BUDGET. Quarterly Presentation of Financial Transactions

Transcription

1 BUDGET Quarterly Presentation of Financial Transactions 1 st quarter June 30, 2002

2 ISSN Legal deposit Bibliothèque nationale du Québec, 2002 Publication date : September 2002 Web site:

3 Presentation of financial transactions Table of contents Results of consolidated financial transactions... 5 Budgetary transactions... 6 Non-budgetary transactions... 7 Financing transactions... 8 Forecasts of consolidated financial transactions... 9 Budgetary transactions... 9 Non-budgetary transactions Financing transactions Results as at June 30, List of tables Summary of financial transactions Budgetary revenue Budgetary expenditure Non-budgetary transactions Financing transactions New borrowings as at June 30, Appendix Accounting policies 3

4

5 Presentation of financial transactions Results of consolidated financial transactions The Supplement of last March 19 forecast the achievement of the zero deficit objective set for the fiscal year ended March 31, 2002 and net financial requirements of $655 million. The actual results for fiscal year show a budgetary surplus of $22 million and net financial requirements of $615 million. TABLE 1 GOUVERNEMENT DU QUÉBEC SUMMARY OF CONSOLIDATED FINANCIAL TRANSACTIONS 1 (in millions of dollars) Supplement Actual results Change Budgetary transactions Own-source revenue Federal transfers Total revenue Operating expenditure Debt service Total expenditure Use of funds allocated to reserve Financing spending Maintaining a balanced budget Budgetary surplus Non-budgetary transactions Investments, loans and advances Capital expenditures Retirement plans Other accounts Non-budgetary requirements Net financial requirements Financing transactions Change in cash position Change in direct debt Retirement plans sinking fund Total financing of transactions Note: A negative entry indicates a financial requirement and a positive entry, a source of financing. For the change in cash position, a negative entry indicates an increase and a positive entry, a decrease. 1 According to the budgetary and financial structure in effect for fiscal year

6 Budget, 1 st quarter Budgetary transactions For purposes of analysis, the revisions can be divided into two parts: first, those concerning the government itself (Consolidated Revenue Fund) and then, those concerning organizations whose results are consolidated with those of the government. The budget balance of the Consolidated Revenue Fund is adjusted downward by $156 million compared with the Supplement of last March, while the net results of consolidated organizations are adjusted upward by $178 million. TABLE 2 CHANGES COMPARED TO THE SUPPLEMENT FOR FISCAL (in millions of dollars) Consolidated Revenue Fund Consolidated organizations Total Own-source revenue - excluding government enterprises government enterprises Federal transfers Total revenue Operating expenditure Debt service Total expenditure Total change Consolidated Revenue Fund Excluding revisions regarding consolidated organizations, revenue and expenditure are revised upward by $55 million and $211 million respectively. Own-source revenue, excluding government enterprises, is $63 million less than what was announced in the Supplement of last March 19. This adjustment is due chiefly to a $137-million decrease in consumption tax revenue, compared with the initial forecast, because of lower-than-expected remittances by government agents over the last few months of the fiscal year. This decline was partially offset by additional receipts of $71 million from income and property taxes. Revenue from government enterprises is adjusted upward by $96 million compared with the forecast in the Supplement of last March. This change is attributable mainly to a $71-million increase in net earnings for Hydro-Québec, owing to the fact that transactions on export markets were more profitable than anticipated mainly because of favourable prices. The earnings of other government enterprises are revised upward by $25 million. 6

7 Presentation of financial transactions Revenue from federal transfers is $22 million higher than forecast in the Supplement, owing to a rise in the revenue of other programs. This increase more than offsets the shortfall stemming from the conclusion in , rather than in , of the agreement regarding the Health Transition Fund, which is accounted for under the Canada Health and Social Transfer (CHST). Program spending is revised upward by $256 million compared with the Supplement of March 19, This revision is due to the $100-million increase in expenditures of the ministère des Affaires municipales et de la Métropole, which stems from, among other things, a change in the payment schedule for compensation provided under the fiscal pact, additional spending of $88 million in the health and social services sector and various adjustments to spending by other government departments totalling $68 million. Compared with the figures shown in the Supplement to the Budget, debt service for is adjusted downward by $45 million. This adjustment is attributable mainly to the fact that interest rates were lower than anticipated. Consolidated organizations Consolidated organizations posted net results that were $178 million higher than forecast in the Supplement. The net results of many organizations, in particular the Financière agricole du Québec and the Agence métropolitaine de transport, were thus revised. TABLE 3 CHANGES TO RESULTS OF CONSOLIDATED ORGANIZATIONS (in millions of dollars) Supplement Actual results Change Revenue Expenditure Net results Non-budgetary transactions Turning to non-budgetary transactions, the $18-million downward adjustment to non-budgetary requirements compared with the Supplement of March 19, 2002 results from the combined effect of many factors. First, financing requirements with regard to investments, loans and advances were revised upward by $54 million, particularly because of higher-thananticipated earnings on the part of certain government enterprises, including Hydro-Québec. In addition, the $84-million increase in financing requirements for capital expenditures is explained essentially by the fact that investments of consolidated organizations were higher than forecast in the Supplement of last March. 7

8 Budget, 1 st quarter Furthermore, the annual surplus of the retirement plans account is $47 million higher than expected, mainly because of lower-than-anticipated benefits payments. Lastly, financial requirements for other non-budgetary accounts are adjusted downward by $109 million. These "other accounts", which include cash and bills on hand, outstanding cheques, accounts receivable and accounts payable, are subject to substantial fluctuations because of the variability of government inflows and disbursements. Accordingly, on the whole, the adjustments to budgetary and non-budgetary transactions have produced a decrease of $40 million in net financial requirements compared with the forecast in the Supplement of last March 19. Financing transactions Turning to financing transactions, the change in the direct debt is adjusted upward by $398 million compared with the forecast in the March 19, 2002 Supplement. This adjustment is explained mainly by the fact that, at the end of the fiscal year, consolidated organizations financed their short-term financing requirements to a greater extent through Treasury bills allotted to the Financing Fund than through other short-term instruments. Treasury bills are included in the government's consolidated debt, while other short-term instruments are included in the change in cash position. This increase in the debt also explains why the cash position was much higher than forecast at the end of the fiscal year. 8

9 Presentation of financial transactions Forecasts of consolidated financial transactions Budgetary transactions The zero deficit objective set for fiscal , announced in the Supplement of last March 19, is maintained. However, if the federal government upholds its recent decision to change equalization unilaterally and retroactively in order to correct the error made by Canada Customs and Revenue Agency, Québec will be faced with a shortfall of $479 million. In that case, the Québec government will have to identify a number of steps to fill this gap that would make it more difficult for it to balance public finances. It should be noted that, because of the federal government s decision, Ontario, which has received sizeable overpayments since 1972, has to repay $1.3 billion over 10 years starting in , while Québec must repay nearly half a billion dollars as of this year. The Québec government has requested that the impacts of this decision be postponed until and that these impacts be rediscussed within that time frame. Québec s Minister of Finance has asked his federal counterpart to convene a federal-provincial meeting of Ministers of Finance as soon as possible to clarify all the issues involved and agree on a fair solution to this matter. 9

10 Budget, 1 st quarter TABLE 4 GOUVERNEMENT DU QUÉBEC SUMMARY OF CONSOLIDATED FINANCIAL TRANSACTIONS (in millions of dollars) Supplement Revised forecasts Change Budgetary transactions Own-source revenue Federal transfers Total revenue Operating expenditure Debt service Total expenditure Discussions with the federal government to defer until 2004 the change in equalization with respect to the CCRA s 1 error or steps to be identified to fill the shortfall Budget surplus 0 0 Non-budgetary transactions Investments, loans and advances Capital expenditures Retirement plans Other accounts Non-budgetary requirements Net financial requirements Financing transactions Change in cash position Change in direct debt Retirement plans sinking fund Total financing of transactions Note: A negative entry indicates a financial requirement and a positive entry, a source of financing. For the change in cash position, a negative entry indicates an increase and a positive entry, a decrease. 1 Canada Customs and Revenue Agency. 10

11 Presentation of financial transactions Budgetary revenue Regarding budgetary revenue, the Supplement to the Budget forecast own-source revenue of $ million and federal transfers of $8 842 million; forecast own-source revenue is revised upward by $185 million, while forecast federal transfers are reduced by $479 million. TABLE 5 BUDGETARY REVENUE CHANGE COMPARED TO THE SUPPLEMENT FOR FISCAL (in millions of dollars) Own-source revenue 185 Improvement of economic outlook personal income tax payable 125 Deferral of corporate tax instalments 115 Corporate tax refunds 135 Other 25 Increase in the tax on tobacco products 185 Federal transfers 479 Change in equalization with respect to the error of Canada Customs and Revenue Agency 479 Total 294 With respect to own-source revenue, it is estimated on a preliminary basis that the more robust economy should generate $400 million in additional revenue. This estimate takes into account changes in economic indicators since the beginning of the year, the uncertainty surrounding the intensity of the recovery in the United States and the results as at June 30. However, a number of specific factors offset this upward adjustment. For example, the processing of income tax returns for 2001, since last April, indicates that personal income tax is $125 million lower than anticipated. In addition, in , enterprises with less than $15 million in paid-up capital were able to defer for six months the instalments of income tax and other taxes they were supposed to pay in the last quarter of the calendar year. This measure was intended to provide them with additional liquidity in the wake of the September 11 attacks. Owing to the strong economy and low interest rates, which helped to sustain liquidity in , a smaller-than-expected number of small and medium-sized enterprises decided to defer their instalments, which reduced revenue from corporate taxes by $115 million in Lastly, revenue from corporate taxes is adjusted downward by an additional $135 million owing to higher-than-anticipated repayments since the beginning of the fiscal year. In all, however, own-source revenue rose by $185 million on account of the increase in the tax on tobacco products announced last June

12 Budget, 1 st quarter The downward adjustment of $479 million in federal transfers stems from the federal government's decision to change equalization retroactively to 2000 in order to correct the error of Canada Customs and Revenue Agency announced last September 4. Budgetary expenditure Forecast budgetary expenditure is adjusted upward by $185 million compared with the March 19, 2002 Supplement, and now stands at $ million. This adjustment is due in particular to increased spending in the health and social services sector. Forecast consolidated debt service remains unchanged at $7 194 million. Non-budgetary transactions With regard to financial requirements, the forecast of $872 million set out in the Supplement remains unchanged. Financing transactions There is also no change to the forecast announced in the Supplement regarding financing transactions. 12

13 Presentation of financial transactions Results as at June 30, 2002 Own-source revenue is down 2.0% for the first three months of compared with the corresponding period in , as opposed to an increase of 5.5% expected for the entire year. This divergence is mainly attributable to the fact that, last year, the income tax reductions announced in the Budget Speech took effect in July 2001, while, this year, the full impact of the reductions was felt in the first quarter. In addition, the decline in corporate taxes observed in the first quarter, because of high refunds, should be less marked by the end of the fiscal year, when year-end balances are paid. The payment of these balances should reflect the growth in profits in Revenue from government enterprises is up 61.7% in the first quarter of compared with that recorded for the same period last year. This rise, which is attributable mainly to Hydro-Québec, is explained essentially by renewed growth in the needs of Québec customers for this period and by an increase in electricity sales on the US market. The disposal of assets by the Société générale de financement du Québec also explains the difference observed between the change as at June 30 and that anticipated for the year. Since these factors are exceptional, growth in revenue from government enterprises will decline substantially over the fiscal year as a whole. Federal transfers are up 8.8% in the first quarter of compared with the same period in , while the anticipated decline for the entire year is 10.1%. This difference is due primarily to the withdrawals that are to be made from the CHST trust funds over the next few quarters, which will be lower than those made during the corresponding period last year. Regarding operating expenditure, the results recorded as at June 30, 2002 are up 3.5% compared with the first three months of , while an increase of 2.1% is forecast for the entire year. These results are explained in particular by earlier payments of expenditures in the first quarter of , stemming from the payment procedures of certain subsidies. Finally, debt service is down 5.6% in the first quarter of compared with the same period in , while the expected decline for the entire year is 0.9%. This situation is due to the sharp drop in interest rates observed last fall. Indeed, interest charges in the first quarter of last year reflect the fairly high interest rates observed prior to the decrease in rates, which results in a much higher rate of decline for the first quarter of the current fiscal year than for the year as a whole. Gilles Godbout Deputy Minister of Finance 13

14 Budget, 1 st quarter TABLE 6 GOUVERNEMENT DU QUÉBEC SUMMARY OF FINANCIAL TRANSACTIONS (Unaudited results) (in millions of dollars) Results as at June 30 Annual Actual Supplement Revised change Change results * forecasts % * % Budgetary transactions Own-source revenue Federal transfers Total revenue Operating expenditure Debt service Total expenditure Use of funds allocated to reserve Financing spending 280 Maintaining a balanced budget 670 Discussions with the federal government to defer until 2004 the change in equalization with respect to the CCRA's 1 error or steps to be identified to fill the shortfall 479 Budgetary surplus (deficit) Non-budgetary transactions Investments, loans and advances Capital expenditures Retirement plans Other accounts Non-budgetary requirements Net financial requirements Financing transactions Change in cash position Change in direct debt Retirement plans sinking fund Total financing of transactions Note: A negative entry indicates a financial requirement and a positive entry, a source of financing. For the change in cash position, a negative entry indicates an increase and a positive entry, a decrease. * The results have been restated on the basis of the budgetary and financial structure in effect for the fiscal year and have been adjusted to take into consideration the implementation of the family policy regarding reduced-contribution spaces in day care services. 1 Canada Customs and Revenue Agency. 2 The change in direct debt includes new borrowings less repayments of borrowings. 3 This sinking fund receives amounts to be used to eventually cover retirement benefits payable by the government under the public and parapublic sector retirement plans. The income from this fund is accumulated in it and is subtracted from the interest expenditure recorded with regard to the retirement plans liability. 14

15 Presentation of financial transactions TABLE 7 GOUVERNEMENT DU QUÉBEC BUDGETARY REVENUE (in millions of dollars) (Unaudited results) Results as at June 30 Annual Actual Supplement Revised change Change results forecasts % % Own-source revenue Income and property taxes Personal income tax Contributions to Health Services Fund Corporate taxes Consumption taxes Sales Fuel Tobacco Duties and permits Motor vehicles Alcoholic beverages Natural resources Other Miscellaneous Sales of goods and services Interest Fines, forfeitures and recoveries Revenue from government enterprises Société des alcools du Québec Loto-Québec Hydro-Québec Other Consolidated organizations Total own-source revenue Federal transfers Programs Equalization Canada Health and Social Transfer Other transfers related to fiscal arrangements Other programs Consolidated organizations Total federal transfers Total budgetary revenue Includes tax on corporate profits, tax on capital and tax on insurance company premiums, as well as tax on telecommunications, gas and electricity. 2 Includes forest, mining and hydraulic resources. 15

16 Budget, 1 st quarter TABLE 8 GOUVERNEMENT DU QUÉBEC BUDGETARY EXPENDITURE (in millions of dollars) (Unaudited results) Results as at June 30 Annual Actual Supplement Revised change Change Departments and agencies results forecasts 1 % % Operating expenditure Assemblée nationale Personnes désignées par l'assemblée nationale Affaires municipales et Métropole Agriculture, Pêcheries et Alimentation Conseil du trésor, Administration et Fonction publique Conseil exécutif Culture et Communications Éducation Emploi, Solidarité sociale Environnement Famille, Enfance et Condition féminine Faune et Parcs Finances (excluding debt service) Industrie et Commerce Justice Recherche, Science et Technologie Régions Relations avec les citoyens et Immigration Relations internationales Ressources naturelles Revenu Santé et Services sociaux Sécurité publique Tourisme, Loisir et Sport Transports Travail Savings to be realized -300 Appropriations carried over in Program spending Consolidated organizations Total operating expenditure Debt service Consolidated Revenue Fund Consolidated organizations Total debt service Total budgetary expenditure Including budget rearrangements to reflect the distribution of the $300 million in savings forecast in the Expenditure Budget tabled by the Chair of the Conseil du trésor last March, as well as a number of measures announced in the Supplement whose funding has initially been supplied by the Contingency Fund administered by the Conseil du trésor. 2 These amounts contain provisions allowing transfers of appropriations to various departments and agencies during the fiscal year ending March 31, Expenditure Budget tabled for

17 Presentation of financial transactions TABLE 9 GOUVERNEMENT DU QUÉBEC NON-BUDGETARY TRANSACTIONS (in millions of dollars) (Unaudited results) Results as at June 30 Annual Actual Supplement Revised change Change results forecasts $ $ Investments, loans and advances Consolidated Revenue Fund Government enterprises Individuals, corporations and others Municipalities and municipal bodies Consolidated organizations Total investments, loans and advances Capital expenditures Consolidated Revenue Fund Net investments Amortization Consolidated organizations Total capital expenditures Retirement plans Employer and employee contributions Benefits and other payments Total retirement plans Other accounts Consolidated Revenue Fund Consolidated organizations Total other accounts Total non-budgetary besoins Note: A negative entry indicates a financial requirement and a positive entry, a source of financing. 17

18 Budget, 1 st quarter TABLE 10 GOUVERNEMENT DU QUÉBEC FINANCING TRANSACTIONS (in millions of dollars) (Unaudited results) Results as at June 30 Annual Actual Supplement Revised change Change results forecasts $ $ Change in cash position Consolidated Revenue Fund Consolidated organizations Total change in cash position Change in direct debt Consolidated Revenue Fund New borrowings In Canadian dollar In US dollar In Euro In Yen Change in the debt resulting from currency swap transactions Repayment of borrowings In Canadian dollar In US dollar In Euro -499 In Yen In French franc Change in the debt resulting from currency swap transactions Contributions to sinking fund for borrowings of the Québec government Consolidated organizations New borrowings Repayment of borrowings Total change in direct debt Retirement plans sinking fund Total financing of transactions Note: A negative entry indicates a financial requirement and a positive entry, a source of financing. For the change in cash position, a negative entry indicates an increase and a positive entry, a decrease. 18

19 Presentation of financial transactions TABLE 11 GOUVERNEMENT DU QUÉBEC NEW BORROWINGS AS AT JUNE 30, 2002 (in millions of dollars) Face value Interest in millions Amount in Date of Date of rate Price to Yield to of monetary Canadian issue maturity (%) 1 investor 2 investor 2 units dollar 3 Consolidated Revenue Fund In Canadian dollar CAN$ Treasury bills Various Various 4 Various Various 5 Québec savings product Savings bonds Various Various Various Various Transitory investments Various Various Various Various Investment savings plan Various Various Various Various Bonds Various Various Various Various Various Bonds Bonds Bonds Bonds Bonds Bonds Real return bonds Various Various Various Various Various Immigrant Investor program bonds Various Various Various Various Various Canada Pension Plan bonds Various Various Various Various Medium-term notes on the Canadian market Various Various Various Various Various Change in the debt resulting from currency swap transactions Consolidated organizations 623 Total new borrowings Interest payable semi-annually except if another frequency is indicated in a note. 2 Based on semi-annual interest payments. 3 Borrowings in foreign currencies are shown in the Canadian equivalent of the amount received, using the exchange rate of the Bank of Canada at noon on the date of issue. 4 Zero-coupon type borrowing. 5 Represents the change in the amount outstanding during the year. 6 Borrowings fully subscribed by the Caisse de dépôt et placement du Québec. 7 The principal and the interest rate of these bonds are adjusted according to the change in the Consumer Price Index in Canada. 19

20

21 Presentation of financial transactions - Appendix Appendix Accounting policies The government's financial transactions include budgetary transactions, non-budgetary transactions and financing transactions. Budgetary transactions comprise transactions relating to revenue and expenditure, including those for the depreciation of capital expenditures. Non-budgetary transactions cover investments, loans and advances, transactions affecting capital expenditures and the retirement plans account as well as the change in certain short-term asset and liability accounts, except the cash position. Financing transactions show how the government meets the net financial requirements resulting from the budgetary and non-budgetary transactions using the change in direct debt and the government's cash position which includes cash in the bank and short-term investments, less short-term borrowings. These transactions also cover activities relating to the retirement plans. Accounting policies The Gouvernement du Québec accounts for its financial transactions in accordance with the accounting policies disclosed below. When necessary, the information included in the consolidated financial statements is based on best estimates and judgments. Reporting entity The government s reporting entity encompasses departments, agencies, enterprises and special funds which must account for the management of their financial transactions and resources to a minister or directly to the National Assembly and which are part of the government or under its control. They are listed in an appendix to the financial statements. Transactions of a fiduciary nature conducted by certain agencies and funds are not included in the government s reporting entity. These agencies and funds are listed in an appendix to the financial statements. Consolidation method The accounts of the Consolidated Revenue Fund and the other entities included in the government s reporting entity, with the exception of government enterprises, have been standardized and combined line by line in accordance with the 1

22 Budget, 1 st quarter accounting policies disclosed below. Inter-entity transactions and balances have been eliminated. Government enterprises are accounted for using the modified equity method. Therefore, investment in these enterprises is recorded at cost, which is adjusted annually by the government s share in the results of these enterprises with an offsetting entry to revenue, and reduced by the portion of dividends that are paid or reported by an enterprise and that accrue to the government. A government enterprise has all of the following characteristics : a) it is a separate legal entity that has the authority to enter into contracts in its own name and to go before a court; b) it is vested with the financial and administrative power to carry out commercial activities; c) its main activity is the sale of goods or the delivery of services to individuals or to organizations not included in the government s reporting entity; d) it may, during the normal course of its operations, pursue its activities and settle its debts using revenue from sources not included in the government s reporting entity. Revenue Revenue from income and property taxes, consumption taxes, duties, permits, fines and forfeitures is recorded in the fiscal year during which it is received, after deducting reimbursements and other amounts deductible under the applicable legislation. Assessments and amounts billed before the end of the fiscal year are entered as revenue. Revenue from Government of Canada transfers is recorded in the fiscal year during which it is received. However, claims issued and estimates of revenue from transfers related to shared-cost programs without fiscal compensation are recorded in the fiscal year during which the related expenditures are made. Other revenue is recorded on the accrual basis. Interest income ceases to be recorded when there is no reasonable assurance that the principal or interest will be recovered. Expenditure Expenditure includes the cost of goods and services acquired during the fiscal year, with the exception of capital expenditures for which an annual depreciation is recorded. Transfers are recorded in the fiscal year during which the events that give rise to them occur, insofar as the transfers have been authorized and once beneficiaries have met the eligibility criteria. 2

23 Presentation of financial transactions - Appendix Liabilities Accounts payable and accrued expenses Specific purpose accounts The Financial Administration Act (S.Q., 2000, c. 15) provides for the creation of specific purpose accounts in which amounts received in respect of a contract or an agreement calling for the allocation of funds to a specific purpose may be deposited. Consequently, certain amounts receivable or payable under sharedcost programs without fiscal compensation or as a result of third-party compensation are recorded in specific purpose accounts. Sick leave and vacations Obligations relating to sick leave and vacations owed to government employees are recorded as liabilities. The annual change in this account is posted to expenditure. Allowance for losses on guaranteed financial initiatives Obligations resulting from borrowings and other guaranteed financial initiatives are recorded as liabilities when a loss is probable. The annual change in this allowance is posted to expenditure. The allowance for probable losses is evaluated using a rate based on past experience regarding losses on each of the guarantee programs. Special guarantees are grouped according to risk level. Pension plans Government pension plans are defined benefit pension plans. Within the context of preparing the government s financial statements, obligations relating to vested benefits are evaluated using the actuarial projected benefit method prorated on service, according to the most probable assumptions set by the government with regard, notably, to inflation, interest and employee remuneration. This method has been adjusted, however, to reflect the way in which benefits are earned by employees. Total cost of plans The annual cost of vested benefits for all pension plans, including the cost of changes to the plans, and the amortization of adjustments to estimates based on actuarial gains or losses are charged to expenditure, with an offsetting entry in the retirement plans account, i.e. pension plan liability. Changes to actuarial assumptions are included in the adjustments to estimates based on actuarial gains or losses. 3

24 Budget, 1 st quarter In the case of the Government and Public Employees Retirement Plan (RRE- GOP), the Civil Service Superannuation Plan (CSSP), the Teachers Pension Plan (TPP), the Pension Plan of Certain Teachers (PPCT) and transfers from the TPP and the CSSP to RREGOP, adjustments to estimates based on actuarial gains or losses are amortized using the straight-line method over a period corresponding to the estimated average remaining years of service of participants in these plans as a whole. However, adjustments to estimates based on actuarial gains or losses for the other pension plans are amortized over a period corresponding to the estimated average remaining years of service of participants in each plan. The total cost of the pension plans also includes interest charges on obligations relating to vested benefits, with an offsetting entry to liabilities in the retirement plans account. The investment revenue of the Retirement Plans Sinking Fund, created to pay for benefits under these plans, is taken into account in computing interest charges on obligations relating to vested benefits. Borrowings Borrowings are recorded at the amount received at the time of issue, adjusted by the premium or discount amortization to obtain the amount of principal repayable at maturity. Issue expenses are recorded as deferred expenses and amortized over the term of each borrowing. The value of borrowings in foreign currency is adjusted using the rates in effect on the balance sheet date, and the changes are recorded as unrealized foreign exchange gains or losses and amortized over the term of each borrowing. Gains or losses on financial instruments are deferred and amortized over the remaining term of each agreement. However, foreign exchange gains or losses on short-term agreements aimed at covering the long-term debt are amortized over the remaining term of the borrowing portfolio in the currency concerned. The amortization is calculated using the straight-line method, except in the case of discounts and premiums, which are amortized according to the effective rate of return on each borrowing. Financial assets Short-term investments are recorded at cost and accounts receivable and loans and advances are recorded initially at cost and then brought down to their net recoverable value through valuation allowances. Investment in government enterprises is recorded using the modified equity method. Other long-term investments are entered at cost and reduced by any durable loss in value. The loss in value is charged to operations for the fiscal year during which it is known. 4

25 Presentation of financial transactions - Appendix Capital expenditures Capital expenditures consist of acquired, built, developed or improved nonfinancial assets, whose useful life extends beyond the fiscal year and which are intended to be used on an ongoing basis for producing goods or delivering services. They include land, buildings, facilities such as parks and outdoor recreational areas, complex networks such as dams, canals, roads and bridges, equipment such as vehicles and furniture, and the development of data processing systems. Capital expenditures are recorded at cost and depreciated using a logical, systematic method over a period corresponding to their useful life. They are a component of net debt. Their cost includes financing charges capitalized during their construction, improvement or development. The cost of capital expenditures held under capital leases is equal to the present value of payments due. Works of art and historic property are not recorded as capital expenditures but are mentioned in a note to the financial statements, and their cost is charged to expenditure for the fiscal year during which they are acquired. Capital expenditures acquired through donation or for a nominal fee are recorded at their fair value at the time of acquisition with an offsetting entry to deferred revenue liabilities, which are gradually transferred to operating results using the same term and method of amortization as for the capital expenditures concerned. However, land is recorded at its nominal value. Sums received from agencies not included in the government s reporting entity for the purchase of capital expenditures are recorded as deferred revenue liabilities and gradually transferred to operating results using the same term and method of amortization as for the capital expenditures concerned. However, contributions received for the purchase of land are deducted from the latter s cost. 5

26