Public Sector Accounting - Notes
68.1 Public sector defined
- The CPA Canada Public Sector Accounting Handbook (PSA Handbook) defines the public sector as governments, government components, government organizations, and partnerships, each of which is a public sector entity.
- Public Sector Accounting Board (PSAB) issues standards and guidance on PSA matters called Public Sector Accounting Standards (PSAS).
- PSAS are designed to generally meet the needs of users of public sector financial statements.
- The PSA Handbook is supplemented by Public Sector Statements of Recommended Practice (SORPS). Adoption of all or part of SORPS is optional for public sector entities.
- SORPS establish recommended practices for:
- financial statement discussion and analysis
- public performance reporting
- assessment of tangible capital assets
- indicators of financial condition
- The public sector encompasses several different types of public sector entities. The categorization is important because it determines which CPA Canada standards are applicable.
- Source: Appendix A, Introduction to Public Sector Accounting Standards, PSA Handbook Update No. 56/1 (11/20), 2021 Chartered Professional Accountants of Canada.
68.2 Organization types
- Governments provide services through various organizations such as ministries, departments, crown corporations, agencies, commissions, and boards (government components).
- Government components typically operate under government direction; others may have more financial/operational authority through legislation and may prepare their own financial statements.
- The reporting entity is made up of organizations that the government controls.
- Control = the ability or power to govern the organization's financial and operational policies.
- Governments fully consolidate the financial statements of organizations within the reporting entity.
- Government business enterprises are excluded from consolidation and are accounted for using the modified equity method (similar concept to the equity method for investments).
- A government organization is any organization controlled by a government that is a separate entity with the power to contract in its own name and that can sue and be sued.
- Government organizations follow the PSA sections of the CPA Canada Handbook - Accounting when presenting their financial statements.
- Individual government organizations are broken out into:
- government business enterprises
- government not-for-profit organizations (NPOs)
- other government organizations
- Government business enterprises: legal entities separate from the government with delegated financial/operational authority; sell goods/services outside the government reporting entity; typically include crown corporations; can sustain operations and meet liabilities from external revenues.
- Government not-for-profit organizations (NPOs): entities with no transferable ownership interest; operated exclusively for social, educational, professional, religious, health, or charitable purposes; examples include some universities and health organizations.
- If not a government business enterprise or a government NPO, an entity is an "other government organization." Appendix A provides governing standards/options for these entity types.
- Appendix A’s flowchart and requirements are provided for quick reference.
68.3 Users and uses of public sector accounting information
- Government financial statements provide users with information to assess the financial condition of a governing body.
- All Canadian governments issue financial statements and make them public.
- Governments are accountable to the public (diverse interests, views, and needs).
- Financial statements aim to serve wide-ranging users.
- Typical users: the public, legislators, councillors, investors, analysts, and other governments.
- Users are interested in:
- sources and types of government revenues
- allocation and use of economic resources
- cost of goods and services provided in the accounting period
- extent to which costs were met by revenues in the period
- the government's financial position
- stock, allocation, and use of non-financial resources
- whether revenues were sufficient to meet expenditures
- how the government financed activities and met cash requirements
- actual results of activities versus originally planned and past periods
- whether public resources were managed in accordance with legislative authorities
- Information in financial statements is used to assess:
- ability to meet financial obligations (short and long term)
- ability to maintain service levels and finance new programs
- future tax and other revenue requirements
- government spending priorities
- impact of government economic activities on the economy
- performance in managing economic resources
68.4 Objectives and limitations of public sector reporting and major reporting issues
68.4.1 Objectives of public sector reporting
- Public sector objectives differ from for-profit entities (profit is not the primary goal).
- Public sector organizations provide services to constituents for social/economic reasons; delivery may not generate direct revenues.
- Financial statements show the results of operations and how services are provided.
- Objectives:
- Provide a full account of the nature and extent of the financial affairs and resources controlled by the government.
- Describe the government's financial position at the end of the accounting period, including how finances will be financed, liabilities, and future services.
- Describe changes to the government's financial position, including source/use of resources, impact on net debt, and cash requirements.
- Demonstrate accountability by evaluating financial results and compliance with legislative authorities.
- Governments must prepare financial statements on an accrual basis in accordance with governing standards.
68.4.2 Limitations of public sector reporting
- PS 1000 Financial Statement Concepts acknowledges that a government financial report should present information useful for evaluating financial condition/performance; however, presenting a government’s financial condition is complex and broad.
- The full extent of a government's financial position is difficult to capture in financial statements; some aspects are outside the statements.
- Financial statements cannot meet all user needs; some information is better provided in other financial reports.
68.4.3 Major reporting issues (public-sector-specific)
- Government transfers: transfers of money/assets between governments; treated as expense for transferring government and revenue for receiving government; requires timing consideration for revenue/expense recognition.
- Unrecognized assets: many assets (e.g., forest, water, minerals) cannot be reliably valued; may be substantial; must be disclosed if not recognized.
- Encumbrance accounting: used to control spending against the budget. An encumbrance entry records a commitment when a good/service is ordered, signaling funds must be set aside; funds are shown as committed even if the expenditure has not yet occurred.
68.5 Required government financial statements
Governments must prepare financial statements in accordance with the PSA Handbook.
Typical consolidated statements include:
- Statement of financial position
- Statement of operations
- Statement of remeasurement gains and losses
- Statement of change in net debt/assets
- Statement of cash flow
Key characteristics of government reporting:
- Government’s goal is to provide services and redistribute resources, not to make a profit.
- Many tangible capital assets provide service capability rather than direct future cash inflows.
- Capital spending is not primarily about maximizing financial return.
- The principal revenue source is taxation.
- The benefits of government services cannot be measured solely by a bottom line of net revenues/expenses.
- The budget is an expression of public policy and a central part of the accountability cycle; comparing actual to budget demonstrates accountability.
- Government debt capacities are distinctive and typically higher standards of accountability apply.
Given these characteristics, government financial statements should include the following key information:
68.5.1 In the statement of financial position
- Financial assets separated from non-financial assets; financial assets used to discharge liabilities; non-financial assets include capital assets representing service capability.
- The net financial resources or net debt of the government.
- The accumulated surplus or deficit representing the net economic resources (net assets) available to provide future services and measures the extent of future revenue required to pay for past transactions and events.
68.5.2 In the statement of operations
- The annual surplus or deficit, representing the net cost of services, affordability of services, and ability to maintain net assets in the year; a measure of effectiveness and efficiency.
68.5.3 In the statement of remeasurement gains and losses
- Accumulated remeasurement gains and losses at the beginning and end of the period and those occurring during the period, with the latter segregated into those arising during the period and amounts reclassified to the statement of operations during the period.
- The amount of remeasurement gains and losses during the period segmented into categories:
- those arising from exchange gains/losses in foreign currency denominated assets and liabilities carried at amortized cost, and changes in the fair value of derivatives;
- portfolio investments in equity instruments that are quoted in an active market;
- financial instruments carried at fair value.
68.5.4 In the statement of change in net debt/assets
- Capital spending and its effect on net debt.
- The increase/decrease in net debt, indicating the need for future revenue to pay for past transactions and events (net debt is an indicator of the affordability of additional spending).
68.5.5 In the statement of cash flow
- Reports the change in cash and cash equivalents in the accounting period, and how the reporting government financed its activities in the period and met its cash requirements.
68.5.6 General requirements
- For the statements of operations and change in net debt, actual-to-budget comparisons are provided as an effectiveness indicator.
- Government assets that are not recognized because of difficulty in measurement should be disclosed, and financial reporting should include performance measures and non-financial performance measures.