Summary Comparison of Canadian Public Sector Accounting Standards

Transcription

1 February 2011 Summary Comparison of Canadian Public Sector Accounting Standards With th e CI CA Han dboo k Part V

2 Location: 8 Bastion Square Victoria, British Columbia V8V 1X4 Office Hours: Monday to Friday 8:30 am 4:30 pm Telephone: Toll free through Enquiry BC at: In Vancouver dial Fax: [email protected] Website: This report and others are available at our website, which also contains further information about the office: Reproducing: Information presented here is the intellectual property of the Auditor General of British Columbia and is copyright protected in right of the Crown. We invite readers to reproduce any material, asking only that they credit our Office with authorship when any information, results or recommendations are used. II

3 T a b l e o f C o n t e n t s Background 1 Introduction 1 Limitations of this document 1 First-time adoption of PSAB 2 Financial statement presentation for not-for-profit organizations 3 1. The Framework Objective Users GAAP hierarchy Assets Liabilities Revenue Expenses 5 2. Financial Statement Presentation Statement of financial position Statement of operations Statement of change in net debt Statement of cash flows 8 3. Statement Of Financial Position Financial Assets Definition Cash and cash equivalents Temporary investments 9 III Revenues receivable 10

4 T a b l e o f C o n t e n t s Inventories for resale Loans receivable and other loans Portfolio investments Derivatives Liabilities Definition Accounts payable and accrued liabilities Deferred revenue, and restricted assets and revenue Employee future benefits Asset retirement obligations Long-term debt, borrowings and loans from other entities Contingent liabilities Loan guarantees Contractual obligations Non-Financial Assets Definition Tangible capital assets and amortization Leased tangible capital assets Prepaid expense Inventories held for consumption or use Statement Of Operations Revenues Expenses 22 IV

5 T a b l e o f C o n t e n t s 5. Other Specific Topics Consolidation principles Goodwill and intangible assets Accounting changes Foreign exchange Risk management and hedging Segment disclosures Related parties Subsequent events Economic dependence Capital disclosures Public private partnerships (P3s) Measurement Uncertainty PSAB Projects Impacting Future Accounting Standards Government transfers Financial instruments Foreign currency translation Related party transactions Appropriations Amalgamations and restructuring Assets Revenue from exchange transactions Financial statements for government organizations 36 V

6 BACKGROUND Introduction This document was prepared by the Office of the Auditor General of British Columbia to assist Provincial government organizations in British Columbia who are transitioning to Public Sector Accounting Standards (PSAB) from the Canadian Institute of Chartered Accountants Handbook (CICA Handbook). Government has directed that the transition occur according to the following timeline: Taxpayer-supported government organizations, except those designated as education or health sector organizations, are to adopt PSAB in their fiscal year that begins in Taxpayer-supported government organizations designated as education or health sector organizations are to adopt PSAB in their fiscal year that begins in With the transition, comparative figures will have to be restated. See the section below regarding the firsttime adoption of PSAB. This document would not be used by government business enterprises (GBEs) which, under the PSAB framework ( Introduction to Public Sector Standards ), are directed to report under the standards applicable to publicly accountable enterprises in the CICA Handbook. Therefore, GBEs will be applying International Financial Reporting Standards (IFRS) along with all the other publicly accountable enterprises in Canada for fiscal years beginning on or after January 1, The introduction to the PSAB handbook also directs other government organizations (OGOs) to follow either PSAB or the standards applicable to publicly accountable enterprises in the CICA Handbook (i.e., IFRS). As well, PSAB now includes optional standards (PS 4200 series) for government not-for-profit organizations (GNPOs) identical in most respects to the HB 4400 series of the pre-changeover CICA Handbook (see below). However, in British Columbia, government has directed both OGOs and GNPOs to adopt PSAB, but without the optional not-for-profit standards available in the PS 4200 series. This document assumes that the PS 4200 series would not be applied; therefore, the detailed sections in this document compare PSAB (excluding the PS 4200 series) with the CICA Handbook Part V (ie the CICA Handbook as it was prior to the transition to IFRS, including the NPO standards in the HB 4400 series). Limitations of this document The government reporting entity of the Province of British Columbia comprises many different organizations, which make a multitude of transactions. No one document can therefore be expected to address every type of transaction or reporting situation that may arise. Applying accounting standards requires professional judgement. This is particularly true for PSAB, which does not provide specific guidance in a number of areas (noted in this document). Every effort has been made to ensure the accuracy of the information presented here, but it may not be comprehensive enough in all respects to meet the needs of every user. As well, accounting standards change constantly, and so some information may have changed since this document s publication. Furthermore, this publication is not intended to cover all aspects of PSAB, or to be a substitute for reading the actual standards Summary Comparison of Canadian Public Sector Accounting Standards with the CICA Handbook Part V 1

7 and interpretations when dealing with specific issues. Our Office accepts no responsibility for anyone acting on the basis of this publication without seeking professional advice. In British Columbia, provincial government organizations are expected to consult with the Office of the Comptroller General before exercising any choice available to them under the reporting framework, and before adopting policies and practices to implement applicable accounting standards. First-time adoption of PSAB (PS 2125) First-time adoption will ensure that financial statements: a) are transparent for users of the financial statements and comparable over all periods presented; b) provide a suitable starting point for accounting in accordance with PSAB; and c) can be generated at a cost that does not exceed the benefits to the users. The adoption of PSAB is to be accounted for by retroactive application, with restatement of prior periods, unless exemption is permitted. The following exemptions to retroactive application are available: a) retirement and post-employee benefits (PS 3250 and PS 3255) o Discount rate A first-time adopter may elect to delay application of these sections relative to the discount rate used until the date of the next actuarial valuation or within three years of the transition date to PSAB, whichever is sooner. o Cumulative actuarial gains A first-time adopter may elect to recognize all cumulative actuarial gains and losses, as of the date of transition to PSAB, directly in accumulated surplus/deficit. b) business combinations (PS 2510) o A first-time adopter need not comply with the requirement for retroactive application for an acquisition that was incurred prior to the date of transition to PSAB. c) investment in government business enterprises (PS 3070) o A first-time adopter need not comply with the requirement for retroactive application of the modified equity method of accounting for an investment in a government business enterprise that was incurred prior to the date of transition to PSAB. d) government business partnerships (PS 3060) o A first-time adopter need not comply with the requirement for retroactive application of the modified equity method of accounting for a government business partnership entered into prior to the date of transition to PSAB. e) tangible capital asset impairment (PS 3150) o A first-time adopter need not comply with the requirement for retroactive application for write-downs of tangible capital assets that were incurred prior to the date of transition to PSAB. Retroactive application is prohibited for: a) some aspects of hedge accounting relating to foreign currency translation; and b) accounting estimates. Summary Comparison of Canadian Public Sector Accounting Standards with the CICA Handbook Part V 2

8 Disclosure requirements: a) changes to accumulated surplus/deficit as a result of first-time adoption of PSAB; b) reconciliation of the most recently reported net income/loss to the entity s annual surplus/deficit under PSAB for the period; c) explanation of material adjustments to the statement of cash flow (if such a statement is presented); d) exemptions used (if any); and e) an opening statement of financial position as at the date of transition (so, an entity that adopts PSAB for its fiscal year ending March 31, 2012, will need to present an opening statement of financial position as at April 1, 2010). Financial statement presentation for not-for-profit organizations (PS 4200, HB 4400) Under the CICA HB 4400 series, not-for-profit organizations (NPOs) have the option of applying either the deferral method or the restricted fund method of accounting and may present balances and results in separate funds. As well, there are a number of other financial reporting requirements and options provided for NPOs (e.g., unique rules for reporting controlled entities, and separate reporting of net assets based on internal and external restrictions). The financial reporting options provided in HB 4400 for NPOs are also available under PSAB (for those organizations electing to apply PS 4200), but with the following differences: a) the modified equity method will be available as an alternative method for reporting controlled forprofit organizations, rather than the equity method that was available under the HB 4400 series; b) there are no requirements relating to other comprehensive income that is not reported as a component of net income in the PSAB handbook: on consolidation, other comprehensive income is reported as a component of the accumulated surplus/deficit; and c) the guidance in the CICA HB 4400 series relating to asset retirement obligations and interim financial statements has not been incorporated into the PS 4200 series. However, as noted above, government has directed GNPOs to report under PSAB without incorporating the PS 4200 series. Therefore, the detailed sections in this document do not consider the optional provisions in PS Summary Comparison of Canadian Public Sector Accounting Standards with the CICA Handbook Part V 3

9 1.1 Objective PS 1100 HB Users PS GAAP hierarchy 1 PS 1150 HB Assets PS 1000 HB THE FRAMEWORK PSAB accounting standards (excluding PS 4200 series) Nine objectives established under PSAB are specific to public sector reporting. Information needs to highlight measures that help users assess whether the reporting entity s financial position has improved or deteriorated, and needs to explain the changes in financial position. The reporting entity s financial statements serve the interests of a variety of users such as the public, legislators, councillors, investors, analysts and other governments. A reporting entity should apply every primary source of GAAP that deals with the accounting and reporting in financial statements of transactions including: a) sections; b) guidelines; and c) appendices and illustrative material. When primary sources of GAAP are not applicable or when additional guidance is needed, a reporting entity should adopt accounting policies and disclosures that are consistent with the primary sources of GAAP and the application of the concepts described in section PS Assets have three essential characteristics: a) they embody a future benefit that involves a capacity, singly or in combination with other assets, to provide future net cash flows, or to provide goods and Differences with CICA Handbook Under the CICA Handbook, the overall reporting principles are consistent to PSAB, but specific objectives are not provided. Under the CICA Handbook, the overall principles are consistent to PSAB, but the user groups are different. Under the CICA Handbook, the GAAP hierarchies are conceptually similar to PSAB. However, PSAB is not as comprehensive as the CICA Handbook and is silent in a number of areas. As a result, there are often specific areas, such as asset retirement obligations (see section 3.2.5), that require professional judgement and reference to other reporting frameworks. Under the CICA Handbook, the essential characteristics are similar to PSAB, except that profitoriented enterprises define future benefit in terms of cash flows only. 1 GAAP hierarchy is an outline for determining the most appropriate sources for obtaining guidance on Canadian generally accepted accounting principles. For example, in PSAB there is no specific standard for asset retirement obligations. Under the GAAP hierarchy, reporting entities would therefore look to other sources for guidance. The sources may include international financial reporting standards (IFRS) or accounting standards for private enterprises (ASPE). Summary Comparison of Canadian Public Sector Accounting Standards with the CICA Handbook Part V 4

10 1.5 Liabilities PS 1000 PS 3200 HB Revenue PS 1000 HB Expenses PS 1000 HB THE FRAMEWORK PSAB accounting standards (excluding PS 4200 series) services; b) the reporting entity can control access to the benefit; and c) the transaction or event giving rise to the reporting entity s control of the benefit has already occurred. Liabilities have three essential characteristics: a) they embody a duty or responsibility to others, leaving a reporting entity little or no discretion to avoid settlement of the obligation; b) the duty or responsibility to others entails settlement by future transfer or use of assets, by provision of goods or services or by other form of economic settlement, at a specified or determinable date, on occurrence of a specified event, or on demand; and c) the transaction or event obligating the reporting entity has already occurred. Revenues, other than gains, can arise from: taxation; the sale of goods; the rendering of services; the use by others of government economic resources yielding rent, interest, royalties or dividends; or contributions received, such as grants, donations and bequests. Expenses, including losses, are decreases in economic resources (either by way of decreases in assets or increases in liabilities) resulting from the operations, transactions and events of the accounting period. Differences with CICA Handbook Similar to PSAB, under the CICA Handbook NPOs define future benefits associated with assets in terms of either cash flows or service potential. Under the CICA Handbook, the essential characteristics are similar to PSAB. Under the CICA Handbook, the essential characteristics are similar to PSAB. Under the CICA Handbook, the essential characteristics are similar to PSAB. Summary Comparison of Canadian Public Sector Accounting Standards with the CICA Handbook Part V 5

11 2. FINANCIAL STATEMENT PRESENTATION Financial Statement Item PSAB accounting standards (excluding PS 4200 series) Differences with CICA Handbook 2.1 Statement of financial position PS 1200 HB 1000 HB 1510 HB Statement of operations PS 1200 HB 1400 HB 1520 Five key figures describe the financial position: a) financial assets; b) liabilities; c) net debt position (liabilities minus financial assets); d) non-financial assets; and e) accumulated surplus/deficit. Current year statement of financial position should be presented with prior year comparatives. A reporting entity should report: a) revenues by significant types; b) expenses by function or major program; c) surplus or deficit for the period (difference between revenues and expenses); and d) accumulated surplus/deficit at the beginning and end of the period on either the statement of operations or a separate statement. The statement of operations excludes other comprehensive income. If a subsidiary business enterprise reports other comprehensive income, the amount is recorded directly to accumulated surplus/deficit. Under the CICA Handbook, accounts are classified into current assets, current liabilities, tangible capital assets, long-term liabilities and equity/net assets. Under PSAB, there is no distinction between current and non-current items. Assets are separated into financial assets and non-financial assets. Presentation highlights net debt position and accumulated surplus/deficit (see also section 2.3). PSAB does not specifically address the presentation of share capital. However, accumulated surplus/deficit is defined as the residual of assets less liabilities, therefore encompassing equity interests. Relevant details of capital/ownership structure should be presented in the notes to the financial statements. Under the CICA Handbook, the statement of operations reports the results of revenues, expenses, gains and losses, discontinued operations, and extraordinary items. The following requirements under PSAB are different from the CICA Handbook: expenses are required to be reported by function or major program on the statement of operations; expenses by object/type are disclosed in the notes to the financial statements; other comprehensive income is included in the statement of change in net debt and not in the Summary Comparison of Canadian Public Sector Accounting Standards with the CICA Handbook Part V 6

12 2. FINANCIAL STATEMENT PRESENTATION Financial Statement Item PSAB accounting standards (excluding PS 4200 series) Differences with CICA Handbook 2.3 Statement of change in net debt PS 1200 HB 1000 HB 1400 HB 1530 The current year statement of operations should be presented with prior year and originally planned (budgeted) comparatives. Proposed Standards PSAB is proposing the inclusion of a separate statement of remeasurement gains and losses. This statement would report unrealized gains and losses associated with foreign exchange and changes in value for financial instruments recorded at fair value. It would also include amounts reclassified to the statement of operations when the asset or liability is derecognized or settled, as well as other comprehensive income. Refer to the summary of these projects in sections 6.2 and 6.3. Net debt is the remainder of liabilities less financial assets. The accumulated surplus/deficit is the remainder of nonfinancial assets less net debt. The statement of change in net debt should report the extent to which the expenditures of the accounting period are met by the revenues recognized. It should report net debt at both the beginning and end of the accounting period. The statement of change in net debt should explain the difference between the surplus/deficit for the period, including: acquisition of tangible capital assets (TCAs); disposals of TCAs; amortization of TCAs; statement of operations; there are no guidelines for discontinued operations or extraordinary items; and the statement of operations should present a comparison of the results for the accounting period with those originally planned (i.e., budgeted). Under the CICA Handbook, a statement of change in retained earnings (or net assets) is presented. Under PSAB, the statement of change in net debt differs from the statement of change in retained earnings (or net assets) in that the former results not only from the surplus/deficit for the period (and any other changes to the accumulated surplus/deficit) but also from the purchase, disposition and amortization of tangible capital assets (TCAs) and other nonfinancial assets. Summary Comparison of Canadian Public Sector Accounting Standards with the CICA Handbook Part V 7

13 2. FINANCIAL STATEMENT PRESENTATION Financial Statement Item PSAB accounting standards (excluding PS 4200 series) Differences with CICA Handbook adjustments relating to write-downs of TCAs; consumption of other non-financial assets; expenditures to acquire other non-financial assets; and other comprehensive income arising in applying the modified equity method when reporting on the results of government business enterprises and government business partnerships. 2.4 Statement of cash flows PS 1200 HB 1400 HB 1540 Prior year comparatives are presented as well as originally planned (budgeted) comparatives on the statement of change in net debt. The statement of cash flows should report how a reporting entity generated and used cash and cash equivalents in the accounting period, and what the change in cash and cash equivalents was in the period. The statement of cash flows should also report the cash and cash equivalents at both the beginning and end of the accounting period. The statement of cash flows should report cash flows during the period, classified by operating, capital, investing and financing activities. Under the CICA Handbook, the statement of cash flows is similar to PSAB, except that PSAB requires cash flows related to capital activities to be shown as a separate category from investing and financing activities. The CICA Handbook indicates no preference for use of the direct or indirect method, while PSAB encourages use of the direct method. Use of the direct method is encouraged. Summary Comparison of Canadian Public Sector Accounting Standards with the CICA Handbook Part V 8

14 3. STATEMENT OF FINANCIAL POSITION Financial Statement Item PSAB accounting standards (excluding PS 4200 series) Differences with CICA Handbook 3.1 Financial assets Definition PS 1000 PS 1200 Financial assets are assets that could be used to discharge existing liabilities or finance future operations and are not for consumption in the normal course of operations. They may include inventories or items for resale. The indicator of net debt is determined by deducting the financial assets from liabilities Cash and cash equivalents PS 1200 HB 1540 HB Temporary investments PS 3030 HB 3855 The statement of financial position should report financial assets segregated by main classifications, such as: a) cash and cash equivalents; b) temporary investments; c) revenues receivable; d) inventories for resale and other assets held for sale that meet the requirements of section PS ; e) loans to other governments; f) other loans; g) portfolio investments; h) investments in government business enterprises; and i) investments in government business partnerships. Cash comprises cash on hand and demand deposits. Cash equivalents are short-term highly liquid investments that are readily convertible to known amounts of cash and that are subject to an insignificant risk of change in value. They are held for the purpose of meeting short-term cash commitments rather than for investing or other purposes. An investment would normally qualify as a cash equivalent only when it has a short maturity (i.e., three months or less). Temporary investments are recorded at the lower of cost and market value. Where there are holdings of marketable securities, their quoted market value as well as their carrying value should be disclosed. Under the CICA Handbook, the essential characteristics are similar to PSAB. Under the CICA Handbook, temporary investments are categorized as held for trading, held to maturity or available for sale. Financial instruments are held at fair value or amortized cost depending on their categorization. This guidance applies to both for- Summary Comparison of Canadian Public Sector Accounting Standards with the CICA Handbook Part V 9

15 3. STATEMENT OF FINANCIAL POSITION Financial Statement Item PSAB accounting standards (excluding PS 4200 series) Differences with CICA Handbook Revenues receivable PS 1200 PS 3410 PS 3510 HB 3855 The financial statements should disclose adequate information about the nature and terms of a reporting entity s temporary investments, together with any valuation allowances. Proposed Standards PSAB is proposing changes to the standards for the recognition and measurement of financial instruments. Refer to the summary of this project in section 6.2. PSAB includes specific guidance on what triggers recognition of revenues (and receivables) relating to contributions and taxation. Under PSAB, financial assets are primarily measured at historical cost. New and Proposed Standards PSAB will be issuing a new standard on government transfers in March 2011, effective for fiscal years beginning on or after April 1, PSAB is also proposing changes to the standard for financial instruments. Refer to the summary of these projects in sections 6.1 and 6.2. profit and not-for-profit organizations. Under PSAB, there are no asset designation categories and temporary investments are recorded at lower of cost and market value. A write-down is recorded directly to the statement of operations. The measurement of shorter term accounts receivable should in most cases be similar under either framework. Under PSAB, potential differences could occur as additional guidance is provided on what triggers recognition of contributions and tax revenues. However, this guidance is consistent with the asset recognition principles in both frameworks. Potential differences may also exist in that the CICA Handbook provides the option for fair value measurement and also requires use of the effective interest rate method Inventories for resale PS 1000 As asset held for sale should be recognized as a financial asset when all of the following criteria are met: Although not currently required, the use of the effective interest rate method is a requirement in the proposed PSAB financial instrument standard. Refer to the summary of this project in section 6.2. Under the CICA Handbook, inventories are assets held for sale in the ordinary course of business, in the Summary Comparison of Canadian Public Sector Accounting Standards with the CICA Handbook Part V 10

16 3. STATEMENT OF FINANCIAL POSITION Financial Statement Item PSAB accounting standards (excluding PS 4200 series) Differences with CICA Handbook PS 1200 a) the reporting entity is committed to selling the asset; b) the asset is in a condition to be sold; c) the asset is publicly seen to be for sale; d) there is an active market for the asset; e) there is a plan in place for selling the asset; and f) it is reasonably anticipated that the asset will be sold outside the reporting entity within one year of the reporting date. Inventories for sale which will not be sold within one year of the financial statement date should be included in inventories for consumption or use. Refer to section for further details. process of production for such sales, or in the form of materials or supplies to be consumed in the production process of rendering of services. Under PSAB, there are two categories of inventories: inventories for resale (financial asset) and inventories for consumption or use (non-financial asset) (see 3.3.5). Their presentation in the statement of financial position differs by category. This distinction is not made in the CICA Handbook Loans receivable and other loans PS 3050 HB 3855 The PSAB Handbook does not have detailed guidance on inventory costing methods when conversion processes occur within the organization. In keeping with the PSAB hierarchy of GAAP (PS 1150), organizations would likely refer to other sources of GAAP for this detailed guidance, such as Canadian Private Sector GAAP or IFRS. Loans receivable should initially be reported at cost. Valuation allowances should be used to reflect loans receivable at the lower of cost and net recoverable value. When the amount of a loss is known with sufficient precision, the loan receivable should be reduced by the amount of that loss. A reporting entity should disclose the nature and terms of significant classes of loans receivable, as well as describe the accounting policies applied to its loans receivable. Under the CICA Handbook, loans and receivables that are not quoted in an active market, unless designated as available for sale or held for trading with the intention that they be sold in the near term, are measured at amortized cost using the effective interest method. Such loans or receivables are initially measured at their fair value, which is calculated as the present value of future receipts discounted using prevailing market rates for similar instruments. Summary Comparison of Canadian Public Sector Accounting Standards with the CICA Handbook Part V 11

17 3. STATEMENT OF FINANCIAL POSITION Financial Statement Item PSAB accounting standards (excluding PS 4200 series) Differences with CICA Handbook Portfolio investments PS 3040 HB3051 HB 3855 Proposed Standards PSAB is proposing changes to the standards for the recognition and measurement of financial instruments. Refer to the summary of this project in section 6.2. Portfolio investments are long-term investments in organizations that are not controlled. Such investments are normally shares or bonds and exclude temporary investments and loans receivable. Some investments in pooled or mutual funds may qualify as portfolio investments if they are held for the long term. Portfolio investments are measured at cost. When there is a loss in value other than a temporary decline, the investment should be written down to recognize the loss. The write-down should be included in the statement of operations and should not be reversed if there is a subsequent increase in value. Any gains or losses from the sale of portfolio investments should be included in the statement of operations in the period of the sale. Although not currently required, the use of the effective interest rate method is a requirement in the proposed PSAB financial instrument standard. Refer to the summary of this project in section 6.2. Under the CICA Handbook, when an investor is able to exercise significant influence over an investee that is not a subsidiary, a joint venture or a variable interest entity, the investor should account for the investment using the equity method. If an investor is not able to exercise significant influence, the investment should be accounted for in accordance with CICA Handbook 3855, Financial Instruments recognition and measurement. Under the CICA Handbook, when significant influence is not present, investments are categorized as either held for trading, held to maturity or available for sale. The financial instruments are measured at fair value or at amortized cost depending on their categorization. This guidance applies to both forprofit and not-for-profit organizations. Portfolio investments should be reported separately on the statement of financial position. Any income from portfolio investments should be reported on the statement of operations. Proposed Standards PSAB is proposing changes to the standards for the recognition and measurement of financial instruments. Under PSAB, the concept of significant influence does not exist. If an organization is not controlled, then it is a portfolio investment. If it is controlled, then it is consolidated as described in section 5.1. Under the CICA Handbook, fair value should be disclosed for financial instruments recorded at cost, subject to certain exemptions. Under PSAB, when Summary Comparison of Canadian Public Sector Accounting Standards with the CICA Handbook Part V 12

18 3. STATEMENT OF FINANCIAL POSITION Financial Statement Item PSAB accounting standards (excluding PS 4200 series) Differences with CICA Handbook Refer to the summary of this project in section 6.2. portfolio investments include marketable securities, then the quoted market value of such securities as well as their carrying value should be disclosed. Currently under PSAB, all portfolio investments are recorded at cost. Impairments are only recorded if other than a temporary decline in value. Under PSAB, an impairment that has persisted for three or four years is evidence of a decline that is not temporary. There is no similar guideline in the CICA Handbook. Impairments are not reversed for subsequent changes in value Derivatives HB 3855 Derivatives are not usually recorded in the financial statements, except that a derivative that gives rise to a contingent liability may be recorded. Proposed Standards PSAB is proposing changes to the standards for the recognition and measurement of financial instruments. Refer to the summary of this project in section 6.2. The proposed changes to the standards for financial instruments, if approved, would significantly change the measurement of portfolio investments. Refer to the summary of this project in section 6.2. Under the CICA Handbook, derivatives and embedded derivatives that are not closely related are classified as held for trading and are recorded at fair value. However, NPOs are given the option of not recognizing certain types of embedded derivatives. Currently under PSAB, derivatives and embedded derivatives are not typically recognized in the financial statements. However, a derivative giving rise to a contingent liability may be recognized and accounted for. Proposed changes to the standards for financial instruments, if approved, would result in derivatives being recorded at fair value. Refer to the Summary Comparison of Canadian Public Sector Accounting Standards with the CICA Handbook Part V 13

19 3. STATEMENT OF FINANCIAL POSITION Financial Statement Item PSAB accounting standards (excluding PS 4200 series) Differences with CICA Handbook summary of this project in section Liabilities Definition PS 1000 PS 1200 Liabilities are present obligations a reporting entity has to others arising from past transactions or events, the settlement of which is expected to result in the future sacrifice of economic benefits. The statement of financial position should report liabilities segregated by main classifications, such as: a) accounts payable and accrued liabilities; b) liabilities for employee future benefits; c) deferred revenue; d) borrowings; and e) loans from other reporting entities Accounts payable and accrued liabilities PS1000 PS 1200 PS 3200 HB 3855 Liabilities have three essential characteristics: a) they embody a duty or responsibility to others, leaving little or no discretion to avoid settlement of the obligation; b) the duty or responsibility to others entails settlement by future transfer or use of assets, provision of goods or services, or other form of economic settlement at a specified or determinable date, on occurrence of a specified event, or on demand; and c) the transactions or events giving rise to the obligation have already occurred. Obligations are not liabilities unless they meet the three characteristics of liabilities. Under the CICA Handbook, the essential characteristics are similar to PSAB. The measurement of shorter term liabilities should be, in most cases, the same under either framework. However, potential differences could occur in that the CICA Handbook provides the option for fair value measurement and also requires use of the effective interest rate method. Although not currently required, the use of the effective interest rate method is a requirement in the proposed PSAB financial instrument standard. Refer to the summary of this project in section 6.2. PSAB provides additional guidance on discretion (being unable to avoid settlement of the obligation) for constructive and equitable obligations. Summary Comparison of Canadian Public Sector Accounting Standards with the CICA Handbook Part V 14

20 3. STATEMENT OF FINANCIAL POSITION Financial Statement Item PSAB accounting standards (excluding PS 4200 series) Differences with CICA Handbook Deferred revenue, and restricted assets and revenue PS 1000 PS 1200 PS 3100 PSG-4 HB 1000 HB 3800 HB 4400 Exchange transactions Revenues should be recognized in the period in which the transactions or events that gave rise to the revenues occurred. For exchange transactions, detailed guidance is not provided in the PSAB Handbook beyond the general recognition principles present in sections PS 1000 and PS Non-exchange transactions For non-exchange transactions, PSAB provides specific guidance for revenues from government transfers and taxes. In the case of government transfers, revenue should be recorded when the transfer has been authorized and any eligibility criteria have been met. Taxation revenue should be recorded when the taxable event occurs, provided that the tax has been authorized. Externally restricted inflows should be recognized as revenue in the period in which the resources are used for the purposes specified. An externally restricted inflow received before this criterion has been met should be reported as a liability (i.e., deferred revenue) until the resources are used for the purposes specified. New and Proposed Standards PSAB will be issuing, in March 2011, changes to the standard relating to government transfers, allowing deferral to occur only where the criteria for recognition of a liability are met. The standard will be effective for fiscal periods beginning on or after April 1, Refer to the summary of this project in section 6.1. Exchange transactions Under the CICA Handbook, the recognition principles for revenues from exchange transactions are consistent with the principles in PSAB. However, the CICA Handbook provides much more detailed guidance on how to apply those principles. Non-exchange transactions For fiscal years beginning on or after April 1, 2012, PSAB will allow for the deferral of contributions only where the criteria for liability recognition are met (see section 6.1). Prior to this date, PSAB provides for the deferral of contributions with external restrictions until they are used for the purpose specified. This is similar to the deferral method of accounting used by NPOs except that, with the withdrawal of section PS 3800 in June 2010, PSAB does not specifically provide for the deferral of capital contributions beyond the point when the asset is purchased (unless there are conditions attached to the transfer, such that a liability is present). NPO standards specifically provide for the amortization of capital contributions over the life of the related asset when the deferral method of accounting is used. For profit-oriented organizations, the CICA Handbook currently provides for deferral accounting (including the matching of capital contributions over the life of the asset), but only for government assistance. Summary Comparison of Canadian Public Sector Accounting Standards with the CICA Handbook Part V 15

21 3. STATEMENT OF FINANCIAL POSITION Financial Statement Item PSAB accounting standards (excluding PS 4200 series) Differences with CICA Handbook Employee future benefits PS 3250 PS 3255 HB 3461 PSAB has also begun a project related to revenue from exchange transactions. Refer to the summary of this project in section 6.8. Retirement benefits, post-employment benefits, and compensated absences are accounted for as liabilities. Defined benefit plans sponsored by the reporting entity are subject to periodic actuarial valuations to attribute the cost of the benefits to the periods of employee service and to determine the liability and assets (if any) to be reported. When a defined benefit multi-employer plan is not sponsored by the reporting entity, the entity needs to account for only contributions it has made. Similar rules apply to defined contribution plans. Changes arising from plan amendments are accounted for when the amendments go into effect. Under the CICA Handbook, the essential characteristics are similar to PSAB, but there are some important differences. Under PSAB, a liability is recorded for sick-pay benefits that accumulate but do not vest (PS ). Under the CICA Handbook, an entity is not required to accrue a liability for non-vested sick-pay benefits. Under the CICA Handbook, actuarial gains or losses should be recognized using a systematic method. They may be recognized immediately, but at a minimum an entity should recognize amortization over the remaining average service period of the related employees for the portion of the gain or loss exceeding the greater of 10% of the accrued benefit obligation or the fair value of the plan assets. The recognition policy adopted should be applied consistently. Under PSAB, by contrast, actuarial gains or losses are amortized into income in a systematic and rational manner over the remaining average service period of related employees; and there is no threshold to meet before amortization begins. Under PSAB, the discount rate used in actuarial valuations should be based on the plan s asset earnings or on the average borrowing rate of the Summary Comparison of Canadian Public Sector Accounting Standards with the CICA Handbook Part V 16

22 3. STATEMENT OF FINANCIAL POSITION Financial Statement Item PSAB accounting standards (excluding PS 4200 series) Differences with CICA Handbook Asset retirement obligations PS 1000 HB 3110 EIC-159 PSAB has no specific standard addressing asset retirement obligations, but these obligations do meet the definition of a liability within the PSAB framework. In keeping with the hierarchy of GAAP (PS 1150), PSAB users have generally looked to HB 3100 and EIC-159 for guidance. However, with the adoption of IFRS in Canada, users of PSAB will have to look to other sources for guidance. This may be IFRS or the new Canadian private sector standards. reporting entity. Under the CICA Handbook, by contrast, the discount rate is the market rate of high-quality debt. Under the CICA Handbook, specific guidance is provided with respect to asset retirement obligations. It addresses the recognition, measurement and disclosure of liabilities for asset retirement obligations Long-term debt, borrowings and loans from other entities PS 3230 PSG 2 HB 3210 The recent PSAB standard PS 3260, Liability for Contaminated Sites, specifically excludes liabilities associated with the retirement of long-lived tangible capital assets that are in productive use. The statement of financial position shows the gross amount of debt outstanding. The notes to the financial statements provide additional information about interest rates, repayment dates (and the nature of repayment), and amounts due on demand. The aggregate amount of payments to be made in each of the next five years, and the total amount in subsequent periods, should also be disclosed. The estimated amount of Canadian dollar payments to meet foreign currency debt retirement provisions should be disclosed separately. Disclosure requirements for debt and capital leases are similar between PSAB and the CICA Handbook. Under PSAB, there is no distinction between current and long-term liabilities. Therefore, the current portion of long-term debt is not separately presented as it is under the CICA Handbook. Under the CICA Handbook, debt reacquired but not cancelled is shown separately as a deduction from the related liability. Under PSAB, debt reacquired is only disclosed. Summary Comparison of Canadian Public Sector Accounting Standards with the CICA Handbook Part V 17

23 3. STATEMENT OF FINANCIAL POSITION Financial Statement Item PSAB accounting standards (excluding PS 4200 series) Differences with CICA Handbook Where sinking funds that have been externally restricted are set aside for the retirement of debt, the statements should disclose: a) the gross amount of the long-term debt to be retired by the sinking funds; and b) the amount of sinking fund assets available to retire the debt. The interest expense should be disclosed, and should include the amortization of long-term debt discounts or premiums and issuance expenses. Liabilities related to leased tangible capital assets should be reported separately from other debt. If any liabilities are secured, they should be stated separately and the fact that they are secured should be indicated. Any assets pledged as security, including their carrying value, should also be disclosed. Any defaults in principal, interest sinking fund or redemption provisions should be disclosed. If the reporting entity holds its own debt instruments, the gross amount of that class of debt should be disclosed, as well as the amount of the securities held by the entity but not yet cancelled. Proposed Standards PSAB is proposing changes to the standards for the recognition and measurement of financial instruments. Under the CICA Handbook, there is an option of recording debt at fair value. However, proposed changes to the standards for financial instruments, if approved, may also provide the option to record debt at fair value under PSAB. Refer to the summary of this project in section 6.2. Under the CICA Handbook, fair value should be disclosed for financial instruments recorded at cost, subject to certain exemptions. Under PSAB, the disclosure of fair value information is not required except for portfolio investments (where it can be reliably determined). Under the CICA Handbook, the use of the effective interest method is required for accounting for interest expense and also for amortizing debt issue costs, premiums and discounts. However, proposed changes to the standards for financial instruments, if approved, would result in the effective interest rate method being a requirement under PSAB as well. Refer to the summary of this project in section 6.2. Summary Comparison of Canadian Public Sector Accounting Standards with the CICA Handbook Part V 18

24 3. STATEMENT OF FINANCIAL POSITION Financial Statement Item PSAB accounting standards (excluding PS 4200 series) Differences with CICA Handbook Contingent liabilities PS 3300 HB Loan guarantees PS 3310 HB 3290 HB 3855 AcG Contractual obligations PS 3200 PS 3390 HB Non-financial assets Definition PS 1000 PS 1200 Refer to the summary of this project in section 6.2. A contingent liability is recognized when it is likely a future event will confirm that a liability has been incurred and the amount can be reasonably estimated. It is derecognized when it is settled or otherwise extinguished, or when the existence of a liability at the financial statement date is unlikely. Loan guarantees should be reported as contingent liabilities in the financial statements. A provision for loss on loan guarantees should be established when a loss is likely, and should be accounted for as a liability and an expense. Any changes to the provision for losses is charged or credited to the statement of operations. Contractual obligations are defined as obligations a reporting entity has to others that will become liabilities in the future when the terms of the contracts or agreements in question are met. Significant contractual obligations should be disclosed. Under the CICA Handbook, the essential characteristics are similar to PSAB. Under the CICA Handbook, some guarantees are treated as financial instruments and are fair valued on inception and on a go-forward basis while other financial guarantees are accounted for as contingent liabilities. Under the CICA Handbook, the essential characteristics are similar to PSAB. Non-financial assets are acquired, constructed or developed assets that do not normally provide resources to discharge existing liabilities, but instead: a) are normally employed to deliver government services; b) may be consumed in the normal course of operations; and c) are not for sale in the normal course of operations. The statement of financial position should report non-financial assets segregated by main classifications, such as: a) tangible capital assets; b) inventories held for consumption or use; and Summary Comparison of Canadian Public Sector Accounting Standards with the CICA Handbook Part V 19

25 3. STATEMENT OF FINANCIAL POSITION Financial Statement Item PSAB accounting standards (excluding PS 4200 series) Differences with CICA Handbook c) prepaid expenses Tangible capital assets and amortization PS 3150 HB 3061 HB 4400 Under PSAB and the not-for-profit standards (HB 4400 series), assets may be valued in terms of service potential. Tangible capital assets are recorded at cost. When conditions indicate that a tangible capital asset no longer contributes to a government s ability to provide goods and services, or that the value of future economic benefits associated with the tangible capital asset is less than its net book value, the cost of the tangible capital asset should be reduced to reflect the decline in the asset s value. Such write-downs are not reversed. Under the CICA Handbook, the essential characteristics are similar to PSAB except for the measurement of impairment. Under PSAB and for NPOs (CICA Handbook 4400 series), write-downs are based on a different definition of future economic benefits, which reflects service potential Leased tangible capital assets Leased tangible capital assets are dependent on whether the contract transfers the benefits and risks of ownership Under the CICA Handbook, other than for NPOs, capital assets are written down when the undiscounted future cash flows are less than the book value. Similar to PSAB, write-downs are not reversed. Under the CICA Handbook, amortization is taken on the greater of: a) the cost of the asset less salvage value over the life of the asset; and b) the cost of the asset less residual value over the useful life of the asset. Under PSAB, amortization is calculated by taking the cost of the asset, less any residual value, over its useful life. Under the CICA Handbook, the essential characteristics are similar to PSAB. Summary Comparison of Canadian Public Sector Accounting Standards with the CICA Handbook Part V 20

26 3. STATEMENT OF FINANCIAL POSITION Financial Statement Item PSAB accounting standards (excluding PS 4200 series) Differences with CICA Handbook PG-2 PG-5 HB 3065 to the reporting entity. When a contract contains multiple elements, the discount rate applicable to the financing component is estimated based on what would apply to comparable leases Prepaid expense PSAB requirements are comparable to those in the CICA Handbook Inventories held for consumption or use PS 1200 HB 3031 Inventories held for consumption or use are defined as tangible non-financial assets that will be used or consumed by the reporting entity in the course of its operations. The PSAB Handbook currently does not have detailed guidance on inventory costing methods when conversion processes occur within the organization. In keeping with the PSAB hierarchy of GAAP (PS 1150), organizations would likely refer to other sources of GAAP for this detailed guidance, such as Canadian Private Sector GAAP or IFRS. Under PSAB, certain additional factors are to be analyzed in determining whether the benefits and risks of ownership have been transferred to the lessee. There are also differences with the accounting for sale lease-back transactions. Under the CICA Handbook, the essential characteristics are similar to PSAB. Under the CICA Handbook, inventories are assets held for sale in the ordinary course of business, in the process of production for such sales, or in the form of materials or supplies to be consumed in the production process of rendering of services. Under PSAB, there are two categories of inventories: inventories for resale (financial asset) (see section 3.1.5) and inventories for consumption or use (nonfinancial asset). Their presentation in the statement of financial position differs by category. This distinction is not made in the CICA Handbook. Under PSAB and the not-for-profit standards (HB 4400 series), inventory may be valued in terms of service potential. For organizations that follow the CICA Handbook other than NPOs inventory is valued at the lower of cost and net realizable value. Summary Comparison of Canadian Public Sector Accounting Standards with the CICA Handbook Part V 21

27 4. STATEMENT OF OPERATIONS Financial Statement Item PSAB accounting standards (excluding PS 4200 series) Differences with CICA Handbook 4.1 Revenues PS 1200 HB 1520 HB Expenses PS 1200 HB 1520 Revenues should be recognized in the period in which the transactions or events occurred that gave rise to the revenues. Refer to section for revenue recognition criteria for exchange and non-exchange transactions. A reporting entity reports revenues by significant types such as revenues from taxes, non-tax sources and transfers from other governments. Significant sources of these revenues include user fees, investments, natural resource revenues, transfers from other governments, taxation, and other revenue. Refer to the sample model financial statements accompanying this document for an example of presentation and disclosure of revenues. New and Proposed Standards PSAB is introducing changes to the standards for the recognition of revenues associated with government transfers. See the summary of this project in section 6.1. PSAB is proposing a standard on revenue from exchange transactions. Refer to the summary of this project in section 6.8. A reporting entity reports expenses by function or major program and discloses them by object and in total in the notes. Therefore, the individual account name of the expense will be different depending on the entity. Refer to the sample model financial statements accompanying this document for an example of presentation and disclosure of expenses. Under the CICA Handbook, financial statements must present revenue from sales, income from investments, finance income, income from operating leases and income for government assistance. Refer to section for key differences relating to revenue recognition criteria for exchange and nonexchange transactions. Under the CICA Handbook, expenses are not required to be reported by function or major program. Instead, disclosure of some specific types of expense is required. Summary Comparison of Canadian Public Sector Accounting Standards with the CICA Handbook Part V 22

28 5. OTHER SPECIFIC TOPICS Topic PSAB accounting standards (excluding PS 4200 series) Differences with CICA Handbook 5.1 Consolidation principles PS 1300 PS 2500 PS 2510 PS 3060 PS 3070 HB 1582 HB 1601 HB 1602 HB 3055 NPO 4450 Organizations that are controlled by the reporting entity should be consolidated. Partnerships and joint ventures are accounted for using the proportionate consolidation method. When a non-controlling interest exists in a subsidiary, the reporting entity should include that subsidiary in its financial statements on a proportionate consolidated basis. The financial statements should disclose the existence of the non-controlling interest. Government business enterprises (GBEs) and government business partnerships should be accounted for using the modified equity method. A GBE is an organization that has all of the following characteristics: a) it is a separate legal entity with the power to contract in its own name and the ability to sue and be sued; b) it has been delegated the financial and operational authority to carry on a business; c) it sells goods and services to individuals and organizations outside of the government reporting entity as its principal activity; and d) it can, in the normal course of its operations, maintain its operations and meet its liabilities from revenues received from sources outside of the government reporting entity. A government business partnership is a government partnership that has all of the characteristics of a GBE. CICA Handbook For-profits organizations Under the CICA Handbook, all organizations that are controlled by the reporting entity should be fully consolidated. The modified equity method of accounting is not permitted for controlled subsidiaries. Under the CICA Handbook, controlled subsidiaries are fully consolidated and non-controlling interests are presented in the consolidated statement of financial position within equity, separately from the equity of the owners of the parent. Under PSAB, proportionate consolidation effectively excludes the portion of the entity a reporting entity does not control. Under PSAB, an organization is either controlled or not controlled. If it is not controlled, it is recorded as a portfolio investment (see section 3.1.7). Under the CICA Handbook, the concept of significant influence exists and provides for an equity pick-up in proportion to ownership interest. Under the CICA Handbook, partnerships and joint ventures are accounted for similarly to PSAB, using the proportionate consolidation method of accounting. CICA Handbook Not-for-profit organizations The CICA Handbook includes provisions for accounting for related organizations that are specific only to NPOs. Summary Comparison of Canadian Public Sector Accounting Standards with the CICA Handbook Part V 23

29 5. OTHER SPECIFIC TOPICS Topic PSAB accounting standards (excluding PS 4200 series) Differences with CICA Handbook Transactions and balances between government units are eliminated on consolidation. Government units, as defined, exclude GBEs. However, unrealized gains and losses arising on transactions between government units and GBEs are required to be eliminated. If an entity becomes a GBE, accounting for the change cannot create revenue or result in reporting tangible capital assets that would improve the net financial position of the reporting entity that consolidates it. When an NPO controls another NPO, it has the option of either consolidating the subsidiary NPO or providing detailed disclosures. If an NPO controls a large number of individually immaterial NPOs, it may be permitted to exclude these subsidiaries from both consolidation and detailed disclosure. When an NPO controls a profit-oriented subsidiary, it has the option of either consolidating the subsidiary or accounting for the investment using the equity method. Under PSAB, such profit-oriented subsidiaries may also meet the definition of a GBE and would be accounted for using the modified equity method. However, if a profit-oriented subsidiary does not meet the definition of a GBE under PSAB, it would be fully consolidated under the PSAB framework. When an NPO has significant influence or an economic interest in another organization, only disclosure is required. Under PSAB, an organization is either controlled or not controlled. PSAB does not provide for the concept of significant influence or economic interest. When an NPO has an interest in a joint venture, it has the option to record its interest using either the proportionate consolidation method or the equity method. Summary Comparison of Canadian Public Sector Accounting Standards with the CICA Handbook Part V 24

30 5. OTHER SPECIFIC TOPICS Topic PSAB accounting standards (excluding PS 4200 series) Differences with CICA Handbook 5.2 Goodwill and intangible assets PS 1200 HB 3064 No intangibles including those that have been purchased, developed, constructed or inherited in right of Crown are recognized as assets in government financial statements. This should be disclosed as part of the accounting policies. Under PSAB, computer software is included in the definition of tangible capital assets. Under the CICA Handbook, intangibles including goodwill are recognized as assets. Under PSAB intangibles are not recorded as assets. Under the CICA Handbook, goodwill is the excess of the cost of an acquired enterprise over the net amounts assigned to assets acquired and liabilities assumed, less any write-down for impairment. 5.3 Accounting changes PS 2120 HB 1506 Under PSAB, accounting changes are treated as follows: a) Change in accounting policy A change in accounting policy should be applied retroactively, unless the necessary financial data are not reasonably determinable. Description of the change, its effect on the financial statements and the reason for the change should be disclosed. First-time adoption of PSAB from another source of GAAP usually must be applied retroactively with restatement. Refer to the accounting treatment of first-time adoption on page 2 of this document for further details. b) Correction of an error Correction of an error is reported retroactively. Comparative figures are Under the CICA Handbook, an intangible asset is an identifiable non-monetary asset without physical substance. It is measured initially at cost and subsequently amortized over its useful life. Under the CICA Handbook, the essential characteristics are similar to PSAB. However, under PSAB, if an auditor raises an issue and it is not corrected until a subsequent period, this is not treated as a correction of an error (i.e., prior period correction). Instead, it is accounted for in the period in which the correction is made. As well, under the CICA Handbook, new GAAP that has been issued but is not yet effective (and therefore not yet adopted) must be disclosed, as must the impact that its eventual adoption will have. There is no similar requirement in PSAB. Summary Comparison of Canadian Public Sector Accounting Standards with the CICA Handbook Part V 25

31 5. OTHER SPECIFIC TOPICS Topic PSAB accounting standards (excluding PS 4200 series) Differences with CICA Handbook restated unless it is impractical to do so. Description of the error, its effect on the financial statements and restatement of prior periods should be disclosed. 5.4 Foreign exchange PS 2600 HB 1651 c) Change in accounting estimate A change in estimate is recognized in the period of the change and applicable future periods. Disclosure is usually not necessary unless it is a change in an accounting estimate that is rare or unusual, and that may affect financial results of both current and future periods. Foreign currency transactions are addressed in PSAB, but detailed guidance on the consolidation of subsidiaries denominated in foreign currencies is not provided. At the transaction date, each asset, liability, revenue or expense is translated into Canadian dollars at the rate in effect on that date. At the financial statement date, monetary assets and liabilities denominated in foreign currencies should be adjusted to reflect the rate in effect at that date. Exchange gains or losses arising from changes in the rate between the transaction date and the financial statement date are recognized in the statement of operations as follows: a) the exchange gain or loss related to a short-term monetary item should be recognized in the statement of operations; b) the exchange gain or loss related to a long-term monetary item should be deferred and amortized over The CICA Handbook provides detailed guidance on the translation and consolidation of subsidiary financial statements denominated in foreign currencies. The CICA Handbook has similar requirements with PSAB to use the date in effect when the initial transaction arises, and to adjust assets and liabilities for the rate in effect at the financial statement date. However, the CICA Handbook does not permit the deferral and amortization of unrealized exchange gains or losses on long-term monetary items. Under the CICA Handbook, the amount of the exchange gain or loss included in the statement of operations should be separately disclosed. (Exchange gains or losses on financial instruments that are held for trading or available for sale do not have to be separately disclosed from the overall fair value change recorded.) Summary Comparison of Canadian Public Sector Accounting Standards with the CICA Handbook Part V 26

32 5. OTHER SPECIFIC TOPICS Topic PSAB accounting standards (excluding PS 4200 series) Differences with CICA Handbook the life of the item; c) the exchange gain or loss arising when an item is settled should be recognized in full in the current period; and d) any remaining unamortized exchange gain or loss when a long-term monetary item is settled should be recognized in the statement of operations at the date of settlement. The unamortized exchange gain or loss should be separately reported on the statement of financial position as an addition to, or deduction from, the related monetary item. The amount of exchange gains or losses recognized in the statement of operations should be disclosed. 5.5 Risk management and hedging PS 2600 HB 3861 HB 3862 HB 3863 HB 3865 Proposed Standards PSAB has issued an exposure draft on foreign currency translation that will change how exchange gains and losses are reported. Refer to the summary of this project in section 6.3 With respect to risk management, the reporting entity should disclose: a) its policy for managing foreign currency risk, including a description of hedging, how the entity evaluates the effectiveness of hedging, and information about the entity s magnitude of hedging; b) the amount of unhedged foreign currency items; and c) a sensitivity analysis showing the impact of exchange rate changes on unhedged items. Under the CICA Handbook, hedge accounting is permitted and the eligibility criteria and accounting are similar. A difference is that under the CICA Handbook, hedge accounting can also be applied to fair value changes. Under PSAB, hedge accounting is available or required only for foreign exchange (as financial instruments are currently recorded at cost under PSAB). Summary Comparison of Canadian Public Sector Accounting Standards with the CICA Handbook Part V 27

33 5. OTHER SPECIFIC TOPICS Topic PSAB accounting standards (excluding PS 4200 series) Differences with CICA Handbook 5.6 Segment disclosures PS 2700 HB 1701 Hedge accounting is currently available under PSAB. The entity must formally document any hedging relationships when it makes such a designation. As well, PSAB allows synthetic instrument accounting, whereby groups of assets or liabilities can be accounted for as though they were one item. Proposed Standards Proposed changes to the standards for financial instruments and foreign currency translation, if approved, would not permit hedge accounting or synthetic instrument accounting. These proposed standards would also require additional disclosures regarding risks. Refer to the summaries of these projects in sections 6.2 and 6.3. A segment is a distinguishable activity or group of activities of a reporting entity for which it is appropriate to separately report financial information so as to help users of the financial statements. Segment reporting is required for governments, but only encouraged for government organizations when their operations are diverse enough to warrant it. Different bases of segmentation include: by major functional classification of activities; by service line segments; and by segments that reflect the different accountability and control relationship between the government and various organizations in the reporting entity. The standard outlines the disclosures required with respect to the reporting entity s segments. Under the CICA Handbook, synthetic instrument accounting is not permitted. Under the CICA Handbook, the disclosure requirements associated with financial instruments (including risk disclosures) are more comprehensive, particularly for those organizations that have to apply HB 3862 and HB Under the CICA Handbook, segment reporting is required only for companies that are publicly accountable. The CICA Handbook also identifies reportable segments differently than PSAB does. The CICA Handbook requires that a reportable operating segment meet quantitative thresholds based on revenues, profit or loss, or assets. The standard outlines where disclosure requirements for reportable operating segments differ from the PSAB disclosure requirements. In addition, an operating segment is defined as a component of an enterprise that engages in business activities; from which it may earn revenue and incur Summary Comparison of Canadian Public Sector Accounting Standards with the CICA Handbook Part V 28

34 5. OTHER SPECIFIC TOPICS Topic PSAB accounting standards (excluding PS 4200 series) Differences with CICA Handbook 5.7 Related parties HB Subsequent events PS 2400 HB 3820 No specific standard for related parties is given in the PSAB Handbook. Proposed Standards PSAB is proposing to issue a new accounting standard for the measurement and disclosure of related party transactions. Refer to the summary of this project in section 6.4. There are two types of subsequent events: a) conditions that existed at the financial statement date; and b) conditions subsequent to the financial statement date. expenses; whose operating results are regularly reviewed by the enterprise s chief operating decisionmaker; and for which discrete financial information is available. The CICA Handbook provides specific guidance that defines related parties and sets out disclosure requirements. A related party transaction is generally measured at the carrying amount, although a transaction with commercial substance is measured at the exchange amount. Under the CICA Handbook, the essential characteristics are similar to PSAB. 5.9 Economic dependence HB Capital disclosures HB 1535 The extent to which, and the manner in which, the effect of a subsequent event is reflected in the financial statements will depend on its type. No specific standard for economic dependence is given in the PSAB Handbook. No specific standard for capital disclosures is given in the PSAB Handbook. Under the CICA Handbook, when the ongoing operations of a reporting enterprise depend on a significant volume of business with another party, the economic dependence on that party shall be disclosed and explained. Under the CICA Handbook, disclosure of information regarding an entity s objectives, policies and processes for managing capital is required. Summary Comparison of Canadian Public Sector Accounting Standards with the CICA Handbook Part V 29

35 5. OTHER SPECIFIC TOPICS Topic PSAB accounting standards (excluding PS 4200 series) Differences with CICA Handbook 5.11 Public private partnerships (P3s) PS 3060 PS 1300 HB 1590 HB 3055 IPSAS Exposure Draft 43, February 2010 No specific standards for P3 accounting are given in the PSAB handbook. Each P3 arrangement needs to be looked at separately to determine what accounting treatment is appropriate for it. Key factors for example, control over the asset, risks and rewards associated with the asset, and the ultimate ownership of the asset at the end of the P3 arrangement vary from one P3 to another. Similar to PSAB, no specific standards are given in the CICA Handbook dealing with P3 accounting. A reporting entity would refer to the principles of accounting in HB 1000 and standards relating to partnerships, tangible capital assets and assets under capital lease when: determining asset cost, operations and maintenance expense, assessing financing costs, recognition of liabilities, asset amortization and revenues. Relevant PSAB sections would include those relating to the conceptual definition of an asset in section PS 1000, and the standards for government partnerships, tangible capital assets, and assets under capital lease. The accounting treatment for P3s should be determined on a case-by-case basis that reflects on the unique terms and conditions of the contract. Other sources of GAAP may be used to determine the accounting treatment for P3s. For example, IPSAS Exposure Draft 43 highlights the recognition and measurement of service concession assets, liabilities, revenues and expenses Measurement uncertainty PS 2130 PS HB 1508 Because of the complexity of this subject, it is necessary for the reporting entity to look at the terms and conditions of the contract agreement to determine how assets, liability, expenses and revenues should be recognized. Measurement uncertainty exists when there is a variance between an estimated amount that has been recognized or disclosed in the financial statements, and another reasonably possible estimate for the same item. Under the CICA Handbook, requirements are similar with PSAB, though more disclosure is required under the latter. Summary Comparison of Canadian Public Sector Accounting Standards with the CICA Handbook Part V 30

36 5. OTHER SPECIFIC TOPICS Topic PSAB accounting standards (excluding PS 4200 series) Differences with CICA Handbook When it is reasonably possible that there might be a material change in the course of the next fiscal year in an estimated amount that has been recognized or disclosed in the financial statements, information about the nature and extent of the uncertainty must be disclosed in the notes to the financial statements. The disclosure should identify the item that is uncertain and the amount at which it is recorded or disclosed, unless such disclosure would have a significant adverse effect in which case the notes should specify the reason the amount is not disclosed. When there is a change in an amount estimated, the effect of the change must be accounted for in the period in which the change occurs. If such a change is rare or unusual, disclosure of the nature and effect of the change may be desirable. Summary Comparison of Canadian Public Sector Accounting Standards with the CICA Handbook Part V 31

37 6.0 PSAB PROJECTS IMPACTING FUTURE ACCOUNTING STANDARDS The projects listed below will impact future accounting standards. For information on current projects, visit the PSAB website: Before adopting a new standard or making any choices available after adopting a new standard, consult the Office of the Comptroller General. CURRENT PROJECTS 6.1 Government transfers Handbook section approved December 2010; to be issued March The objective of this project is to address and clarify government transfer recognition criteria for recipients and transferring governments. The key concepts in the exposure draft: Accounting transferring entity A transferring entity recognizes the expense when the transfer has been authorized and the eligibility criteria, if any, have been met. Authorization means that the appropriate authority has been exercised and the enabling legislation is in force, or that the transferor is demonstrably committed to the transfer before the financial statement date and the enabling legislation comes into force in the stub period. Accounting recipient entity The recipient entity recognizes revenue when the transferor has authorized the transfer and the recipient has met the eligibility criteria, except when, and to the extent that, the transfer gives rise to an obligation that meets the definition of a liability for the recipient government in accordance with section PS 3200, Liabilities. The determination of whether a liability exists would be influenced by stipulations made by the transferor, or a combination of those stipulations and the actions and communications of the recipient. Authorization means that the appropriate authority has been exercised by the transferor and the enabling legislation is in force. Transition The standard will apply to fiscal years beginning on or after April 1, Earlier adoption is encouraged. Summary Comparison of Canadian Public Sector Accounting Standards with the CICA Handbook Part V 32

38 6.2 Financial instruments Handbook section expected to be approved March The objective of this project is to develop a public sector accounting standard that addresses the recognition, measurement, presentation and disclosure of financial instruments, including embedded derivatives. Currently under PSAB, derivatives are not recognized and investments are recorded at cost. PSAB reviewed the responses of the September 2009 Exposure Draft and issued a supplementary exposure draft in November 2010 proposing amendments to section PS 1200, Financial Statement Presentation. This exposure draft contains a presentation model that reports remeasurement gains and losses in a new statement separate from the statement of operations. The key concepts in the exposure drafts: Accounting financial instruments are measured at fair value or cost or amortized cost; derivatives and portfolio investments in equity instruments that are quoted in active markets should be measured at fair value; hedge accounting and synthetic instrument accounting will not be permitted; when an entity manages and reports on the performance of a group of financial assets or liabilities on a fair value basis, it may also account for those assets or liabilities on a fair value basis; and interest should be recorded using the effective interest rate method. Presentation and disclosure A new statement of remeasurement gains and losses is introduced and will report: unrealized gains and losses associated with financial instruments in the fair value category; unrealized foreign currency exchange gains and losses (see section 6.3); amounts reclassified to the statement of operations upon derecognition or settlement; and other comprehensive income when a reporting entity includes the result of government business enterprises and government business partnerships in the reporting entity s financial statements. Realized gains and losses will be separately reported in the statement of operations. When a gain or loss is realized, previously recognized remeasurement gains or losses are deducted from the remeasurement gain or loss for the year. Summary Comparison of Canadian Public Sector Accounting Standards with the CICA Handbook Part V 33

39 Additional disclosures would be required to enable users to evaluate the nature and extent of risks arising from financial instruments (including disclosure of credit risk, liquidity risk and market risks). Transition PSAB expects the final section on financial instruments to be approved by March It is expected that the section will apply to fiscal years beginning on or after April 1, Early adoption is encouraged. Any adjustment to the carrying amount is recognized as an adjustment to accumulated surplus/deficit at the beginning of the fiscal year in which this section is initially applied. 6.3 Foreign currency translation Handbook section expected to be approved March The objective of this project is to amend section PS 2600 taking into consideration the final recommendations of the Financial Instruments project (section 6.2) and the conceptual framework to ensure consistent accounting standards. PSAB reviewed the responses of the September 2009 Exposure Draft and issued a supplementary exposure draft in November 2010 proposing amendments to section PS 1200, Financial Statement Presentation. This exposure draft contains a presentation model that reports remeasurement gains and losses in a new statement separate from the statement of operations. The key concepts in the exposure drafts: Accounting the reporting entity s functional currency is presumed to be the Canadian dollar; transactions made in a currency other than Canadian dollars are translated applying the exchange rate in effect on the date of the transaction; and all monetary items and those non-monetary items included in the fair value category are translated at the exchange rate at the balance sheet date; hedge accounting and synthetic instrument accounting will not be permitted; and exchange gains and losses on long-term monetary items will be recorded in the current period (deferral and amortization over the life of the monetary item will no longer be permitted). Presentation and disclosure Unrealized foreign currency exchange gains and losses will be reported in the statement of remeasurement gains and losses (see section 6.2). Realized gains and losses will be separately reported in the statement of operations. When a gain or loss is realized, previously Summary Comparison of Canadian Public Sector Accounting Standards with the CICA Handbook Part V 34

40 recognized remeasurement gains or losses are deducted from the remeasurement gain or loss for the year. Transition PSAB expects the final PSAB Handbook to be approved by March It is expected that the section will apply to fiscal years beginning on or after April 1, Early adoption is encouraged. Any adjustment to the carrying amount is recognized as an adjustment to accumulated surplus/deficit at the beginning of the fiscal year in which this section is initially applied. 6.4 Related party transactions A statement of principles is expected in March 2011, with an exposure draft in September 2011 and the final handbook section in March The objective of this project is to issue a new accounting standard that defines a related party in the context of government and government organizations, describes the disclosures required, and addresses recognition and disclosure of appropriations. 6.5 Appropriations A statement of principles is expected to be approved in March 2011, with an exposure draft in September 2011 and the final handbook section in March The purpose of this project is to develop an accounting standard that addresses recognition and disclosure of appropriations received or receivable by an entity from its controlling government. 6.6 Amalgamations and restructuring A statement of principles is expected in June 2011, with an exposure draft in March 2012 and the final handbook section in December Accounting for amalgamation and restructuring activities is not specifically addressed in the PSAB Handbook in situations where an acquirer cannot be identified. In practice in these situations, the continuity-of-interest method has been used in the public sector. The objective of this project is to issue an accounting standard that addresses the recognition, measurement and disclosure requirements that are unique to amalgamation and restructuring. Summary Comparison of Canadian Public Sector Accounting Standards with the CICA Handbook Part V 35

41 6.7 Assets A statement of principles is expected June 2011, with an exposure draft in March 2012 and the final handbook section in December The objective of this project is to issue one or more accounting standards for assets, contingent assets and contractual rights that address: the definition of assets, contingent assets and contractual rights; and recognition, measurement and disclosure of assets, contingent assets and contractual rights. 6.8 Revenue from exchange transactions A statement of principles may be issued in September, depending on the results of the International Accounting Standards Board (IASB) revenue recognition project. The objective of this project is to address the recognition and disclosure of revenue from exchange transactions. The IASB currently has a project on revenue recognition. The purpose of this project is to monitor the development and assess the applicability of the IASB project to the public sector. PSAB will continue to monitor the development of the IASB s revenue recognition project to consider whether this project should lead to development of a standard in the PSAB Handbook. 6.9 Financial statements for government organizations Project on hold The objective of this project is to amend PSAB standards with terminology that includes public sector reporting entities, and to issue a guideline to clarify appropriate financial statement presentation for government reporting entities. Separate projects on related party transactions (6.4) and appropriations (6.5) have been started, arising from initial feedback on this project. The project is currently on hold pending availability of staff resources. Summary Comparison of Canadian Public Sector Accounting Standards with the CICA Handbook Part V 36