British Columbia Budget and Fiscal Plan 2003/04 to 2005/06 -- Ministry of Finance

Converting to GAAP

The Public Sector Accounting Board (PSAB) of the Canadian Institute of Chartered Accountants establishes Generally Accepted Accounting Principles (GAAP) for senior governments. British Columbia’s Budget Transparency and Accountability Act requires all financial documents produced by the province under that legislation to fully comply with GAAP by fiscal 2004/05.

GAAP guidance is not static. In the past year, two major initiatives of PSAB have resulted in anticipated changes to:

The criteria for determining which entities are included in the government reporting entity; and
The basis upon which the government bottom line is calculated — moving from expenditure-based accounting (reporting tangible capital asset expenditures as they occur) to expense-based accounting (reporting annual capitalization and amortization of tangible assets).

In addition, PSAB is reviewing the method of accounting for certain entities that may be included in the government reporting entity (primarily school districts, universities, colleges and health authorities — SUCH). Current guidance requires any of the SUCH entities that are included in the government entity to be consolidated on a line-by-line basis (adding assets, liabilities, revenues and expenses to those of government). PSAB is reviewing this guidance to determine if modified equity accounting (adding an agency’s net income to government’s bottom line) might be more suitable. Changing the method of accounting would have no impact on government’s bottom line.

All senior governments follow GAAP in the preparation of their Public Accounts. However, 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 judgement is required to interpret and apply the guidelines.

Within this changing environment, British Columbia is the only senior government within Canada, to legally require adherence to GAAP for Estimates, Budgets, Quarterly Reports and Public Accounts.

For the most part, British Columbia’s 2002/03 financial documents comply with GAAP. The two main exceptions are:

The way taxpayer-supported Crowns are presented in the Estimates, Budget and Quarterly Reports; and
The definition of the reporting entity (the province does not fully include the SUCH sector).

Two other technical deviations from GAAP are the use of prepaid capital advances to provide capital funding to the SUCH organizations, and the capitalization by government of tangible capital assets. In both cases, it is anticipated that government will not be required to change its accounting policies, since GAAP guidelines are changing and are expected to accommodate existing government policies by Budget 2004.

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 judgement — such as the determination of the government reporting entity.

Implementation of GAAP

The implementation of GAAP will have two major impacts on government financial reports:

In 2003/04 the Estimates, Budget and Quarterly Reports will fully consolidate the taxpayer-supported Crown corporations and agencies. The change will not affect the government’s bottom line since the current fiscal plan includes the bottom line results of these Crowns and agencies. This change in presentation is being done a year ahead of the 2004/05 legislated deadline for full GAAP compliance in order to clearly separate the changes relating to the Crown/agency consolidation from the entity expansion that will take place in 2004/05. The change this year will have minimal impact on the Public Accounts since the taxpayer-supported Crowns and agencies are already fully consolidated in that document.

Changes to Accounting Presentation.

While fully consolidating the government’s Consolidated Revenue Fund (CRF) with the taxpayer-supported Crown corporations and agencies, the new Estimates presentation also maintains CRF ministry expenses (which are detailed in the Estimates for legislative approval) as a key element of the expense statement. An expense-by-function format is also provided for full compliance with GAAP.

The net incomes of the commercial Crown corporations are included with government revenues. This enables the net effect of the taxpayer-supported organizations to be separated from that of the commercial enterprises, as recommended by the Auditor-General. The simplified schematic in this topic box contrasts the previous and the current presentation formats.
In 2004/05 the reporting entity will be expanded to fully include school districts, colleges, and health authorities.
The inclusion of universities is less clear and will be the subject of further discussion between the government, the Accounting Policy Advisory Committee and the Auditor General. Including these organizations in the government reporting entity does not affect those organizations’ bottom lines. Nor should the change materially affect the government’s bottom line since the government Contingencies Vote will be available to offset any possible negative impact associated with the expanded entity. In addition, school districts will receive $25 million in 2004/05 and $35 million in 2005/06 further reducing the possibility of a negative impact from moving to GAAP.

Universities

As previously noted, GAAP guidance related to determining the government reporting entity is currently undergoing a major review. It is anticipated that very shortly the criteria for inclusion will be changed from organizations that ‘are accountable to, and owned or controlled by government’ to ‘organizations that are controlled by government’. With the increased focus on control, the new guidelines will include indicators that will assist in the determination of whether or not an entity is controlled (or not controlled) by government.

The indicators clearly show that school districts, colleges and health authorities should be included in the government reporting entity. However, the indicators make a strong case for the exclusion of universities from the government reporting entity. This view is supported by the Accounting Policy Advisory Committee. Discussions with the Auditor General regarding the status of universities are ongoing.

Conclusion

These steps demonstrate the government’s commitment to comply with GAAP by Budget 2004. The process will require the commitment, effort and support of all agencies involved, in particular school districts, colleges and health authorities, in implementing this plan.