Public Sector Initiatives 

 

Standards

Public Sector Initiatives

Not sure what the Public Sector Accounting Board has been up to lately? Here's a brief review of recommendations currently under consideration.

 

FROM: JUL-AUG 2004 ISSUE | BY STEPHEN SPECTOR

Over the past year, this column has focused on a number of issues that affect for-profit reporting. New and revised recommendations from both the Accounting Standards Board and the Audit and Assurance Standards Board will have far-reaching consequences. The Public Sector Accounting Board (PSAB) has also been active recently. Following is an overview of three PSAB initiatives scheduled to be finalized by the end of 2004.

Government Reporting Entity

In August 2003, the PSAB revised Section PS 1300 of the Public Sector Accounting Handbook (PSAH) to modify the definition of a government reporting entity. After releasing the revision, the PSAB agreed to review concerns about the new definition, which stipulates that all organizations comprising the government reporting entity be fully consolidated on a line-by-line basis (except for government business enterprises, which use the modified equity basis).

Upon completion of the review, the PSAB reiterated its view that full consolidation is appropriate for government reporting entities. However, the PSAB has issued an exposure draft proposing a transitional period during which a government reporting entity may apply modified equity accounting in limited cases. The PSAB has proposed that government organizations with the following characteristics may be included on a modified equity basis:

• The government organization is a separate legal entity with the power to contract in its own name and that can sue and be sued;
• The government organization has the financial and operational authority to provide a government service within a defined service area;
• There is a governance framework of appointed or elected local board representatives from the defined service area; and
• There are significant restrictions on the government’s ability to access assets.

A final decision on the proposal is expected by fall 2004.

Liabilities, Contingent Liabilities, and Contractual Obligations

In December 2003, the PSAB issued an exposure draft, which applies to all levels of government and proposes three new PSAH sections:

• Liabilities;
• Contingent Liabilities; and
• Contractual Obligations.

The definition of liabilities set out in Section PS 1000 was created in 1984. The PSAB is currently reviewing the definition, as a number of limitations and inconsistencies have developed within the PSAH over the past twenty years. For example, with the exception of loan guarantees, the PSAH does not permit recognition of contingent liabilities. Despite that fact, some governments were accruing contingent liabilities. The PSAB is also reviewing commitments arising from agreements, contracts, and legislation to determine whether information of this type is best provided in financial statements or in a separate financial report.

The exposure draft proposes that:

• Liabilities are present obligations arising from past transactions or events, the settlement of which is expected to result in the future sacrifice of economic benefits. Liabilities include those arising from contractual, legislative, constructive, and equitable obligations;
  
  
• For liabilities that cannot be recognized because a reasonable estimate of the amount involved cannot be made, information about the nature and possible amounts should be disclosed in the notes;
  
  
• Where there is measurement uncertainty related to an amount recognized, the nature and extent of that uncertainty should be disclosed except when disclosure of the amount would have an adverse effect on the entity;
  
  
• Contingent liabilities are possible obligations that may result in the future sacrifice of economic benefits arising from existing conditions or situations involving uncertainty. That uncertainty will ultimately be resolved when one or more future events not wholly within the government’s control occur, or fail to occur;
  
  
• Contingent liabilities should be recognized when it is likely that the future confirming event will occur;
  
  
• Contingent liabilities should be derecognized when it is unlikely that the future confirming event will occur;
  
  
• Disclosure of the nature and extent of contingent liabilities should be provided unless disclosure of extent may have an adverse effect on the outcome;
  
  
• Contractual obligations are existing obligations of a government to others that will become liabilities in the future when the terms of those contracts or agreements are met.
  
  
• The recommendations of the exposure draft will result in governments having to follow standards that are similar to those of profit-oriented entities. Given that governments are moving to full accrual, the adoption of these requirements makes sense, as the recognition of a liability be based on the characteristics that define a liability.

The proposals are expected to be finalized in the summer of 2004, to be effective for fiscal periods beginning on or after April 1, 2005.

Funds and Reserves

In July 2003, the PSAB released a draft guideline on funds and reserves for comment. The goal was to provide guidance on presenting information related to stabilization funds or financial reserves of federal, provincial, and territorial governments. Funds or reserves take a variety of forms and are often a tool for managing government finances. Many senior governments currently use this vehicle, although presentation and disclosure vary. The guideline was intended to standardize practice and it proposes that:

• Funds or reserves supported by assets meet the definition of “designated assets” as set out in PSAH Section PS 3100. As such, when a government chooses to provide information about designated assets, it would do so in the notes and not on the statement of financial position;
  
  
• Funds or reserves not supported by assets are a designation of accumulated and/or annual surplus/deficit. If a government chooses to provide information about such funds or reserves, it would again do so in the notes and not on the statement of financial position;
  
  
• PSAH Section PS 1200, sets out the indicators for consolidated financial statements and specifies the “residual balances” of the financial statements. The residual amount refers to the final number or “bottom line” of the financial statements. The guideline highlights that:
  
  
  • the accumulated surplus/deficit would be the residual amount of the statement of financial position; and
    
    
  • the residual amount of the statement of operations would be the ending accumulated surplus/deficit, except when a separate statement reconciling the beginning and ending accumulated surplus/deficit with the surplus/deficit for the period is provided. In this case, the residual amount for the statement of operations would be the surplus/deficit for the period.

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Stephen Spector, MA, FCGA, owns Spector and Associates and teaches Financial and Managerial Accounting at Simon Fraser University. He also serves on CGA-BC’s board of governors. E-mail shspector@shaw.ca.