May 2011 Highlights of PSAB Mission The ( PSAB ) serves the public interest by: Establishing standards and other guidance for financial reporting by Canadian entities in the public sector Contributing to the development of internationally accepted public sector financial reporting standards The mission of the PSAB is to support informed economic decision-making and accountability by maintaining a framework that provides a basis for high- quality information about organizational performance reported by public sector entities. Upcoming PSAB Meetings June 23-24, 2011 September 29-30, 2011 December 15-16, 2011 March 22-23, 2012 You can access meeting agendas 10 days prior to the meeting and the Decision Summaries 10 days after the meeting. Activities of the Canadian and Staff Message from the Chair As we conclude our 2010-2011 fiscal year, I am delighted to share with you another major achievement of the Public Sector. At the March 2011 meeting, the Board approved a CICA Accounting (PSA) Handbook Section PS 3450, Financial Instruments. The new standard will increase the transparency and accountability of the use of derivatives and their impact, and enhance and bring consistency to reporting of government risk management activities. The Board initiated the Financial Instruments project in 2003 and issued three due process documents over the life of the project. During the development stage, there was significant outreach to the senior government treasury, debt management and finance communities across the country. Eleven meetings were held in 2009. We also exchanged views on this topic with the Deputy Ministers of Finance in our recently completed crosscountry tour. This project has been controversial because of its complexity, the fiscal policy effects of a recognition-based standard and the implications of using fair value. Many questioned the relevancy of applying a fair value measure to derivatives when governments intend to hold them to maturity. In addition, there were divided views on whether the Board should issue a recognition-based or a disclosure only standard. The Board had extensive discussions at the March 2011 meeting, trying to reach a balance among government organizations pressing need for a financial instruments standard, the public interest, the needs of users of financial statements, the quality of an accounting standard and stakeholder responses. Section PS 3450 is unique (see Highlights of ). It is tailored to address the needs and concerns of stakeholders in the Canadian public sector in the following manner: The application of fair value measurement is limited to derivatives and portfolio investments that are equity instruments quoted in an active market because fair value is the most relevant measure of these items. Unrealized gains and losses arising from changes in fair value are reported in a new statement of remeasurement gains and losses. This addresses stakeholders concerns over meaningful budget-to-actual
Highlights of comparisons and volatility in the measure of government performance in the statement of operations. The classification of financial instruments is straightforward and easy to apply. The Board recognized that financial reporting and accounting standards are evolutionary. International standards development activities on this topic and the Board s own Concepts Underlying Financial Performance project may reveal concepts that the Board had not considered previously. The Board believes that the most sensible solution at this time is to allow governments a later transition date of April 1, 2015 and state in the transitional provisions that the Board will review the application of this standard for governments by December 31, 2013. Government organizations adopting the PSA standards can apply this new standard upon their transition into the PSA Handbook (see Transitional Provisions in the New Standards ). This has been the most complex project on the Board s technical agenda. I want to thank all the members of the Financial Instruments Task Force, its Chair, Robert Siddall, and staff, Robert Correll, for their technical expertise and commitment to the successful completion of the project. Looking forward, the Board s 2011-2012 technical agenda will focus on reviewing the concepts underlying financial performance in the conceptual framework, identifying and addressing government organizations need for accounting guidance on topics not specifically addressed in the PSA Handbook, and improving the not-for-profit accounting standards jointly with the Accounting Standards Board. This is my last update as I have completed my two-year term as Chair of PSAB on March 31, 2011. It has been an honour and a privilege for me to serve the public interest in this capacity. I want to thank my fellow Board members, staff and stakeholders for their support. I wish the Board another successful year in 2011-2012. John Wiersema, FCA Chair of the Learn more about PSAB members by clicking here.
Highlights of Conceptual Framework Financial statements are one means of communicating financial information to users, to help them make decisions and assessments concerning government financial operations and management. The conceptual framework identifies and discusses the basic qualities of information that is effective in meeting the needs of users in Section 1000, Financial Statement Concepts. What is considered high-quality and useful financial information? For information provided in financial statements to be useful, it must be relevant to the needs of users, reliable, comparable, understandable and clearly presented. These are called the qualitative characteristics of information. Trade-offs between them are often necessary. The intention is to maintain an appropriate balance among the characteristics to meet the users needs. Their relative importance in different circumstances is a matter of professional judgment. Relevance Information is relevant when it can influence the decisions of users and their assessments of the stewardship of public resources. To be relevant, it must also be provided in a timely manner. Information relevant for decision making helps users to: predict future financial performance and the extent their responsibilities for the efficient and effective use of public resources are discharged; and confirm or correct their previous predictions and present expectations. Information relevant for accountability assessment should reflect the unique nature of a public sector entity s operation. For example: providing the financial targets established with the measure of their actual achievements reflects the budgetary accountability; and demonstrating how public resources have been applied and consumed in providing public services and redistributing wealth. Reliability Reliable information faithfully represents what it purports to represent, is complete, neutral, reasonably conservative, and verifiable when estimates are involved or uncertainty exists. Reliable information faithfully represents the substance of the underlying transactions and events rather than their legal or other forms. Sufficient information about the transactions and events is necessary for users to understand the nature and extent of their impact on a government s
Highlights of financial position and performance. None of the information critical to represent the substance of the transactions and events is missing. Reliability implies completeness of information to the extent that is feasible within the benefit versus cost constraint. Incomplete information is potentially biased. Reliable information is neutral and free from bias. Biased information can lead users to the wrong conclusions. Information that faithfully represents the transactions and events is not intended to induce or inhibit particular predetermined results or to influence user behavior in a particular direction. Reliability does not imply certainty. When uncertainty exists, reasonable estimates are often made with the exercise of professional judgment. Reliable estimates are conservative. However, conservatism does not mean deliberate understatement of assets, revenues and gains or overstatement of liabilities, expenses and losses. Reliable information is verifiable. Knowledgeable and independent observers would come to the conclusion that the information faithfully represents the underlying transactions and events. Comparability Comparability is a characteristic of the relationship between two pieces of information rather than of a particular piece of information by itself. It enables users to identify similarities in and differences between two or more pieces or sets of financial statements. For information to be comparable, like things must look alike and different things must look different. Comparability differs from consistency. Consistency means the same accounting principles or reporting methods should be applied to all similar transactions and events. Consistency helps achieve the goal of comparability. Understandability and Clear Presentation For information to be useful, it must be clearly presented and understandable by those who have general knowledge of economic activities and accounting and a willingness to study the information with reasonable diligence. Supporting or supplementary information that is crucial to users understanding of information in government financial statements should be provided.
Highlights of Highlights of New Standards This section summarizes the main features and, where applicable, the impacts of public sector accounting standards approved by PSAB at its most recent meeting. A summary of the effective dates of new and amended standards can be accessed here. At the March 2011 meeting, PSAB approved Section PS 3450, Financial Instruments, Section PS 2601, Foreign Currency Translation, and Section PS 1201, Financial Statement Presentation. The new standards will be effective for fiscal periods beginning on or after April 1, 2012 for government organizations and April 1, 2015 for governments. Retroactive application is prohibited. Earlier adoption is permitted; however, the new standards must be adopted in the same fiscal year. A related Basis for Conclusions document, which provides the rationale for the new standards, will be posted on PSAB s website shortly. Financial Instruments New Section PS 3450 provides comprehensive guidance on the recognition, measurement, presentation and disclosure of financial instruments including derivatives. Given the complex nature of financial instruments, the principles set out in the standard are supplemented with detailed application guidance in an appendix to enhance understanding and consistent application. Areas covered in the standard include, but are not limited to, guidance on contracts containing embedded derivatives, considerations for fair value measurement, treatment of transaction costs, impairment of financial assets, reclassification of financial instruments, derecognition of a financial liability, and offsetting of a financial asset and a financial liability. The standard requires public sector entities, which include governments and government organizations, to recognize a financial asset and/or a financial liability when it becomes a party to a financial instrument contract. Fair value measurement is required for derivatives and portfolio investments that are equity instruments quoted in an active market. A public sector entity can choose to report non-derivative financial assets and/or financial liabilities on a fair value basis if it manages and reports performance of these items on a fair value basis. A change in the fair value of items in the fair value category is recognized in the statement of remeasurement gains and losses until settlement.
Highlights of The standard is substantially the same as stated in the attachment to the 2010 Exposure Draft, Financial Instruments and Foreign Currency Translation: Financial Statement Presentation, except for the transitional provisions. In addition to those described above, the standard clarifies that retroactive adjustment is not required for transaction costs included in the carrying value of items in the fair value category. Foreign Currency Translation Section PS 2601 replaces existing Section PS 2600, Foreign Currency Translation. Major changes from Section PS 2600 include: elimination of deferral and amortization of unrealized gains and losses arising from foreign currency translation before settlement; withdrawal of hedge accounting as it is unnecessary under the new treatment of unrealized gains and losses; and separating realized and unrealized foreign exchange gains and losses and reporting them in different statements. The annual surplus and deficit will no longer include amortization of unrealized foreign exchange gains and losses. Instead, it will reflect the impacts of the cumulative changes in foreign exchange in the period of settlement. The standard includes a few changes to the text attached to the 2010 Exposure Draft, Financial Instruments and Foreign Currency Translation: Financial Statement Presentation. Foreign exchange reserves and balances with the International Monetary Fund are now excluded from the scope of the standard. The transitional provisions have been clarified. If there is no unamortized exchange gain or loss associated with an item in the cost or amortized cost category that is a monetary asset or a monetary liability at the date of adoption of Section PS 2601, the exchange rate at the date of adoption (not at initial recognition) should be used to measure the exchange gain or loss to be recognized at settlement. Financial Statement Presentation Section PS 1201 replaces existing Section PS 1200, Financial Statement Presentation, and includes a new statement of remeasurement gains and losses. The new statement will report: unrealized gains and losses associated with financial instruments in the fair value category; exchange gains and losses associated with monetary assets and monetary liabilities denominated in a foreign currency that have not been settled; amounts reclassified to the statement of operations upon derecognition or settlement; and other comprehensive income reported when a public sector entity includes the results of its government business enterprises and government business partnerships in the summary financial statements.
Highlights of Transitional Provisions in the The transitional provisions in Section PS 3450, Financial Instruments, Section PS 2601, Foreign Currency Translation, and Section PS 1201, Financial Statement Presentation, set out different effective dates for governments and government organizations. This explains the transitional provisions for those government organizations transitioning to Accounting Standards for the first time. When do the new standards apply? The new standards will be effective for fiscal periods beginning on or after April 1, 2012 for government organizations and April 1, 2015 for governments. Retroactive application is prohibited. Earlier adoption is permitted. The new standards must be adopted in the same fiscal year. Why should government organizations consider earlier adoption? Many government organizations are transitioning from Part V of the CICA Handbook Accounting to the CICA Accounting (PSA) Handbook for fiscal periods beginning on or after January 1, 2011. Government not-forprofit organizations are transitioning for fiscal periods beginning on or after January 1, 2012. The effective dates of the new standards will come after the date of transition to the PSA Handbook for government organizations and for some GNFPOs. Government organizations (including government not-for-profit organizations) that currently follow the Financial Instruments and Foreign Currency Translation standards in the CICA Handbook Accounting may want to adopt the new standards when they transition to the PSA Handbook. This avoids having to change their accounting policies in these areas twice within a few years. Transitioning to the PSA Handbook without these new standards would mean adopting existing Section PS 2600, Foreign Currency Translation, and no standard on financial instruments. Once the new standards come into effect, they would need to transition again to Section PS 2601 and Section PS 3450. Implementation of the new standards should be generally straightforward for these government organizations as no additional information will be required.
Highlights of Should government organizations transitioning to the PSA Handbook restate their comparative figures? Government organizations that adopt Section PS 3450 and Section 2601 in their first Accounting Standards financial statements 1 will first apply the new standards at the beginning of the fiscal year that begins on or after January 1, 2011 for government organizations and January 1, 2012 for government not-for-profit organizations. The balances in the opening statement of financial position and the comparative figures in their first Accounting Standards financial statements will be based on the accounting policies they follow for Financial Instruments and Foreign Currency Translation prior to their transition to the PSA Handbook. Why governments are given more time to adopt the new standards? PSAB recognizes that implementation of Section PS 3450 and Section PS 2601 will result in significant changes to financial reporting. Additional time is provided to governments to address the reporting requirements and implementation issues. However, governments can choose to apply the new standards before the transition date of April 1, 2015 to enhance reporting of their risk management activities. Why do the transitional provisions contain a review for governments by the end of year 2013? Financial reporting and accounting standards are evolutionary. Section PS 3450 and Section PS 2601 were developed in the context of the current conceptual framework and existing accounting literature in these areas. In approving these standards, PSAB recognized that international standards development activities on this topic and its own Concepts Underlying Financial Performance project may reveal concepts that the Board had not considered previously. 1 The first Accounting Standards financial statements are defined as the first financial statements in which a government organization adopts PSA standards in First-time Adoption by Government Organizations, paragraph PS 2125.03(b).
Highlights of Project Status This section provides you with PSAB s latest discussions and decisions regarding some of its active projects. You can access a summary of PSAB s 2010-2011 Work Plan based on the 2010-2013 Strategic Plan, with the expected document approval dates of PSAB s active projects here. Additional information about the individual projects including reasons for the project, issues to be addressed, project history, summary of major decisions and next steps of the project can be accessed here. Appropriations and Related Party Transactions PSAB continued its discussions on the accounting issues related to interorganization transactions and non-monetary transactions among related parties, and the nature of appropriations. Feedback was provided to the Task Force on issues discussed. The Board also identified specific areas it would like the Task Force to explore and address at the June 2011 meeting. Improvement of PSA Handbook Terminology Staff contact: Terry.Corrigan@cica.ca 416-204-3474 The CICA Accounting (PSA) Handbook was written primarily for government summary financial statements. The term government is used throughout the PSA Handbook. As part of an initiative to improve the PSA Handbook for government organizations, the Board considered the need to clarify the application of the standards for government organizations and to replace the reference to government(s) with a term that would include entities that will adopt the PSA Handbook in the foreseeable future. PSAB requested staff to prepare an exposure draft to address this issue for its review at the June 2011 meeting. Staff contact: Jim.Keates@cica.ca 416-204-3282
Highlights of Technical Agenda This section provides you with PSAB s latest discussions and decisions regarding its technical agenda. Some of these items may become active projects after a project proposal is approved in future Board meetings. Completeness of GAAP for Government Organizations Staff presented a comparison of topics covered in Part V of the CICA Handbook Accounting and the CICA Accounting Handbook at the March 2011 meeting. PSAB considered the need for input from the government organization community regarding the topics to be addressed. The Board requested staff to consult representatives from a broad range of government organizations and consider their views for further development of specific project proposal(s). Staff contact: Jim.Keates@cica.ca 416-204-3282 Project Identification Survey In preparation for the development of the 2012-2013 Work Plan later in the year, PSAB agreed to initiate the consultation process to obtain input from stakeholders regarding its future technical agenda. The process involves stakeholder participation in a Project Identification Survey by identifying and recommending five projects for PSAB s consideration. Included in the survey is a list of possible projects identified by staff. Stakeholders are welcomed to identify other projects that are not listed in the Survey. The results of the Survey will be considered by PSAB along with other factors in the selection of future projects. Staff contact: Joanna.Chrzanowski@cica.ca 416-204-3412
Highlights of What s New Recent Handbook Update and Related Resources The CICA Accounting Handbook was updated in March 2011 to replace existing Section PS 3410, Government Transfers. A copy of the Handbook can be ordered here. A related Basis for Conclusions document, which provides the rationale for the new standard, is posted on PSAB s website and can be accessed here. The document discusses major issues, alternatives considered, stakeholders views on these issues and how PSAB resolved them. New Resources for Government Organizations A flowchart entitled Determining an Organization s Basis of GAAP, and a Summary Comparison of the PS 4200 Series and Other Standards in the CICA Accounting Handbook, that compares the not-for-profit standards with other public sector accounting standards, have recently been posted on PSAB website. Also, course material of a half-day session on Reporting on Public Sector Operations is now available to financial managers and auditors of government organizations that are adopting Accounting Standards. You can contact Robert Correll, Principal of Accounting, to request a copy. Appointment of the Conceptual Framework Task Force A 10-member Task force representing the senior government finance, controller and auditor communities, the local governments, public accounting firm and academe has been appointed to undertake the Concepts Underlying Financial Performance project. Click here for the list of Task Force members.