up, unless this responsibility is waived by the
Treasury Board.
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Reporting
|
Application of GAAP Reports prepared on a modified cash basis and on an accrual basis of accounting Financial statements prepared annually for Public Accounts Financial statements that reflect all costs incurred to deliver the goods and services;
such as termination benefits and accrued annual leave, which may not be currently charged
to the departmental appropriations Notes to financial statements used to disclose exceptions to the application of GAAP and
to fully disclose these costs Annual financial statements that are required as part of the business plan (covering one
to two years of actual results before the start of the planning period and prospective
financial statements for each of the subsequent three to five years)
|
Costing methodology
|
The use of an acceptable methodology such as activity-based
costing
|
Fee
|
Rate setting policies and structures (e.g. full cost)
|
Guidance and training
|
Appropriate financial management expertise Assistance available from the Treasury Board Secretariat through guides and direct
consultation
|
4500 Opening entries on
specific items of the revolving fund Authority
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.
Accumulated net charge against the fund's 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.
Capital assets
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.
Termination benefits
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.)
Illustration
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
( Source of authorities)
|
Disposition of authorities
|
Available from previous
years
|
Main Estimates
|
Supplementary Estimate
|
Adjustment and transfer
|
Total available for use
|
Vote
|
Department
|
Used in the current year
|
Lapsed or (overexpended)
|
Available for use in
subsequent years
|
Used in the previous year
|
|
|
$1
|
|
$1
|
4b
|
XYZ revolving fund (establishment of fund
effective April 1)
|
|
$1
|
|
|
|
|
|
$10,000,000(1)
|
$10,000,000
|
S
|
XYZ revolving fund authorized limit per vote
xx, Appropriation Act no.x. 199x-199x
|
|
|
|
|
|
|
|
-$750,000(2)
|
-$750,000
|
|
Net assets assumed by the fund
|
|
|
|
|
|
|
|
$9,250,000
|
$9,250,001
|
|
|
|
$1
|
$9,250,000
|
|
(1) The revolving fund was established under
Appropriation Act No. 199x-199x effective April 1, 199x, with a continuing
authority of $10,000,000. (2) The unused authority of the revolving fund is adjusted by the recognition of the net
assets assumed by the revolving fund.
|
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.
|
Revolving fund
|
Responsible department
|
Receiver General
|
Description
|
Statement of operations
|
Balance sheet
|
Central Accounts
|
|
DR (CR)
|
DR (CR)
|
DR (CR)
|
DR (CR)
|
Accounts receivable Inventories Capital assets Accounts payable Contributed capital ANCAFA
|
|
$1,000,000 $500,000 $2,000,000 ($1,750,000) ($1,000,000) ($750,000)
|
|
|
It is advisable to have the opening balance sheet audited in the first year of
operation.
5000 Financial
statements
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.
5100 Balance sheet
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.)
5200 Statement of
operations
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.)
5300 Accumulated
surplus/deficit
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.
5400 Statement of changes
in financial position
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.
5500 Notes to the
financial statements
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.
5600 Other financial
statements
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]
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