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September 24, 2004 153049 Via E-mail: ron.salole@cica.ca Ron Salole, Director Accounting Standards Public Sector Accounting Board 277 Wellington Street West Toronto ON M5V 3H2 Dear Mr. Salole: Thank you for the opportunity to respond to Government Transfers - Associates' Draft to Revise Section 3410 prepared by the CICA Public Sector Accounting Board. Our general comments and more specific responses are attached. Should you wish any further explanation of our comments, please contact Barbara Reuther, or myself. Yours truly, Arn van Iersel Comptroller General pc: Provincial Comptrollers Auditor General of British Columbia Barbara Reuther Attachment Ministry of Finance Office of the Mailing Address: Comptroller General PO Box 9413 STN PROV GOVT www.gov.bc.ca Victoria BC V8W 9V1 Province of British Columbia Response to Government Transfers - Associates' Draft to Revise Section 3410 CICA Public Sector Accounting Board General Comments Generally Accepted Accounting Principles (GAAP) should establish a principle-based approach that promotes sound decision-making; it should not drive business decisions. There should be an emphasis on achieving representational faithfulness, to ensure transactions and events affecting the entity are presented in financial statements in a manner that represents the substance of underlying transactions and events rather than their legal form. ...
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Ministry of Finance
Office of the
Comptroller General
www.gov.bc.ca
Mailing Address:
PO Box 9413 STN PROV GOVT
Victoria BC
V8W 9V1
September 24, 2004
153049
Via E-mail: ron.salole@cica.ca
Ron Salole, Director
Accounting Standards
Public Sector Accounting Board
277 Wellington Street West
Toronto ON
M5V 3H2
Dear Mr. Salole:
Thank you for the opportunity to respond to Government Transfers - Associates' Draft to Revise Section 3410
prepared by the CICA Public Sector Accounting Board.
Our general comments and more specific responses are attached.
Should you wish any further explanation of our
comments, please contact Barbara Reuther, or myself.
Yours truly,
Arn van Iersel
Comptroller General
pc:
Provincial Comptrollers
Auditor General of British Columbia
Barbara Reuther
Attachment
Province of British Columbia
Response to Government Transfers - Associates' Draft to Revise Section 3410
CICA Public Sector Accounting Board
General Comments
Generally Accepted Accounting Principles (GAAP) should establish a principle-based
approach that promotes sound decision-making; it should not drive business decisions.
There should be an emphasis on achieving representational faithfulness, to ensure
transactions and events affecting the entity are presented in financial statements in a
manner that represents the substance of underlying transactions and events rather than
their legal form.
Frequently, the determination of the substance of a transaction or event
will be a matter of professional judgment in the circumstances.
We would like to emphasize two areas that require attention to ensure accounting
represents the substance of transactions rather than the results of prescriptive guidance.
Exchange type transfers
The Province of British Columbia strongly disagrees with operating and capital transfers
being treated differently as detailed in this revised Section PS 3410.
The differentiation
between capital and operating transfers is an artificial distinction that compromises the
representational faithfulness of the transaction where in substance, they have the same
outcome (i.e. buying a service over time).
Funding the construction of capital assets
where the government has a residual claim, is in effect, an investment in future service
potential in the same way that funding a program to be run over multiple future periods
is.
They are both in the nature of exchange transactions and should be accounted for
under a consistent set of principles.
We believe that transfers should be recognized over the same period that service potential
is recognized where there are definable purpose restrictions.
We disagree with the
prescriptive approach to defining restrictions, as professional judgement is required to
best determine the true substance of the transfer.
There can be no "silver bullet" or
universal standard that adequately defines the complexities of government transfers.
Alternately, where there is no residual claim, the expense should be recognized
immediately, if there are no conditions, or as the progress conditions are met.
The donor
should not be held to the construction schedule of the recipient unless the donor chooses
to include progress conditions.
The Province endorses the approach that recognizes these transfers as revenue or
expenses/expenditures over the periods funded by treating the funding as a prepaid
capital advance when it is given.
Therefore, we disagree with the proposed sections
3410.15 through 3410.29, and the corresponding sections of Appendix B and C that
flowchart these sections, that could necessitate recognition of revenue/expense in the year
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Province of British Columbia
2
Response to Government Transfers - Associates' Draft to Revise Section 3410
CICA Public Sector Accounting Board
the transfer is authorized or at best over the period of construction of the capital asset.
Fundamentally, we must ask what is it that we are purchasing.
If it is a service to be
delivered over a number of years, then both the operating and capital components should
be treated the same and expensed over the service period.
Non-exchange type transfers
Substance over form should also be the guiding principle in determining the recognition
of non-exchange type transfers.
If the criteria established are too restrictive, professional
judgement cannot be applied, in consideration of practicality and intent, to appropriately
represent the transaction to the users of the financial statements.
In particular, the
accountability requirements that require explicit or implicit consequences, such as the
return of the asset, will be difficult to apply in all transfer situations.
We believe that a
binding right or obligation can be established without the firm requirement of a penalty
clause.
Since receipt of the funds does not in itself trigger a liability, expenses may not be
recorded in the same year as the revenue is received.
This is contrary to the matching
principle, as these are special purpose transfers not regular tax transfers.
Failure to
recognize a liability in situations where a substantive liability exists is not consistent with
conservatism in that revenues are overstated while liabilities are understated and
expenses are not matched with the related revenues. While the province is obligated to
deliver program services and constrained by practicality to do so in a future period the
guidance does not require the recognition of a liability.
If a liability and related expense
were recognized at the same time as the revenue the transaction would be consistent with
accounting principles and allow governments to manage their resources effectively in
accordance with the intent of the funding.
It is our belief that there must be flexibility available to both the donor and recipient of
transfers, to arrange their affairs so that accounting for the transfers best reflects their
intentions and appropriate program costing.
Specific Items
Definitions
3410.03 - .09
We find the definitions helpful, clear and concise.
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Province of British Columbia
3
Response to Government Transfers - Associates' Draft to Revise Section 3410
CICA Public Sector Accounting Board
3410.04
The Province of British Columbia supports the exclusion of flow-through type
arrangements from the definition of government transfers.
The arrangements as
described in 3410.04
"where a government agrees to act merely as an intermediary to
administer funds on behalf of another party and has no ability to make decisions
regarding the use of the funds"
are clarified in that revenue/expense recognition
conditions do not apply in these circumstances.
Recognition
3410.10
We agree that the basis for determining the amount to be recognized for any particular
transfer should be applied consistently from year to year.
We agree with the statement
"Judgement will be required to account for transfer in a manner that best reflects the
substance of the underlying events rather than the form or funding pattern."
3410.13
We concur with the statement that
"Recipients of government transfers with stipulations
may account for the transfer in different time periods than the transferring government."
However, there also needs to be flexibility in recognizing the existence of stipulations.
Provincial governments may find that, for accounting purposes, they have to recognize
revenue where the required expense flow will occur in future periods.
Recognition - transferring / recipient government
Purpose restrictions - capital
3410.15 through .29
The Province of British Columbia is in agreement with the criteria if the interpretation of
stipulations is amended to recognize the expenditure over the useful life of the asset
where the Province has a residual claim, rather than during the construction of the asset.
The Province asserts that the expenditure should be recognized over the useful life of the
asset as it is not only the development of the service capacity that is of concern it is the
investment in service potential, providing the service throughout the useful life of the
asset, that is of real significance to the province.
None of the proposed stipulations (e.g.
penalty clause) in and of themselves should be a "silver bullet".
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Province of British Columbia
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Response to Government Transfers - Associates' Draft to Revise Section 3410
CICA Public Sector Accounting Board
Authorization
3410.30 through .34
We favour approach (a), which is the approach that requires formal authorization of a
transfer by the financial statement date.
We disagree with approach (b), the constructive
obligations approach specified in the Liabilities Exposure Draft (ED).
The Province concurs with the recognition of the primacy of the role of the legislature in
authorizing the actions of the government of the day.
We support the conclusion that the
provision of a transfer remains discretionary until final legislation.
The legislature or
local government council must have approved regulations or by-laws and required
approvals under those authorities have been exercised.
The practicality of attempting to recognize obligations under the Liabilities ED definition
of constructive obligations would be difficult to achieve on a consistent basis and could
undermine the reliability of the financial statements.
The constructive obligation
references to
"inferences… from the situation"
or consideration of a
"government making
a promise to others and should have reasonably expected them to rely upon the promise"
promotes uncertainty and could hinder governments ability to effectively communicate.
Conditions
3410.38
The conditions as established are too restrictive.
While the purpose restriction and time
constraint stipulations are appropriate, we disagree with the very narrow definition of
performance requirements.
The need for consequences or penalties is not representative
of the relationship between transferring and recipient governments.
In many situations,
the nature of transfer programs precludes either the opportunity to apply explicit penalties
or the need for them.
Because the transferring government has the freedom to apply
stipulations the recipient government could be forced to respond contrary to sound
management principles.
Again, you need to look at the overall substance with no one
stipulation as a "silver bullet".
If for example, you insist on a penalty clause, this may
serve as an incentive for governments to put one in simply to meet the requirement.
Presentation and Disclosure
3410.51
We agree with this paragraph since the intention of the donor may be different from the
recipient.
It is appropriate that there would not necessarily be symmetry between the
two.
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Province of British Columbia
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Response to Government Transfers - Associates' Draft to Revise Section 3410
CICA Public Sector Accounting Board
3410.52
The explanation of when there is a duty to disclose commitments is a useful inclusion in
PS 3410.
Appendices
We find the examples and further explanations found in the appendices useful and would
support their inclusion as part of a final standard.
