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Backgrounder
Implementation of Full Accrual Accounting in the Federal Government’s Financial Statements

Introduction

• The Government announced its intention to adopt full accrual accounting in the February 1995 budget.

• This was one of the initiatives undertaken as part of its Program Review exercise to increase efficiency through better management.

• It was also in response to concerns raised by the Auditor General with respect to the accounting for capital assets and environmental liabilities, and the reporting of the Government’s investments in enterprise Crown corporations.

• Under full accrual accounting:

1. Capital assets will be recognized on the Government’s financial statements. They will be reported as part of non-financial assets. This will have no effect on the net public debt (gross liabilities less financial assets), but will have an impact on the accumulated deficit (net public debt less non-financial assets).

2. Tax revenues will be allocated to the period in which they are earned. As such, receivables, net of adjustments for doubtful accounts, will now be recorded. For personal income taxes, assessment data provided by the Canada Customs and Revenue Agency following the processing of the previous year’s tax return will be used to adjust the fiscal year cash figures. This means that cash received at the end of April/early May (taxes paid on filing), net of refunds processed to date, will be recast to the previous fiscal year. For corporate income tax and excise taxes and duties, cash received will be used as a proxy for the accrual. Disruptions in the flow of revenues, remittance procedure changes, etc., will no longer have an impact, as appropriate adjustments will be made to link the revenue received to the period to which it relates.

3. In moving to accrual accounting, the Government will change its accounting policy with respect to Aboriginal and environmental liabilities. Environmental liabilities are currently not recognized in the financial statements and Aboriginal liabilities are not fully recognized.

How Is This Different From Current Practice?

• The Government currently follows a modified accrual basis of accounting:

1. Most expenditures, with the exception of capital assets, are on an accrual basis, whereby the liability is recognized when it is incurred, regardless of when the cash payment is made.
     
   • Capital acquisitions are recorded on a cash basis, rather than depreciated over their economic life.
       
2. Non-tax revenues are on an accrual basis of accounting, recorded in the period in which they are earned (even if cash has not yet been received).
     
3. Tax revenues are largely on a cash basis (recorded when they are received). There are some exceptions related to transfers to the Tax Collection Accounts and the inclusion of "significant" refunds.

What Does It Imply?

• These changes in accounting policy will be made retroactively. Previously published figures will be restated to incorporate the impact of these accounting policy changes.

• Net public debt and the accumulated deficit will no longer be defined the same. Net debt will still represent the difference between liabilities and financial assets. However, the accumulated deficit will represent the difference between liabilities and all financial and non-financial assets (capital assets, prepayments). The annual surplus will now be calculated as the difference between revenues and expenses (rather than expenditures).

• It is premature to provide estimates on the impact of these changes. Departments and agencies are in the process of quantifying their assets and liabilities. These will have to be reviewed by the Auditor General. As a result, the impacts will not be fully known until the audited financial statements for 2001-02 are finalized. The following table provides the expected direction of the changes.

Impact of Accounting Policy Changes

What Are the Steps?

• The key step in the change to full accrual accounting has been the implementation of the Financial Information Strategy (new departmental and Receiver General financial systems and accrual accounting policies). The phase-in by departments started in April 1999 and was completed in April 2001.

• In the February 2000 budget, the Government announced that the final audited financial statements for 2001-02 would be presented on a full accrual basis. Financial results for previous years will be adjusted accordingly.

• At this time monthly results for 2001-02 will continue to be based on a modified accrual basis of accounting.

• These changes will not result in any change in the accounting basis for appropriations at this time. Appropriations will remain on a partial accrual basis (primarily cash basis). Just as there are differences between appropriations and our current modified accrual basis for financial reporting, there will remain differences in future under full accrual accounting. The merits of adopting accrual-based appropriations are under review internationally. It is a complex matter and there is currently no consensus that it is required to support accrual accounting for financial statement reporting.

Members of the media who have additional questions on this topic should contact Peter DeVries at the Department of Finance at (613) 996-7397.