Upcoming Accounting And Auditing Standards In Government .
Upcoming accounting and auditing standardsin Government of CanadaDiane PeressiniExecutive Director, Government Accounting Policy & ReportingFMI February 21, 2019
Agenda1Background on financial reporting in theGovernment of Canada2Existing standards3Accounting and audit standards considerations4PSAB work plan5Questions2
Background on financial reporting in theGovernment of Canada
Objectives of Financial StatementsAccounting for the full nature and extent of the activities of thegovernment Government entity includes all departments, agencies, Crowncorporations, and other entities in the Government Reporting Entity Departmental reporting entity comprises the activities for which the deputyhead (DH), as the accounting officer, is expected to maintain accountingcontrolPresent information on the government’s financial position and changesduring the accounting period Ability to finance activities and meeting liabilities; and Ability to provide servicesAllows the government to demonstrate accountability for the resources,obligations and financial affairs for which it is responsible4
Users of financial statementsThe PublicLegislatorsInvestors &AnalystsDepartmentalManagementMainly Government-levelfinancial statements.5
Accounting StandardsPublic SectorPrivate SectorDirective on Accounting StandardsPublic Sector Accounting Board (PSAB)CPA CanadaInternational Public Sector AccountingStandards Board (IPSASB)International Accounting StandardsBoard (IASB)Establishes International Financial Reporting Standards(IFRS)Is this thefuture?6
Need for accrual-based informationConsiderations Qualitative characteristics of information - relevant, reliable, comparable, understandableand clearly presented Relevant information has predictive, feedback and accountability value Financial reports and Treasury Board submissions and Memorandums to Cabinetshould provide accrual information.Accrual based financialreportsComplete picture ofgovernment activitiesFiscal decisions basedon relevantinformationAccountability tostakeholders7
Current Reporting Cycle for Government ExpendituresBeforeFiscal YearDuringFiscal YearAfterFiscal YearJanuary toMarch Tabling of Interim Estimates Budget Presentation Interim Supply(supply for Interim Estimates)April toJune Tabling of Main Estimates Departmental Plans Full Supply for Main EstimatesSeptembertoDecember Economic and Fiscal Update Supplementary Estimates A Appropriation ActJanuary toMarch Supplementary Estimates B Appropriation ActSeptembertoDecember Annual Financial Report Tabling of Public Accounts Departmental Results Reports,including departmental financialstatementsOther Key Documents Quarterly FinancialReports Monthly Fiscal Monitor Annual DebtManagement Strategyand Debt ManagementReport Annual Tax ExpenditureReport Crown CorporationCorporate PlanSummaries and AnnualReportsTBS InfoBase8
Government Accounting StandardsFinancialManagement PolicyBased on Public SectorAccounting Board (PSAB)Directive onAccounting StandardsGovernment ofCanada AccountingHandbookNote: Certain Crown Corporations use International Financial Reporting Standards (IFRS)IllustrativeDepartmentalFinancial StatementsGovernment ofCanada Accountingand Coding Manual9
Accounting and auditstandards considerations
Contingent LiabilitiesDefinition* Contingent liabilities are possible obligations that may resultin the future sacrifice of economic benefits arising fromexisting conditions or situations involving uncertainty. That uncertainty will ultimately be resolved when one ormore future events not wholly within the government'scontrol occurs or fails to occur. Resolution of the uncertainty will confirm the existence of aliability.* Source: Canadian Public Sector Accounting Standards11
Contingent Liabilities - Assessment and RecognitionAssessment by LegalServices & ManagementMeasurementAccounting TreatmentEstimableRecordPotential Liability inthe FinancialStatements2Likely ( 70%)NotEstimablePotentialContingentLiability?Not determinable1EstimableDisclosePotential Liability inthe notes toFinancial StatementsNotEstimableUnlikely ( 30%)1-Not determinable can be foroutcomes unknown as well asthose assessed 30% but 70%Do Nothing Monitor but nofurther action2-Impacts the fiscal framework12
Capital Assets: Cloud computingThe big question: what is capitalized?No PSAS guidance.Three models ofcloud computingSoftware as a Service (SaaS)Platform as a Service (PaaS)Infrastructure as a Service (IaaS)Multiple-elementcontractPurchase of one-time software licence or development, andservice deliveryService contractPurchase of software services; annual licence formaintenance13
Cloud computing – what to capitalizeActivityCapital ExpenseFeasibility study, business case, selection of alternativeXDesign, software configuration, developmentXEnhancements to software service functionalityXEvaluation of existing hardware and software for compatibilityEnhancement of existing software that will be used undercloud arrangementXXTesting functionality of software serviceXBusiness process re-engineeringXReport developmentXEmployee trainingXData conversionXOne-time licence for use of softwareAnnual licence for use, maintenance, routine upgradesXX14
Capital Assets: Whole Asset vs Component ApproachTwo methods of defining capital assets:Whole asset: an assembly of connected parts, all of which are capitalizedand amortized as one asset.Component: different parts of a larger asset are individually capitalized andamortized.Example: a building could be divided into substructure, superstructure,HVAC, roofing, etc. PSAS and GCAH allow for both methods; must be used for an entire assetclass. PSPC is transitioning its portfolio of buildings to the componentapproach. Consultation with Office of the Comptroller General is required for achange in approach.15
Upcoming Public Sector Accounting StandardsEffective dateTopicApril 1, 2018Restructurings, Section PS 3430April 1, 2021Financial instruments suite of standards: F/S Presentation PS 1201 Foreign Currency Translation PS 2601 Financial Instruments PS 3450 Portfolio Investments PS 3041April 1, 2021Asset Retirement Obligations, Section PS 3280April 1, 2022Revenue, Section PS 340016
PS 3430 RestructuringsObjectiveProvides guidance onaccounting for andreporting assets andliabilities transferred inrestructuring transactionsby both transferors andrecipients.ScopeImpactA restructuring transactionmay take place between: related entities undercommon control, e.g.between departments;or unrelated parties, e.g.between the federal andprovincial governments.Assets and liabilitiestransferred inrestructurings betweendepartments or with Crowncorporations are: measured at thecarrying amount net impact is recognizedin annual surplus/deficit.Transition Effective April 1, 2018 Prospective application17
Financial Instruments Suite of StandardsPS 3450 Financial InstrumentsObjective Provides guidance on recognition, measurement,presentation and disclosure of financial instruments.Key feature Introduction of fair value measurement for a number offinancial instruments including derivatives.Major impacts ondepartments Derivatives and embedded derivativesEffective interest method for long-term loans & receivablesAdditional disclosures related to credit risk.Effective date: April 1, 202118
Financial Instruments Suite of Standards (cont’d)PS 1201 FinancialStatement PresentationPS 2601 Foreign CurrencyTranslationPS 3041 PortfolioInvestments Replaces PS 1200 Replaces PS 2600 Replaces PS 3040 Introduces newStatement ofRemeasurement Gainsand Losses for reportingunrealized fair valuegains/losses. Major change relates topresentation - unrealizedforeign exchange gainsand losses in Statementof Remeasurement Gainsand Losses; Realized foreignexchange gains andlosses in the Statementof Operations Recognition andmeasurement principlesnow in PS 345019
PS 3280 Asset Retirement Obligations (AROs)Objective Recognition,measurement,presentation anddisclosure of AROsScope Legal obligationsassociated with theretirement of longlived tangible capitalassets currently, orno longer, inproductive useImpact Identify and assess. Examples include– Asbestos inbuildings– Leases with returnto original conditionclause– Nuclear facilities orequipmentTransition Effective April 1,2021 Retroactive,modified retroactiveor prospectiveapplication20
PS 3280 Asset Retirement Obligations (cont’d)1.Legal obligation– Agreements, contracts, legislation, promissory estoppel2.Past transaction or event– Acquisition, construction, development of a TCA; or– Normal use of a TCANormal use predictable, likely to occur, unavoidableNormal use improper use, accidents, unexpected21
PS 3280 Asset Retirement Obligations (cont’d)Recognition and allocation of asset retirement costsIn productive useAllocate to expense in arational and systematic manner(component OR network level)No longer inproductive useExpense immediately22
PS 3280 Asset Retirement Obligations (cont’d)Measurement Best estimate of the amount required to retire a tangible capital asset A present value technique is often the best available method. Noprescriptive guidance on appropriate measurement techniques anddiscount rate Subsequent measurement:Adjust the Tangible CapitalAsset Timing Amount Discount rateExpense Passage of time (accretion) If related asset is retired23
PS 3280 Asset Retirement Obligations (cont’d)Determining which standard should be appliedSection PS 3280Section PS 3260Cause for the retirement or remediation obligation Acquisition, construction,development, normal use.Not necessarily associated withcontamination. Unexpected event, improper use.Contamination needs to exist.Type of obligation Legal obligation related to tangible capital asset of the entity. Does not need to exceed theenvironmental standard.Legal, constructive, and equitableobligations (direct responsibility andassumed).Extent of contamination Must exceed the environmentalstandard.24
PS 3400 RevenueObjectiveExchange transactionsUnilateral revenueTransition Revenue recognitionfrom sources otherthan tax revenueand governmenttransfers.Performanceobligations: Revenue recognizedas performanceobligations aresatisfiedNo performanceobligations: Revenue recognizedwhen public sectorentity has authorityto claim or retain aninflow of economicresources as a resultof a past event Effective April 1,2022 Choice of retroactiveor prospectiveapplication.25
PS 3400 Revenue - Government of Canada examplesexternal fees RegulatorychargesfinesbundlesalesRoyaltiesLicences penaltiesdistinctUser feespassportsDepartments will need to review theirindividual revenue streams to determine: Whether a performance obligation exists When the performance obligation is satisfied26
Canadian Auditing Standards - New Auditor’s ReportAuditor’sopinionpresented atbeginningDisclosure of theengagementpartner’s nameEnhancement to“Report on theOther Legal andRegulatoryRequirements”MAJORCHANGES TOAUDITOR’SREPORTBasis of Opinion– explicitstatement ofauditor’sindependenceMarch 31, 2019Enhanceddescription ofauditor’sresponsibilities &key features of anauditEnhanced auditorreporting ongoing concernsInclusion of thosecharged withgovernance, ifapplicable27
Canadian Auditing Standards – Upcoming changesExposure draft re: CAS Expected effective date of 1540, Auditing Accounting January 2020Estimates, Including Fair Objective: Auditors to obtainValue Accountingsufficient appropriate auditevidence regarding accountingEstimates, and Relatedestimates and assess theDisclosures to adoptreasonableness of relatedproposed changes to ISAdisclosures540.Impacts on departments: Ensure sufficientdocumentation exists – stepstaken, conclusions reached,approvals obtained Consider performingbacktesting on estimates Potential additional writtenmanagement representations28
PSAB work plan
PSAB Work PlanProjectAnnual Improvements 2018-19Financial instruments - amendmentsPublic Private PartnershipsEmployment BenefitsConceptual framework and reporting modelInternational StrategyNot-for-profitDocument issuedEDEDSOPITCSOPCPCPStatusIssued for commentIssued for commentED to be issued Q1,2019Comments deliberationComments deliberationCP#2 developmentConsultationED: Exposure DraftITC: Invitation to CommentSOP: Statement of PrinciplesCP: Consultation Paper30
Public Private Partnerships (PPP)Recognizing,measuring andclassifying capitalassets procuredthrough a PPPInterpret existingasset recognitionrequirements;Developprinciples forrecognizing aliability vsrevenueMeasure theresulting PPPasset andliability.An ED is under development31
Employment benefitsThis project aims toreview the guidance inthe PSA handbook foremployment benefits. Three ITCs have been issued: deferral provisions discount rates non-traditional plans PSAB will be deliberating feedback fromstakeholders in 2019. The intent is to replace current sections PS 3250Retirement Benefits and PS 3255 Post-EmploymentBenefits, Compensated Absences and TerminationBenefits with one revised section.32
Proposed Conceptual FrameworkExistingConceptualFramework Section PS 1000, Financial Statement Concepts Section PS 1100, Financial Statement Objectives Chapter 1: Chapter 2:ProposedConceptualFramework Chapter 3: Chapter 4: Chapter 5: Chapter 6: Chapter 7: Chapter 8: Chapter 9: Chapter 10:Introduction to the ConceptualFrameworkCharacteristics of Public SectorEntitiesFinancial Reporting ObjectiveRole of Financial StatementsFinancial Statement FoundationsFinancial Statement ObjectivesQualitative Characteristics andRelated ConsiderationsElements of Financial StatementsRecognition and MeasurementPresentation Concepts33
Responses to Conceptual Framework Consultation34
Proposed Reporting ModelHighlights ofthe revisedreportingmodel Elements: Assets, Liabilities, Revenue,Expenses Keep historical cost as the primarymeasurement attribute unless deemed tobetter serve the accountability objective Removal of recognition prohibitions (i.e.intangibles) from the conceptualframework Provide PSAB with the tools to deal withfuture issues and standards35
International StrategyConsiderations in developing PSAB’s international strategy are: International Public Sector Accounting Standards (IPSASs) have matured: Momentum in adoption of IPSAS or IFRS by international governments; Canada wants to maintain a leadership position in influencing international standards Improve time to market for standards Synergies with private sector standards (IFRS Standards) applied by publicly accountable entities in Canada36
International Strategy – OptionsIIIIIIIVStatus QuoAdapt IPSASprinciples .AdaptIPSASsAdoptIPSASs37
International Strategy – TimelinePSAB is currently in the process of drafting the second consultation paperto be released in Spring onsultation Paper 1 IssuedComment Period & OutreachActivitiesReview of CommentsConsultation Paper 2 IssuedComment Period & OutreachActivitiesReview of CommentsDecision on InternationalStrategyBasis for Conclusion DocumentIssued38
Useful LinksPSAB projects ies/projects/active/item56215.aspxGC Directive on Accounting Standardstbs-sct.gc.ca/pol/doc-eng.aspx?id 32499Receiver General anuels-manuals/index-eng.htmlOCG GCPedia Webpagegcpedia.gc.ca/wiki/External financial reporting community/PublicAccounts of Canada39
Remeasurement Gains and Losses for reporting unrealized fair value gains/losses. PS 2601 Foreign Currency Translation Replaces PS 2600 Major change relates to presentation - unrealized foreign exchange gains and losses in Statement of Remeasurement Gains and Losses; Realized foreign
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