Inclusion of SUCH in Government's Budget and Reporting Framework

Introduction

The Public Sector Accounting Board (PSAB) of the Canadian Institute of Chartered Accountants (CICA) establishes generally accepted accounting principles (GAAP) for senior governments.

As a key component of the government's election commitments, the Budget Transparency and Accountability Act requires all financial documents produced by the province under that legislation to fully comply with GAAP by 2004/05. Financial documents produced by the province include the Estimates, Budget and Three Year Fiscal Plan, Quarterly Reports and Public Accounts. As well, the move to full GAAP addresses the recommendations of the Office of the Auditor General.

Previous exceptions to GAAP on British Columbia's financial documents included:

• The definition of the government reporting entity (the province did not include school districts, universities, colleges and institutes, and health-care organizations (SUCH); and
• The use of prepaid capital advances to provide capital funding to the SUCH organizations.

Budget 2004 addresses both of these exceptions by expanding the government reporting entity to fully include the SUCH sector, which in turn, effectively removes prepaid capital advances from the assets of government.

Generally Accepted Accounting Principles for Senior Governments

GAAP guidance is subject to change. At this time there are a number of PSAB initiatives that could result in future changes to GAAP for senior governments.

One of these initiatives involves a review of the method of accounting for SUCH organizations. Current guidance requires any SUCH organizations that are included in the government reporting entity to be consolidated on a line-by-line basis (adding assets, liabilities, revenues and expenses to those of government). PSAB is currently reviewing this guidance to determine if modified equity accounting (adding an entity's net income to the government's bottom line) might be more suitable.

In accordance with current guidance, the SUCH sector has been consolidated on a line-by-line basis. However, the government will continue to monitor the accounting practices of other provinces and the recommendations of PSAB to ensure that the most appropriate accounting treatment is applied.

Other initiatives currently underway include a review of when government transfers, in particular revenues and expenses associated with capital grants and multi-year funding arrangements, should be recognized in a government's budget and financial statements.

Comparison with other Provinces

Currently, British Columbia is the only province within Canada to legislate adherence to GAAP in the preparation of its financial documents.

Although all senior governments generally follow GAAP in the preparation of their Public Accounts, the application of GAAP across provinces is inconsistent. This is due to the fact that GAAP guidelines are principle based rather than rule based, and therefore, in many instances, professional judgment is required to interpret and apply the guidelines.

As noted in Table 1, most other provincial governments do not include the entire SUCH sector in their reporting entity.

Accounting Policy Advisory Committee

To assist the province in moving to full compliance with GAAP, the province established an Accounting Policy Advisory Committee. The Committee is comprised of professional accountants independent of government, and its role is to advise Treasury Board on the implementation of GAAP. The Committee's advice has been sought in areas where the implementation of GAAP requires significant professional judgment – such as the determination of the government reporting entity.

Expanding the Government Reporting Entity

The decision to include the SUCH sector in the government reporting entity was a complex undertaking. In making this determination, the government followed the PSAB criteria for determining inclusion, which is based on whether or not an entity is controlled (or not controlled) by government.

The PSAB criteria clearly show that school districts, colleges and institutes, and health care organizations are controlled by government and should therefore be included in the government reporting entity.

Although the PSAB control indicators make a strong case for the exclusion of universities, the Auditor General has indicated that universities should be included in the government reporting entity, as he believes that the government controls the financial affairs and resources of the public universities in the province. In recognition of the Auditor General's opinion, these organizations have been included in the government reporting entity. However, government will continue to monitor this issue and, in particular, the treatment of universities by other provinces under the new PSAB reporting entity criteria.

Financial Impact of the SUCH Sector

Expanding the government reporting entity to include SUCH organizations requires full consolidation of the financial results of those organizations into government's budget and financial reports.

As noted in Chart 1 and Table 2, the inclusion of the SUCH sector in recent years would have resulted in a positive impact on government's bottom line and is forecast to have a positive effect for the next three fiscal years.

The noticeable decline in 2003/04 relates to a $51 million expense by the health authorities to address their share of the current year portion of the $260 million unfunded liability associated with the Healthcare Benefits Trust. It is assumed that the health authorities will treat the remaining liability as a prior year adjustment.

The assets, liabilities and debt of the SUCH sector are included in government's statement of financial position.

Overall, the SUCH sector receives a significant amount of its revenues from provincial sources in the form of operating grants. Non-provincial revenue sources include contributions from the federal and municipal governments as well as own-source revenue, such as fees and licences.

Spending by the SUCH sector reflects the costs incurred to deliver health and education programs on behalf of the province, in keeping with statutory obligations as well as for other related activities.

In accordance with GAAP requirements, a number of adjustments have been made to the forecast amounts provided by SUCH organizations in arriving at the impact of including these organizations in the government reporting entity. Adjustments typically involve entries to adjust accounting policies of the organization to a basis consistent with the accounting policies of the government. Appendix Table A9 provides the net operating impact of the SUCH sector both before and after adjustments.

The province also provides annual capital grant funding to SUCH organizations towards the acquisition of capital infrastructure and equipment. This funding is provided through a prepaid capital advance. Upon consolidation, this advance is eliminated and replaced by the capital assets of the SUCH organizations. Capital assets for these organizations are funded through both provincial and non-provincial sources.

Although the assets of the SUCH sector are reflected on government's balance sheet, some of the assets owned by these organizations have external restrictions on their use and therefore cannot be used to meet government's general obligations. Examples include endowment funds of post-secondary institutions, and assets owned by denominational hospitals that are used in the delivery of provincial health care services.

As noted in Table 2, the addition of SUCH sector debt to government's balance sheet increases taxpayer-supported debt. This debt is used primarily to finance the construction of post-secondary institutions, hospitals and long-term care facilities. Chart 2 illustrates the impact of the additional debt on taxpayer-supported debt to GDP ratios.

In many cases, methods employed by SUCH organizations in tracking employees are incompatible with how government monitors its staffing levels. For this reason, SUCH employees are not included in government's annual staff utilization (FTEs).

Implementation of SUCH – Budget Integration and Confirmation Process

Identifying responsibilities and procedures for the developing and reporting of financial plans by the SUCH organizations required significant effort on the part of staff from the various government ministries and the SUCH organizations.

Chart 3 outlines the budget integration and confirmation process used to collect the information contained in this year's budget documents.

Inclusion of the SUCH sector in government budget documents will require closer coordination of government and SUCH organization financial processes and timelines in order to facilitate a streamlined process. The initial years of the new consolidated budgeting and forecasting process inevitably presents some challenges, however the process should improve as both government and the SUCH organizations gain experience.

Successful conversion to GAAP would not have been possible without the co-operation and support of staff in the school districts, universities, colleges and institutes, health-care organizations and participating ministries.