Guide on Revolving Funds

Termination benefits (severance pay portion) are payable to employees who are subject to the Public Service Staff Relations Act (either under Part I or as a separate employer), upon termination of employment. Certain requirements must be met for employees to be eligible for termination benefits and these conditions for payment are contained in the collective agreements for unionized employees and in Treasury Board Manuals covering terms and conditions of employment for management.

The Treasury Board establishes a liability for termination benefits for the entire government which is calculated for all Public Service employees as well as those of National Defence, Royal Canadian Mounted Police (RCMP), plus members of Parliament (MPs).

The government's financial statements recognize accrued employee termination benefits as liabilities which are recorded through a central allowance reviewed annually. The government's financial statements reflect any change in the annual allowance by showing an increase or decrease to the provision for employee termination benefits, with a corresponding adjustment to the expenses of the government for that fiscal year.

Since the revolving fund financial statements are not consolidated with the financial statements of the Government of Canada, the recording of a liability for termination benefits of the revolving fund employees in the fund's financial statements will not duplicate the liability recorded centrally in the Accounts of Canada.

Termination benefits accrue to employees of the revolving fund according to their years of service with the Government of Canada, as provided for under their employment agreements. Beginning with the date the fund was established, y the revolving fund is responsible for financing the severance entitlements of its employees.

The value of termination benefits that employees of a revolving fund earned before the fund was established represents an obligation of the Government of Canada. Consequently, the value of these benefits must be calculated as of the creation date of the revolving fund and referenced to a note in the financial statements of the revolving fund. The Treasury Board will fund the pay out of these benefits for a period of up to fifteen years from the establishment date of the revolving fund. However, the employees' service entitlements that accumulate due to employment with the revolving fund will be the responsibility of the revolving fund.

The Treasury Board Secretariat established this adjustment period based on its expectation that the revolving fund will have reached financial stability by the end of the fifteen year period. At that time, the revolving fund is expected to be capable of fully financing employee termination benefits accrued before and after the inception of the revolving fund unit.

This rule will be applied consistently across all revolving funds unless the Treasury Board has previously approved an alternative approach.

The funds will show as a note to the financial statements, the amount of termination benefits employees earned before joining the revolving fund. The note will be updated annually to reflect the arrival or departure of employees. The adjustment in the dollar value of the note will apply only to the years of service of current employees before the revolving fund was established.

Sample note to be included in the financial statements of the revolving fund unit:

"Employees of XXX revolving fund are entitled to specified termination benefits calculated on the basis of salary levels in effect at the time of termination as provided for under collective agreements and other conditions of employment. Employee termination benefits of an employee earned before joining the revolving fund are considered a liability of the Treasury Board and, accordingly, have not been recorded in the accounts. As at March 31, 19xx, the Treasury Board liability for revolving fund's employees is $x.x million. The liability for benefits earned after an employee joins the revolving fund is recorded in the accounts as benefits accrue to employees."

The Treasury Board will only fund this portion of the past service benefits for employees leaving the Public Service, up to and including the fifteenth year of the revolving fund's operation. After fifteen years, unless the Estimates Division of the Treasury Board Secretariat extends funding, the long-term liability account for termination benefits will be adjusted accordingly with an offset against the revolving fund's accumulated deficit/surplus account. This adjustment establishes the accounting entry as a prior-year adjustment representing a change in policy in accounting for these past service benefits. A note to the financial statements will be required to clearly explain this impact on the financial position of the revolving fund and the removal of the previous year's notes.

Benefits paid after the fifteenth year of operation will be funded fully though the ANCAFA.

These funds will show a liability on their balance sheet for all years of service of their employees (with no distinction between years of service before and after the employee joined the revolving fund). The termination benefits will be funded fully through the ANCAFA.

The revolving fund's financial statements must reflect the value of termination benefits under current liabilities (benefits payable in the current year) and long-term liabilities (benefits payable in future years). As mentioned previously, the termination benefits employees earned before the fund was established should be reflected in a note to the financial statements up to and including the fifteenth year of operation. Each year, the note and values in the liability accounts will be adjusted. Once the fifteen year period has lapsed, the note will be eliminated and replaced as appropriate, by changes in the current or long-term liability.

The termination benefits of Public Service employees who are no longer employed by the federal government will be based on the reason for the termination of their employment. These termination benefits are those that the employee had accrued as of the date the revolving fund was established, as well as those accrued monthly afterwards. Three examples follow:

- Maximum up to 35 years of service, as applicable

- One week per complete year of continuous service

- Only permanent employees are considered

- Maximum 26 years of service

- Minimum 10 years of service

- Half a week per complete year of continuous service

- Only permanent employees are covered

- No maximum number of years

- No minimum number of years

- One week per complete year of continuous service except that the employee receives two weeks for the first complete year of continuous service

- Only permanent employees are covered

Employment agreements for all employee bargaining groups must be consulted when calculating the accrued termination benefits for employees transferred to the revolving fund on its establishment and as changes in staff occur during subsequent years. The human resources branch of the responsible department, assisted by the finance branch, should be able to provide the required dollar values for accounting and reporting purposes within the revolving fund. As employees move in and out of the revolving fund before it reaches its fifteenth year of operation, the calculation for the termination benefit liability will be based on the employees' service as part of the revolving fund and on the service they accumulated in other departments while the revolving fund existed. In all cases, base calculations on the computation followed when an employee retires to ensure that all revolving funds use a consistent accounting approach.

The following examples illustrate the accounting entries required for various types of transactions that affect termination benefits.

Example 1: The monthly accounting entry to record termination benefits accrued to employees of the revolving fund are accruing termination benefits following establishment of the fund

When an employee of a revolving fund leaves the Public Service, a payment is recorded by the revolving fund for termination benefits from its ANCAFA account. This entry will decrease the liability account "Allowance for Termination Benefits". When an employee of a revolving fund is transferred to another Public Service entity, the liability account "Allowance for Termination Benefits" of the revolving fund will be decreased accordingly by either a credit to the annual expenditure or a decrease related to a major structural change. However, the credit can be disclosed separately with the appropriate description of the special event.

Example 2: An employee leaves the Public Service while on strength with a revolving fund created five years ago.

This example shows how to set up accrued termination benefits receivable and the Treasury Board funding for the years of service before the fund was established. In addition, also shown is the initial requirement of the ANCAFA to pay the termination benefits until replenishment by collection from the Treasury Board.

Example 3:

The revolving fund has completed its fifteenth year of operation and must now account for all employee termination benefits accrued before the revolving fund was established.

As a rule, a revolving fund should not require prepayment from other federal government departments, as its operations and services on behalf of other departments are expected to be temporarily financed from its drawdown authority.

Advance payments from other federal government departments cannot be carried over between fiscal years unless such action has been previously approved by Treasury Board. Any balance remaining on hand must be returned before March 31, even if the project pertaining to the advance has not been fully completed.

When advance payments are required, they must be related to and cannot exceed the value of the work reasonably expected to be performed during the fiscal year in which the advance payment is made. Payments accepted in advance should be in accordance with a direct contractual obligation or agreement. Advance payments from outside parties should be presented on the balance sheet as advance payments. Any other internal advances, if any, must be refunded before year end (March 31).

The following journal entry is needed to recognize unearned revenue.

"Contributed capital" is an equity account that normally represents the value of capital assets financed from contributed capital, being brought into an operation such as a revolving fund. This account serves as a financing arrangement, which is approved by the Treasury Board on an exception basis, as a substitute for the normal financing of capital assets under the authority of the revolving fund.

The financing of assets by the revolving fund results in a recognition of capital assets offset by an increase to the ANCAFA. However, when the contributed capital method is approved, the capital assets are still accounted for but the offset is to the "contributed capital" equity account.

The net value of capital assets transferred to a revolving fund, but financed by contributed capital, must be amortized in a rational and systematic manner over their useful lives, similar to those assets funded out of the revolving fund's authority. Recognizing amortization in this way allocates the cost of capital assets to the periods in which these assets are being used to provide client services. Regardless of how the assets are funded, amortization expense is an important part of the cost associated with providing an organization's services and goods.

The Treasury Board may approve the use of a contributed capital account when a revolving fund is created, reorganized or restructured. A request for this type of financing will be approved only if it positively affects the revolving fund's financial viability. This factor must be clearly outlined in the Treasury Board submission, including the initial impact on the authority and the future impact on operations. In the précis of the Treasury Board submission, the Treasury Board Secretariat program analyst will identify the reasons for approving the use of contributed capital and any impact on resource allocation issues.

Two major impacts are:

1. if the capital assets are not set up as contributed capital, then the authority limit (i.e. ANCAFA) will be affected, and

2. there will be no interest charge on contributed capital. Interest is charged, where applicable, only in situation where there is a net credit balance shown in the ANCAFA account (refer to Section 6270 Interest Expense on Drawdown).

If there is a write off, the Treasury Board decision will be taken in accordance with GAAP for government business type organizations. The following entries show how to record contributed capital initially and, if approved, how eventually to write it off.

The ANCAFA is an equity account which is disclosed in the revolving fund unit's balance sheet. This account records the amount of the fund's non-lapsing authority that has been used since inception of the fund. At no time should the balance of this account exceed the total amount of the fund's non-lapsing authorization from Parliament. The ANCAFA account comprises :

- accumulated net expenditures charged to the CRF by the revolving fund since its establishment;

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

- amounts of deficits or surpluses that have been authorized to be deleted from the fund.

In the responsible department's accounts, the use of the ANCAFA in the current year will be derived from the expenditures and revenues of the revolving fund unit that are processed in a department budgetary statutory account. These transactions are processed on a modified cash basis of accounting. Proper application of the modified cash basis of accounting is particularly important at year end. This means that in the responsible department's accounts, expenditures are processed on an accrual basis of accounting and revenues are processed on a cash basis, except for those revenues that are internal to the government, which must be processed on an accrual accounting basis. (See Section 7100 Year-end Reconciliation.)

The net value of the transactions affecting the budgetary statutory account in the books of the department is the source of transactions that the ANCAFA used in the current year.

An example of a transaction that affects the ANCAFA in the revolving fund unit's books and the account in the department's books, is the collection of an account receivable with a non-government entity. In the revolving fund account, the revenue is recorded when earned but the ANCAFA account is affected only when the cash is received. The control account held by the department for the revolving fund unit is also affected when cash is received.

This account is used to record the net accumulation of income and loss arising from the operation of the unit, and under certain circumstances, the transfer of all or part of accumulated deficit to ANCAFA (Parliamentary authority required), or the transfer of all or part of the accumulated surplus to ANCAFA (Treasury Board approval required).

Accumulated deficits shall remain in the accounts of the fund until final disposition is approved by the Treasury Board and by Parliament through an Appropriation Act. A Treasury Board submission, including the amount and the reason(s) for the deletion, is required to request the necessary authorization to effect the write-off.

The following is an example of an accounting entry to delete an accumulated deficit.

The responsible department will reflect the deletion of a revolving fund's accumulated deficit by disclosing the impact in the Estimates and Public Accounts. The authority is adjusted and the authority available for use in subsequent years is increased.

The departmental summary will reflect the following:

Source of authorities Disposition of authorities

The write-off of accumulated surplus to the ANCAFA only requires Treasury Board approval. Since this action reduces spending authority and no parliamentary authorization is required.

The Treasury Board may direct the deletion of operating surpluses if there is no expectation of offset by future deficits. The rationale for this write-off is that the Treasury Board may want to reduce an excessive authority limit which has accumulated over past years.

The following is an example of an accounting entry to delete part of an accumulated surplus.

The responsible department will reflect the deletion of an accumulated surplus of its revolving fund by disclosing the impact on its authority in the Public Accounts of Canada. The authority is adjusted and the authority available for use in the subsequent year is decreased.

The department summary will include the following additional information.

Cost of sales comprises all the costs that can be directly related to producing a product, whether it is manufactured in house or purchased from a supplier.

The cost of goods sold is displayed in the statement of operations as a reduction from sales revenues. (See Section 5200 Statement of Operations.)

When such merchandise is acquired from outside suppliers, the cost relating to sales can be determined as being the sum of the cost of beginning inventory, plus purchases and any freight and storage costs related to the acquisitions, less the cost of any merchandise on hand at the end of the period.

Should merchandise be manufactured by the revolving fund, the cost of goods sold or manufactured, is calculated by deducting the end cost of goods in progress from the figure obtained by adding the following elements together:

- the cost of goods in process at the beginning of the period;

- the cost of materials put into the production;

- the direct labour costs; and

- the general overhead expenses such as the cost of running the plant and equipment such as amortization of plant/equipment, indirect labour, power, light and heat.

Less the ending cost of good in process

Apply GAAP to determine and account for amortization of capital assets. Refer to the CICA Handbook for further clarification on this subject. Also, review the draft Treasury Board policy on accounting for capital assets for guidelines on estimated service life, amortization methods and rates used.

Amortization is the charge to income that recognizes that the life of a capital asset is finite. Allocate the cost, less salvage or residual value of a capital asset to the periods of service provided by the asset. The amount of amortization to be allocated to operations is the cost of the asset less expected salvage value or residual value over the life of the asset.

Do not amortize capital assets that have an unlimited life, such as land.

When the useful life of a capital asset other than land is expected to exceed 40 years and cannot clearly be clearly estimated or demonstrated, the amortization period is limited to 40 years.

Capital assets transferred into the revolving fund at its establishment should be recorded at appropriate net book value. Net book value is the cost less accumulated amortization. Where possible, existing capital assets should be valued using historical costs, adjusted for the proportion of the economic life of the asset already consumed. Historical cost is simple to administer and less vulnerable to manipulation. Where it is not practicable to establish a reasonable estimate of an asset's historical cost, use an appraised value or some appropriate measure of current value and extrapolate back to estimated historical cost using the Consumer Price Index (CPI). Do not use replacement cost unless it is the lowest of the several cost alternatives. Amortize that net book value over the estimated remaining useful life of the capital assets.

Allocate the cost of capital assets purchased after the establishment of the revolving fund to the operations of the fund over their estimated useful life.

Different methods of amortizing a capital asset generally result in different patterns of charges to income. The objectives are the provision of a rational and systematic basis for allocating the acquisition cost of a capital asset over its estimated useful life. Amortization of assets where the appropriate measure of service life is in years, should be on a straight-line basis. Review the amortization method and estimates of the life of a capital asset regularly.

Amortization shall commence on the first day of the month following the month the expenditure for the asset is recorded.

The following is an example of an entry required to record amortization of assets.

The calculation is as follows:

- Purchased in September at a cost of $6,000

- Estimated useful life is five years with no salvage or residual value

- Amortization calculation: $6,000/(5 years X 6/12 months) = $600

Note: An accounting entry is not required in the books of the responsible department since the current significant accounting principles of the government do not allow for the recognition of amortization costs.

Revolving fund should establish procedures to ensure that, when capital assets become obsolete or are removed from service, there is a write off or write down of the net carrying amount of the assets to their net realizable value. If the capital asset is subsequently returned to service, its book value should not be set up again. The only time the book value can be increased, is when a betterment has been made. If this happens, the increase in value is restricted to the costs of the betterment. (See the Treasury Board draft policy on accounting for capital assets.)

When a disposal of capital assets takes place, record the net proceeds in the ANCAFA and, when appropriate, record a gain or loss on the disposal according to GAAP. The proceeds from the sale of assets will increase the spending authority level of the revolving fund.

The statement of operations discloses financial information concerning any gain or loss on disposal of capital assets, and the statement of changes in financial position will reveal shows the proceeds of disposal.

The following table illustrate two examples of journal entries required on disposal of capital assets.

Example 1: A capital asset originally costing $5,000, which has been amortized by $1,000, is sold for $3,500

Example 2: The same capital asset was sold for $4,500

All revolving funds are charged interest on the negative balance of the ANCAFA account. Revolving funds use the CRF via their responsible department in a manner similar to a draw on a line of credit. Consequently, interest must be paid on any drawdown on this authority. The interest cost is an expense to earn revenue. Therefore, any resulting interest charges must considered in establishing pricing and rate structures for the goods and services offered.

Applicable interest charges must be calculated and paid by all revolving funds unless exempted by the Treasury Board under the terms and conditions of the enabling authority. Approval may be granted only in an exceptional circumstance, for example, a legislative mandate in some way makes it impossible to apply interest charges to a program activity; and

The government does not pay interest on any accumulated surplus in the ANCAFA account. No exemptions apply.

The ANCAFA account represents the net amount of cash and cash-equivalents utilized by the revolving fund since inception via the departmental revolving fund expense account, offset by any deposits to the CRF and adjusted for any other entries such as net assets assumed.

At period end, the cumulative drawdown amount used to calculate interest is based on the following transactions processed through the ANCAFA:

- the carry forward from the previous year of net authority used, according to the reconciliation of unused authority; and

- the current year-to-date drawdown on a monthly basis (periods 1-12), as reflected in the general ledger of the Accounts of Canada.

The above two items make up the base data used to calculate interest. These figures are then adjusted by the following items to arrive at the "true" cash drawdown:

- outstanding payables at month end and year end for both other government departments and outside suppliers. Adjustments for payables at year end (PAYE) and payment on due date (PODD) transactions are to be deducted from the general ledger account, as appropriate in the monthly calculation. In the financial statements, show these items as payables. Note that they do not affect the cash draw; and

- other non-cash items such as adjustments that may be necessary in special circumstances but result in an incorrect charge computation. Continual periodic adjustments will be necessary until such items clear.

The above calculations provide the "cash used" by the revolving fund in each particular period. The adjustments made for periods 13, 14, and 15 of the current year and the previous year will result in a figure for the "net authority used". Adjust the transactions of current year periods 13, 14 and 15 in the appropriate periods 1, 2 or 3 of the subsequent year. All revolving funds should determine the amount of cash used and net authority used in a similar manner to ensure calculations are made on a consistent basis.

Ensure that the final quarter payment is processed by interdepartmental settlement so that the internal interest revenue figures (reported by Finance) and interest expenditure (reported by the revolving fund) are equal.

The revolving funds take the initiative for the recording of interest charges in the Accounts of Canada. Interest payments are made to the Department of Finance via the IS process through Source 060 and using economic objects within standard objects 15 and 16. Interest must be calculated monthly and remitted quarterly. Record the payment in the period following each quarter. Before the beginning of a fiscal year, the revolving fund must ensure that appropriate creditor account code information is available from the Department of Finance (the creditor department), to facilitate timely recording.

An example of the application of these interest calculation guidelines is included in a chart at the end of this section. Each month, the Department of Finance determines the rate used to calculate the interest expense as of the last day of each month. To receive information on the monthly rate schedule, contact the following office:

Chief, Public Debt
Financial Services Division
Administration Branch
Treasury Board Secretariat
5th Floor, East Tower
140 O'Connor Street
Ottawa Ontario K1A 0R5
Tel.: (613) 995-4522

Calculate interest as of the last day of the month and record it as an operating expense. The following are examples of the journal entries required to record the interest expense using the sample data included in the chart.

The Revolving fund do not pay interest on charges that have not resulted in a draw from the CRF. Deposits credited to the CRF, after the cut off date, do not reduce the amount subject to interest.

Note 1
These timing differences will be adjusted using the net authority used as the carry forward figures from the previous year.

6290 Extraordinary items

Extraordinary items result from transactions or events that include all of the following characteristics:

- they do not expected to occur frequently;

- they do not typify the normal business activities of the revolving fund; and

- they do not depend primarily on decisions or determinations made by management.

An example of an extraordinary loss would be damage caused by weather-related event such as a flood. An example of an extraordinary gain would be the gain from the sale of land (only land not used in delivering the activity can qualify) which met all of the characteristics listed above. Not to included in this category are such items as losses and provision for losses as a result of bad debts and adjustments to contract prices.

Report extraordinary gains or losses separately on the statement of operations and the statement of changes in financial position. They should be also fully explained by means of a note to the revolving fund statements.

The following is an example of the journal entry required to record a decrease in value of inventory due to a flood.