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Release no. 5 - July 14, 2000
Release no. 4 - June 20, 2000
Release no. 3 - May 19, 2000
Release no. 2 - April 14, 2000
1.0 INTRODUCTION1.1 Objectives of the ManualThe objectives of this Manual are to:
1.2 Limitation of ManualIt should be noted that the Manual does not purport to cover all possible accounting transactions and Scenario s. This is considered to be neither desirable nor possible because of the number of permutations and combinations that can exist. This is especially so for the use of authority codes because they depend to a great extent on specific departmental legislation and other authorities including Estimates. As a result, the Manual cannot be considered authoritative. The transactions presented must be considered in light of this and may not be the only possible way of handling a specific transaction. Thus, the Manual only provides general direction on the majority of transactions that Departments will encounter. However, the transactions covered together with the explanations should provide departmental personnel with the necessary guidance to handle most transactions. In circumstances where this is not possible, the advice of TBS should be sought. To use this Manual effectively, departmental personnel should refer to:
Recommendations for the inclusion of other types of transactions in the Manual should be made to the Government Accounting Policy Division of TBS, Telephone (613) 957-2527, Facsimile (613) 952-9613. 1.3 Applicability of the ManualThis Manual will be useful to all government departments as defined in Section 2 of the Financial Administration Act (FAA). "Department" means
The contents of this manual do not override legislation, regulations or Treasury Board policy relating to financial administration. When there are any conflicts between this manual and legislation or regulations or policy, the latter will apply. 1.4 Description of Accrual Accounting, Accounting for Appropriations and Other Authorities and Reporting by ObjectsWith the full implementation of the Financial Information Strategy on 1 April 2001, departments will be required to account for economic events specific to their department on: a) an accrual accounting basis; b) an authority basis to identify the appropriations or other authorities; and, c) an objects of expenditure basis. Although there may be similarities amongst these three requirements, there are many differences. Consequently, they will be considered separately. The underlying bases of accounting differ to some extent between accrual accounting and appropriation accounting. Currently appropriations are on a partial accrual basis. Consequently, reporting in financial statements will need to be on both a full accrual accounting and partial accrual accounting bases. Under the partial accrual basis now used for amounts reported in the Estimates, some expenses are accrued but not all; respendable revenues are on a pure cash basis; and, non-financial assets are expensed on acquisition. For example, Payables at Year End (PAYE) are accrued, as are salaries, while other items like employee benefits are not accrued. Transactions that get recorded on an accrual accounting basis may or may not affect appropriations and vice versa. In these cases, the appropriate coding and journal entries must be made to ensure that appropriations are not improperly affected. Departments will also be required to record transactions on an object of expenditure basis. It is best to consider these three elements i.e., accrual, authority and objects as separate and distinct since there are many circumstances where there is not a direct correlation amongst or between them. 1.4.1 Accrual AccountingAccrual accounting recognizes transactions when the underlying economic event occurs, not just when cash is received or paid. In accrual accounting, transactions are classified as assets, liabilities, equity, revenues or expenses. The objective of accrual accounting is to ensure that events that affect a department's financial statements are recorded in the periods in which they occur, rather than in the periods in which the department uses its appropriation. Accrual accounting means recognizing revenue when earned (rather than when cash is received) and recognizing expenses when incurred (rather than just when paid). Over the long run, trends in expenses and revenues, since they reflect the underlying economic consequences of operating decisions for a time period are generally more meaningful than trends in payments and cash receipts or charges to an appropriation. The accrual basis provides users with information about such matters as the resources controlled by the department, the cost of its operations and other information useful in assessing its financial position and changes in it over a particular time period, and in assessing whether a particular organization is operating economically and/or efficiently. It should be noted that Financial Reporting Accounts (FRAs) were developed as separate accounts in the Chart of Accounts to code transactions for accrual accounting purposes. 1.4.2 Accounting for Appropriations and other AuthoritiesAn appropriation is an authority of Parliament to pay money out of the Consolidated Revenue Fund (CRF). Therefore, an appropriation is required before moneys can be spent by the government. Some authorities are given in the form of annually approved limits through appropriation acts. Other authorities come from other legislation in the form of statutory spending authority for specific purposes (for example, employee benefits). Appropriation authority is the means by which Parliament controls the outflows of money from the CRF. However, there are a number of transactions which are charged to a current year appropriation but which do not affect the CRF until a later date or not at all, such as:
As a general rule, transactions are recorded against an appropriation on an "expenditure basis". However, there are certain expenditures which are not charged to an appropriation until a payment is required e.g. various allowance or provision accounts currently set up by Treasury Board Secretariat such as employee benefit costs for accrued vacation pay, severance pay, etc. Currently, accounting for the use of appropriations provides parliamentarians with control over most expenditures of the Government, for both amount and purpose. However, it does not give a complete financial picture of the government since it lacks information on assets and some liabilities and skews information on program costs. For example, if a department purchases a building, the department will record the full expenditure against a particular appropriation in the year acquired notwithstanding that the building will provide benefits over a number of years. 1.4.3 Reporting by ObjectsTo measure the impact of government transactions on the economy, expenditures are classified according to the type of resources (goods and services) acquired, revenue earned or the transfer payments made. Identification of detailed economic objects, combined with information from other sectors of the economy, makes possible economic analysis, on a national basis, of the effects of government spending. The economic objects are the base code for the object classification and are required for government-wide statistical purposes. They may be used by departments as departmental line objects, but departments may need more detail for their own purposes. To accommodate the need for differing degrees of detail, several levels of classification by object are used. In descending order of aggregation, they are: categories, sub-categories; reporting objects; economic, source and class objects; and departmental (line) objects. Standard objects, which are the highest level for Parliamentary reporting, can be related to specific categories or sub-categories. 1.5 Identifying Important DifferencesIn order to understand the primary differences between accrual accounting and accounting for the use of appropriations, terminology becomes increasingly important. It is necessary to distinguish between certain terms, to ensure that all users are consistent when describing a transaction, preparing a journal entry or providing rationale for various accounting treatments. 1.5.1 Expenditures versus Expenses versus DisbursementsAs per the Canadian Institute of Chartered Accountants Public Sector Accounting Handbook (PS) 1500.88, expenditures are the cost of goods and services acquired in the accounting period whether or not payment has been made or invoices received and include transfer payments due where no value is received directly in return. Examples would include the payment of grants, contributions, the acquisition or construction of capital assets, and the acquisition of operating supplies etc. Expenses, as per PS1500.93 are the cost of resources consumed in and identifiable with the operations of the accounting period. Expenses include the costs associated with:
Expenses do not include:
To further clarify the difference, an expenditure refers to the acquisition of a good or service whereas an expense refers to the use of the good or service acquired. For example, the acquisition cost of a tangible capital asset would be an expenditure and the amortization of the cost of that asset would be an expense in the Statement of Operations for the period. Conceptually, the cost of an asset is deferred and recognized as an amortization expense over the period when the assets are used in delivering government programs. A disbursement is an outlay of cash. Such disbursements may be in the form of cheques, warrants or through the electronic transfer of funds. 1.5.2 Revenues versus ReceiptsRevenues, from an accrual accounting perspective, are defined as increases in economic resources, either by way of inflows of or enhancements to assets or reductions of liabilities, resulting from the ordinary activities of a department. As per PS 1500.83-84, revenues should be accounted for in the period in which the transactions or events occurred that gave rise to the revenues. For example, user fees should be recorded in the period the goods or services are provided, sales and excise taxes should be recorded in the period when the sales are made, and transfer payments for shared cost agreements should be recorded in the period the costs are incurred. Items not practicably measured until cash is received would be accounted for at that time. Accounting for all of government's revenues ensures that related financial assets are accounted for in the period they are created. Revenues include amounts earned from:
Revenues do not include
Revenue earned which is not yet collected in the year would be an accounts receivable. Receipts refer to moneys received, whether through cash, cheque or by electronic transfer of funds. 1.6 Guidance on Accrual AccountingThe purpose of this section is to provide an overview of accrual accounting in the government environment. Accounting standards "Departments" will follow generally accepted accounting principles (GAAP) as defined in the Canadian Institute of Chartered Accountants Public Sector Accounting (PS) Handbook. Specifically, departments will use the "expense basis" of accounting as referred to in the handbook (PS1500.93). Subject to modifications or interpretations by the Treasury Board Accounting Standards (TBAS), the PS Handbook will be the authoritative reference manual. In situations where a specific item is not covered in the PS Handbook, then the Canadian Institute of Chartered Accountants (CICA) Handbook will be used. This FIS Accounting Manual refers to accounting standards where they are relevant. These are part of GAAP. Where appropriate, the text contains a brief description of the requirements of the standards, together with details of any additional or alternative accounting treatments. The relevant accounting standards should be consulted for a full understanding of their requirements. 1.7 Other guidanceAs mentioned in section 1.2, not every possible Scenario is covered in this Manual. Furthermore, the PS and CICA Handbooks may not be explicit enough in certain circumstances. Therefore, it may be necessary to consult alternative sources to determine the most appropriate treatment for a particular transaction. An intermediate or advanced accounting textbook would be a most valuable source of information, since a variety of Scenario s would be described in sufficient detail to aid departments. As well, the Canadian Institute of Public Real Estate Companies (CIPREC) Handbook can serve as a useful guide to help departments with real property issues. In addition, there will be specific guidance, which will be the responsibility of, and be developed by, departments themselves. This means that each department should have an accounting guideline that is sufficiently detailed to deal with its own unique circumstances. 1.8 Departmental ReportingEach department, as defined by Section 2 of the FAA, will produce annually a full set of financial statements as at March 31 that can withstand the test of audit. These statements will consist of a Statement of Financial Position, a Statement of Operations, and a Statement of Cash Requirements, together with required Notes and Schedules. The financial statements, accompanied by a Statement of Management Responsibility and Auditor's Report, (if required by legislation or policy), must be available to the Receiver General for Canada by June 15th of each year. Departments will publish these financial statements in their Departmental Performance Report. To the extent possible, department specific financial information now contained in the Public Accounts will be included in either the departmental financial statements or the supplementary financial information attached thereto. All financial information required on a government-wide basis would continue to be included in the Public Accounts. 2.0 ACCOUNTING PRINCIPLESTo prepare financial statements, there are certain basic accounting principals that need to be generally recognized and understood before individual transactions can be analyzed. 2.1 Going ConcernThe going concern principle is applied on the expectation that a department will continue to operate for the foreseeable future and there is no intention to curtail its operation. The implications of this going concern principle are critical. The historical cost principle (described below) would be of limited usefulness if it were not for the going concern principle. For example, amortization policies are only justifiable and appropriate if we assume continuity of the department. 2.2 Historical CostThe determination of the measurement base on which an item is to be recognized in financial statements has been one of the most difficult problems in accounting. A number of bases exist on which an amount for a single item can be measured e.g. replacement cost, net realizable value (net amount that would be received from selling an asset), present value of future cash flows, market value, original cost (less amortization, where appropriate) etc. Generally, under existing GAAP, transactions and events are recognized in financial statements at the amount of cash or cash equivalents paid or received or the fair value ascribed to them when they took place; i.e., historical cost. By using historical cost as the basis for record-keeping, financial statements will contain objective and verifiable information. Historical cost provides financial statement users with a stable and consistent benchmark that they can rely on to establish historical trends. This concept is especially critical since there is a great deal of controversy about valuation of real property and other tangible assets carried by departments for many years. The historical cost is not always available or relevant to the users of the financial statements and must be supplemented by other financial information relevant to the decision making. 2.3 Matching PrincipleThe matching principle requires that revenue and expenses be accrued; that is, they are recognized as they are earned or incurred, not just when they are received or paid or when they affect an appropriation. Under the matching principle, inclusion or exclusion of an item of revenue or expenses will depend on the period to which it relates, the period in which it was received or performed, or the period in which it was consumed, used or lost, subject in all cases to materiality considerations. In general accounting literature, the matching principle normally refers to the matching of revenue and expenses. However, with minor exceptions, departments do not generate major amounts of non-tax revenue but are funded through appropriations. As such, the matching principle must take on a slightly different interpretation. Consequently, revenues should be recognized when the goods and/or services have been rendered and expenses should be matched to program delivery outputs of services to the public. For example, in the case of tangible capital assets, a systematic and rational allocation policy is used to approximate the matching principle. This type of expense recognition involves making assumptions about the benefits that are being received as well as the cost associated with those benefits. The cost of a long-lived asset is allocated over the accounting periods during which the asset is used because it is assumed that the asset contributes to the generation of program outputs throughout its useful life. 2.4 ConsistencyThere should be consistency of accounting treatment of like items within each accounting period and from one period to the next. This is particularly important if users are to compare successive years' accounts, for example, to identify trends in revenue and expenses. Changes in accounting policies and practices should generally only be made when those changes will result in fairer presentations of financial results. Any changes that have a significant impact on departmental and or consolidated results should only be made after prior discussion with TBS. Consistency does not mean that different organizations must apply the same accounting methods. This may be thought to improve comparability between departments. However, requiring such uniformity may result in dissimilar circumstances between departments being reported as being similar. For example, amortization policies should be developed on the basis of what best reflects the consumption of the asset in its particular operating environment. There may be different operating environments in each department. 2.5 MaterialityMateriality is a term used to describe the significance of financial statement information to users. It is a matter of judgement in the particular circumstances. An item, or an aggregate of items, is material if it is probable that its omission or misstatement would influence or change a decision. In short, it must make a difference or it need not be disclosed. It is difficult to provide firm guidelines to help judge when an item is or is not material because materiality depends on the relative size of the item compared to the size of other items and the nature of the item itself. In determining whether an item or an aggregation of items is material, the following factors should be considered:
It should be noted that specific disclosures in annual financial statements required by legislation must be complied with regardless of the amounts involved. Care should be taken in reporting immaterial items since reporting them could otherwise impair the clarity and understandability of the financial statements and notes. 2.6 Substance over FormFinancial statements should present the economic substance of transactions
and events even though their legal form may suggest a different treatment. As
such, departments must ensure that transactions and events affecting their
entity are presented in the financial statements in a manner that is in
agreement with the actual underlying transactions and events. Thus, transactions
and events are accounted for and presented in a manner that conveys their
substance rather than necessarily their legal or other form. For example,
a) capital leases should be accounted for by the lessee as an acquisition
of an asset and an assumption of an obligation, since the lease transfers
substantially all of the benefits and risks of ownership related to the leased
property from the lessor to the lessee. b) repayable contributions may
appear to be an expense for the period but some of them are in fact loans.
Therefore those, which meet the definition of a loan according to the PS
Handbook, should be accounted for as a loan receivable. Depending on the terms
of the agreement, some of them may need to be treated as concessionary loans. |
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