Public Sector Accounting Discussion Group

Transcription

1 Public Sectr Accunting Discussin Grup Reprt n the Public Meeting January 15, 2015 The Public Sectr Accunting (PSA) Discussin Grup is a discussin frum nly. The Grup s purpse is t supprt the Public Sectr Accunting Bard (PSAB) by enabling discussin in a public venue f issues arising frm the applicatin f the CPA Canada Public Sectr Accunting Handbk (PSA Handbk). The Grup cmprises members with varius backgrunds wh participate as individuals in the discussin. Any views expressed in the public meeting d nt necessarily represent the views f the rganizatin t which a member belngs r the views f PSAB. The discussins f the Grup d nt cnstitute fficial prnuncements r authritative guidance. This dcument has been prepared by the staff f PSAB and is based n discussins during the Grup s meeting. Cmments made in relatin t the applicatin f the PSA Handbk d nt purprt t be cnclusins abut acceptable r unacceptable applicatin f the PSA Handbk. Only PSAB can make such a determinatin. Items Presented and Discussed Sectin PS 1201: Presentatin f Budget Infrmatin Sectin PS 3250: Shared-Risk Retirement Benefit Arrangements The Value f Statements f Recmmended Practice Standard Setting in the Public Interest

2 ITEMS PRESENTED AND DISCUSSED Sectin PS 1201: Presentatin f Budget Infrmatin The Intrductin t Public Sectr Accunting Standards indicates that PSAB issues standards and guidance with respect t matters f accunting in the public sectr t serve the public interest. Questins have been raised related t the presentatin f budget ( planned ) infrmatin as required by Financial Statement Presentatin, paragraphs PS , incrprating the requirement t serve the public interest. Issue 1 Interpreting the requirement "riginally planned" At its January 2014 meeting, the Grup discussed the term riginally planned and instances when it wuld be apprpriate t present a revised budget. At that time, sme Grup members indicated that it wuld be apprpriate t use a revised budget after an electin when a new budget is passed. At the January 2015 meeting, clarificatin was sught regarding the fllwing specific scenaris: Scenari 1 If a budget was presented and apprved befre an electin and a new budget was presented and apprved after the electin is it apprpriate t present the new budget n the financial statements? Scenari 2 Wuld it be apprpriate t present the amended budget fr a cntrlled gvernment entity when the cntrlling gvernment changed as the result f an electin and it requested a revised budget fr the gvernment entity? Scenari 3 Wuld a municipal r schl bard electin als permit use f a revised budget? Scenari 4 If the cntrlling gvernment changes the service respnsibilities f the cntrlled gvernment entity, wuld it be apprpriate t present a revised budget n the financial statements? Scenari 5 Wuld it make a difference if the budget prcess was cmpletely restarted, as ppsed t an amended budget that is essentially a revised frecast? Scenari 6 Sme municipalities prepare a prvisinal budget in January fr interim levy purpses. It is reviewed and apprved by Cuncil but perhaps with nt the same level f diligence as the full budget. They prepare the full budget in May fr final prperty tax levy purpses. This ne fllws the full budget prcess and is als apprved. Can they use the secnd apprved budget as their riginal budget? The municipalities indicate that it was their intent and the ne that they shuld be held accuntable against. The Grup s Discussin The presenter explained the desire fr a fllw-up discussin t understand the view that accuntability t the public is enhanced when figures used fr a cmparisn with budget are based n a pst-electin rather than a pre-electin budget. A prvince may have tw budgets when an electin is held during the financial reprting year. A municipality, schl bard r ther public sectr entity may need t revise their riginal budget r prepare a secnd budget fr a variety f reasns, including thse utlined in the submissin. The discussin fcused n the best ways t ensure accuntability is supprted thrugh the budget cmparisn. 2

3 Scenari 1 The discussin revealed a variety f circumstances are pssible. Several Grup members stressed that in a scenari as straightfrward as the ne presented, the pst-electin budget supprts accuntability as it is the plan f the current gvernment wh have the mandate t gvern. Other Grup members suggested the pre-electin budget respnds t the requirement t present the riginal plan. Circumstances were cited that may affect the apprach. The electin may have been held late in the year. The functinal ministries f individual ministers may have been redefined r cmbined. When circumstances are ut f the rdinary, Grup members cited the need fr enhanced disclsures. Depending n the circumstances, detailed explanatins and a supprting recnciliatin may be required. In ther cases, a descriptive header n the budget clumn may be sufficient. There is a need t apply prfessinal judgment t ensure the budget figures presented are bth useful and supprt accuntability thrugh the lens f the public interest. Scenari 2 The views f Grup Members were mixed n whether amended budget figures shuld be presented by a cntrlled gvernment entity when changes are made in a pst-electin perid. Once again, the pssibility f differing circumstances was cited. A new gvernment may fundamentally rerganize the mandate and respnsibilities f the entities it cntrls. Mre ften, plicy changes intrduced by a new gvernment are limited t changes in funding. In the view f sme Grup members, amending budget figures due t requests f a gvernment in a pst-electin perid is cnsistent with the entity's accuntability t the gvernment. Other Grup members stressed accuntability in relatin t the riginal plan, particularly when changes were limited t changes in the funding the gvernment prvides. Scenari 3 One Grup member expressed the view that a municipality adpting a new budget fllwing a municipal electin may restate its budget figures as municipalities are nt cntrlled by anther level f gvernment. Hwever, when a schl bard is cntrlled by a prvince, an electin at the level f the schl bard wuld nt affect the budget figures the schl bard presents. Scenari 4 In this instance, there has been n electin. Grup members agreed budget figures presented are thse riginally planned. The cntrlled entity uses supprting disclsures t explain variances, including variances attributable t changes in service respnsibilities. Scenari 5 In this instance, as the budget prcess is cmpletely restarted, accuntability wuld be served by using the secnd (mst recent) budget. In reaching this view, Grup members nted they wuld nly cnsider a budget prcess as cmpletely restarted if new apprvals are btained at each stage f the budget prcess. 3

4 Scenari 6 The presenter explained this scenari summarizes the circumstances f budget preparatin fr municipalities in at least ne prvince. As setting prperty taxes is a cre bjective, Grup members expressed the view that accuntability is enhanced when the budget cmparisn is based n the budget that sets the prperty tax rate. Issue 2 Hw shuld paragraphs PS be interpreted? Paragraphs PS require a cmparisn f results with the riginal plan. Paragraph PS addresses situatins when the scpe f financial activity reprted in the fiscal plan is nt the same as that reprted n in the financial statements. In such a case, the guidance states: " it may be necessary t restrict the cmparisn f actual and budgeted results t the scpe f financial activity reprted in the budget r main estimates f expenditures. This cmparisn wuld be presented in a nte r supprting schedule." Paragraph PS addresses situatins when a fiscal plan is nt prepared n a basis cnsistent with that used t reprt the actual results. In such a case, the guidance states: "...planned results shuld be reprted n the same basis as that used t reprt the results f the current perid. In thse circumstances, it wuld be necessary t prvide a recnciliatin f the restated infrmatin with that riginally presented in the fiscal plan." Sme f these adjustments culd be significant and the inclusin r exclusin wuld impact the users ability t achieve the fcused cmparisn f actual and budgeted financial results. Paragraph PS states: "Such cmparisns serve as a starting pint fr understanding and assessing trends in gvernment peratins and future revenue requirements as well as fr identifying variances that need t be explained." Clarificatin was being sught in three scenaris: Scenari 1 The amunts are amended t adpt different accunting plicies. Fr example, this wuld be applicable if the entity recrded emplyee future benefits n a cash basis in their budget and restated as actual results apply Sectins PS 3250 and PS Is it apprpriate t cnfrm the budget figures t amunts based n the applicatin f Sectins PS 3250 and PS 3255? Scenari 2 The nly budget apprved by the entity issuing financial statements is prepared n an uncnslidated basis. T cmply with Sectin PS 1300 the actual results are presented n a cnslidated basis. Is it apprpriate t add the amunts budgeted fr the cntrlled entity? Scenari 3 Certain new prgrams are nt included in the riginal budget, but separate budgets were apprved later during the year as each new prgram was apprved. Is it apprpriate t include the amunts budgeted fr these new prgrams? 4

5 The Grup s Discussin Tw Grup members described their experience, gained at a prvincial level, when there are differences in the scpe f financial activity and reprting basis between budgets and financial statements. In each case, effrts were made t present budget figures that were cnsistent with the accunting principles the gvernment applied and the activities being reprted n. Wrking tgether with the entities their gvernments cntrlled, infrmatin was btained t make adjustments necessary t enable meaningful budget t actual cmparisns. Fr sme smaller entities, Grup members acknwledged that this may nt always be feasible. When the budget prcess and accunting principles are nt cnfrmed, there may be limitatins n what accuntants can d when preparing the financial statements. When a budget des nt reflect the full scpe f activities being reprted n, paragraph PS allws the cmparisn t be made in the ntes. When the basis f accunting n which a budget is prepared is nt in accrdance with the PSA Handbk, paragraph PS indicates that the budget is cnfrmed and a supprting recnciliatin is presented in a nte. When a new prgram is intrduced that was nt part f the riginal budget, the view f the Grup members is nt t change the budget figures riginally planned but t explain variances attributable t the new prgram in a supprting nte. Sectin PS 3250: "Shared-Risk" Retirement Benefit Arrangements Sme jurisdictins have amended, r are planning t amend, legislatin allwing retirement benefit arrangements described as shared-risk plans. At its May 2014 meeting, the Grup discussed the classificatin f retirement benefit arrangements with shared-risk characteristics. This submissin fcuses n measurement f the accrued benefit bligatin fr shared-risk plans presuming that they are classified as defined benefit plans. Issue Shared-risk plans are relatively new in the public sectr and their characteristics present applicatin challenges when applying the measurement guidance fund in Sectin PS 3250, Retirement Benefits. Belw is an illustratin f thse features. A number f views have emerged as accuntants attempt t apprpriately reflect the distinctive features f such plans. Paragraph PS states: Fr a defined benefit plan, plan assets shuld be valued at marketrelated values. When measuring the accrued benefit bligatin, actuarial assumptins are required. Paragraph PS states: Accunting fr retirement benefit bligatins f defined benefit plans requires frecasts f future events, such as inflatin rates, investment returns, interest rates, wage and salary increases, medical inflatin and emplyee turnver and mrtality. Such frecasts frm the basis f actuarial assumptins. 5

6 Paragraph PS states: Actuarial assumptins shuld be based n the gvernment s best estimates f expected lng-term experience and shrt-term frecasts. In determining a discunt rate, the guidance in paragraph PS is cnsidered: The actuarial assumptins underlying the valuatin f the retirement benefit liability and expense wuld be internally cnsistent. Fr example, when a gvernment determines its discunt rates by reference t its plan asset earnings, the assumptins used t determine the shrt-term frecast incrprated in the discunt rates wuld be cnsistent with the shrt-term frecasts f rates f return n assets currently held in the fund. When a gvernment determines its discunt rates by reference t its cst f brrwing, the assumptins used t determine the shrt-term frecast incrprated in the discunt rates wuld be cnsistent with the specific rates f interest and the perids cmmitted t by the gvernment n the amunts brrwed. View A Prjectin f the benefits is an actuarial assumptin Measurement f the accrued benefit bligatin and the plan assets are independent. Thse hlding View A assert that as the funding plicy f the plan targets benefits t fall within a specified range ver the lng term and the target is mnitred, adjustments such as cntributin increases are autmatically generated when plan assets fall t a level that appears insufficient t meet these targets. As a cnsequence, actuarial assumptins culd include benefits payable cnsidering additinal cntributins frm bth emplyees and emplyer under the funding deficit recvery plan when thse cntributins represent the best estimate f the effect f the perfrmance target (and subject t a cntributin cap als factred int the actuarial assumptins). Actuarial assumptins wuld als include estimates abut cnditinal indexatin cnsistent with the terms f the plan. Paragraph PS prvides examples f future events frming the basis f actuarial assumptins and bth additinal cntributins and cnditinal indexatins wuld als be such future events t be included as actuarial assumptins. A retirement benefit liability culd arise when: the prjected returns t be earned n the referenced plan assets exceeds the discunt rate; r the best estimate f benefits payable cnsiders indexing / future variability in cntributins due t funding shrtfalls. Under View A, the funding plicy bjectives f the plan are reflected in the actuarial assumptins. Retirement benefits expense and retirement benefits interest expense wuld be determined in accrdance with Sectin PS View B The accrued benefit bligatin is equal t the value f the plan assets Measurement f the accrued benefit bligatin and the plan assets are linked. Under this view, the benefits payable t the members cannt exceed the plan assets, the accrued benefit bligatin shuld simply be equal t the value f the plan assets, measured at market-related values as required by paragraph PS

7 An accrued benefit bligatin is defined in the Glssary t Sectin PS 3250 as the value f retirement benefits attributed t services rendered by emplyees and frmer emplyees t the financial statement date. Accrdingly, applying the requirements in paragraphs PS and PS , the best estimate f the value f the retirement benefits is the value f the plan assets that will be used t settle the accrued benefit bligatin at the financial statement date. Shared risk plans are structured t meet very narrwly defined risk management gals and the funding levels are set t meet these bjectives. Cnsequently, discnnecting the accrued benefit bligatin frm the value f the plan assets des nt prvide a faithful representatin f the value f the benefits frm the entity s perspective. N prjectin frward f the benefits r discunting is made. Until changes are made t the cntributin rates r t the cnditinal indexatin rates, these changes are nt cnsidered t have been incurred at the financial statement date. While nt directly in scpe, this wuld be cnsistent with the accunting fr plan amendments that are nly reflected when they are incurred (paragraph PS ). Under View B, the current service cst fr the perid is cntributins made by the emplyer ffset by cntributins made by emplyees. View C Prjectin f the benefits based n current funding Measurements f the accrued benefit bligatin and the plan assets are initially linked. Plan assets are measured independently at market-related values as required by paragraph PS As fr the accrued benefit bligatin, unlike the apprach used in View B, the entity prjects benefits payable t members based n current funding. Cnsistent with paragraphs PS and PS , an entity wuld frecast future events that culd have an impact n the accrued benefit bligatin. The starting pint fr such a frecast wuld be the plan assets currently available. This wuld nt include additinal cntributins cntemplated under the funding deficit recvery plan t the extent that such changes t cntributin rates have nt been incurred yet (similar t View B in this regard). This wuld nly include benefits payable based n expected returns n plan assets generated in the future frm current funding levels. The entity discunts these benefit payments using a discunt rate cnsistent with the guidance fund in paragraph PS This may include a reference t a shrt-term frecast f plan asset earnings r a shrt-term frecast f an entity s cst f brrwing. The statement f peratins wuld include a current service cst fr funding made by the emplyer during the perid ffset by a benefit fr funding made by emplyees during the perid. Changes in actuarial assumptins (expected earnings n assets and the discunt rate) wuld lead t actuarial gains and lsses. This methd culd give rise t a retirement benefit liability when the prjected return t be earned n the referenced plan assets exceeds the discunt rate (if the discunt rate is determined by reference t the rate f brrwing). Fr example, an emplyer cntributes $100 t the retirement fund. Under this view, the $100 wuld be prjected until the expected timing f the pensin benefit payment at say five 7

8 per cent being the expected earnings n plan assets fr that perid. The prjected value f the plan assets at the expected time f the pensin benefit payment wuld then be discunted at a discunt rate, based n the cst f brrwing f say, three per cent. This wuld lead t a retirement benefit liability since the accrued benefit bligatin wuld exceed plan assets. Hwever, when the discunt rate is determined by reference t the expected rate f return n plan assets, the apprach yielded under this alternative wuld be similar t View A. Under View C, retirement benefits expense fr current service cst wuld be calculated by reference t the funding made during the year (and prjected in a similar manner t the calculatin n the accrued benefit bligatin). Retirement benefits interest expense wuld be determined in accrdance with Sectin PS Actuarial gains and lsses culd be recgnized, fr example, upn revisins t the expected return n assets r t the discunt rate. View D Prjectin f the benefits is nt an actuarial assumptin Measurement f the accrued benefit bligatin and the plan assets are independent. When making actuarial assumptins, the entity des nt anticipate measures the Bard f Trustees may adpt t cmply with the funding plicy. Paragraph PS describes the nature f actuarial assumptins: Accunting fr retirement benefit bligatins f defined benefit plans requires frecasts f future events, such as inflatin rates, investment returns, interest rates, wage and salary increases, medical inflatin and emplyee turnver and mrtality. Such frecasts frm the basis f actuarial assumptins. Changes t cmply with the funding plicy are accunted fr as plan amendments. Paragraph PS requires: The cst f plan amendments related t prir perid emplyee services shuld be accunted fr in the perid f the plan amendment. Under View D, the measure f the retirement benefits expense des nt anticipate the financial effects f changes t cmply with the funding plicy until such changes are made. Other cncerns Grup Members were invited t cmment n ther cncerns cited in the submissin: Hw shuld the preparer develp an actuarial assumptin regarding cnditinal indexatin? Fr example, shuld that actuarial assumptin be derived frm the funded status at the end f the perid? If the current funded status allws fr cnditinal indexatin, this is presumed t apply t future perids as well and cnversely if the current funded status des nt allw fr cnditinal indexatin, it is presumed nt t apply t future perids. Or shuld the preparer estimate future funding status and determine fr each future perid whether cnditinal indexing will be allwed? What impact des a regulatry minimum target have n this estimate? Hw shuld the preparer develp an actuarial assumptin regarding ptential additinal cntributins? Fr example, shuld such assumptin be develped in a manner similar t the cnditinal indexatin assumptin (i.e., by reference t the current funded status)? Or shuld the 8

9 preparer estimate future funding status and determine fr each future perid whether additinal cntributins will be required? T what extent shuld the apprach used t develp assumptins leverage the stchastic mdelling perfrmed upn inceptin r cnversin f a plan? Fact Pattern: At the crux f a shared-risk plan is a funding plicy and stipulated threshlds designed t manage cntributins within a reasnable range but at the same time prvide a high prbability that a target level f benefits will be paid. This is dne bth thrugh a fairly cnservative investment strategy and the peratin f funding parameters. Threshlds are determined s as t ensure that the risk f missing the targets is effectively managed when the plan assets get t lw relative t plan liabilities, additinal cntributins are required t be made. T summarize: Benefits are established pursuant t a frmula. The benefits are nt guaranteed but targeted with cntributins and benefits being managed thrugh a funding plicy. The cntributins f the emplyer match thse f the emplyee. Indexatin adjustments (i.e., t link the benefits t inflatin) are nt guaranteed but cnditinal n available funds. The funding plicy is required, by regulatin, t include the fllwing primary and secndary risk management gals: the primary risk management gal is at least a 97.5 per cent prbability that the past base benefits will nt be reduced ver a 20 year perid; and the secndary risk management gal is an expected escalatin (inflatinary) adjustment f the base benefit shall, n average, ver a 20-year perid exceed 75 per cent f the increase in the cnsumer price index. The viability f a shared-risk plan is tested using an asset liability mdel. This mdel must cmply with the fllwing: ecnmic assumptins are established based n the actuary s best estimates taking int accunt the current ecnmic envirnment and future expectatins and shall reflect a reasnable distributin f future ecnmic scenaris (this is dne using stchastic i.e. based n prbability mdelling); ecnmic assumptins subject t review every 12 mnths; and demgraphic assumptins cnsistent with funding plicy liabilities. The primary and secndary risk management gals must be met n cnversin f a pensin plan t a shared-risk plan. The primary risk management gal must be tested each year. A funding plicy valuatin is als required t be cmpleted annually. 9

10 When the rati f assets/liabilities is less than 100 per cent in tw successive funding valuatins, cntributins f the emplyer and emplyee are increased (up t a maximum f 25 per cent f the initial cntributin rate r tw per cent f earnings). If the abve is insufficient t meet the primary risk management gal, future and past base benefits may be reduced until a rati f 105 per cent is achieved and the primary risk management gal is met. When the rati f assets t liabilities is 105 per cent r mre: any prir reductins in benefits are reversed; and in the event this is insufficient, in cnsultatin with the pre-established funding excess utilizatin plan, ne r bth f the fllwing changes are made: - benefits are indexed; and - the cntributins f the emplyer and the emplyees decrease. Gvernance is prvided by an independent bard f trustees with representatives frm the emplyees and the emplyer. Each trustee is mandated t act independently f the persn wh appinted him r her. The emplyees and the emplyer appint an equal number f trustees. The terms f the plan indicate that: The sle bligatin f persns making cntributins under a shared-risk plan is limited t making r remitting, within the time prescribed by regulatin, the cntributins required under the plan text and the funding plicy. In the case f a plan wind-up, plan members wuld be entitled t a wind-up value. The wind-up value is equal t the: funding plicy liabilities f the benefits that each member r frmer member is entitled t multiplied by the funded rati at that time. The Grup s Discussin The presenter explained certain similarities in the views. Views A and D share the perspective that the accrued benefit bligatin and the plan assets are measured independently f ne anther. Views B and C adpt a perspective that prvisins in the shared-risk plan create a linkage between the accrued benefit bligatin and the plan assets. Grup members cmmented n the inherent difficulty f applying Sectin PS 3250 t plans with features such as thse in the illustratin. The emplyer des nt prmise a defined benefit in the traditinal sense. Instead, the benefit prmise is cnditinal. A target level f benefits is prvided subject t a funding plicy used t manage cntributins and benefits. The emplyer prvides n assurance that the target level f benefits can be maintained. Grup members expressed mixed views. Several Grup members supprted the perspective that measurement f the accrued benefit bligatin is linked t the plan assets. This view is based n the expectatin that a shrtfall in funding may decrease benefits as the terms f the plan d nt place any further bligatin n the emplyer. These Grup members felt that as the funding plicy limited the 10

11 ptins available, there is a practical link between management's best estimate f the liability and the plan assets. Other Grup members disagreed with the cnclusin that measurement f the accrued benefit bligatin and plan assets are linked. Measurement f the accrued benefit bligatin is nt related t the measurement f the assets. Limiting the liability's value t the amunt f the plan assets might nt result in presenting the full extent f the liability. Grup members supprting View A explained that any actins taken by the bard f trustees t cmply with the funding plicy wuld nt cnstitute a plan amendment. The presenter was asked t clarify the rle f the bard f trustees. It was explained that the funding plicy largely predetermines the actins available t the bard f trustees. One Grup member cautined nt t presume that all plans are the same. It was bserved that sme plans grant a bard f trustees a degree f discretin. If discretin is present and the bard f trustees has nt yet decided n what actin t take by the financial reprting date, this culd present an issue. If the bard trustees had discretin ver the required curse f actin, sme Grup Members indicated they wuld adpt View D. The discussin als tuched n prvisins in Sectin PS 3250 that describe jint defined benefit plans. The illustratin evidences sme but nt all f the characteristics f a jint defined benefit plan. In the case f a jint defined benefit plan, Sectin PS 3250 states that the emplyer's risk is limited t its prtin f the plan. While the illustratin describes a plan that is funded equally by the emplyees and the emplyer, the risk f a benefit shrtfall is brne by the retirees and the emplyees entitled t benefits at a future date. The emplyer des nt expect t make additinal cntributins. The ther cncerns cited in the submissin were nt discussed. The Value f Statements f Recmmended Practice Statements f Recmmended Practice (SORPs) are issued by PSAB t prvide general guidance t a gvernment r gvernment rganizatin (entity) chsing t prvide supplementary infrmatin beynd that which is cntained in its financial statements. Grup members were asked t share their experience as users f SORPs t supprt reprting n the perfrmance f public sectr entities. PSAB's Strategic Plan, states an aim f PSAB is t supprt the preparatin f "cmprehensive, high-quality cmparable financial and nn-financial perfrmance data." The mst recent SORP was issued in May N SORPs are in develpment. Backgrund As part f an "envirnmental scan" fr PSAB's upcming strategic review, staff f PSAB reviewed annual reprts issued by the federal gvernment, the prvinces and territries and sme lcal gvernments. In ttal, 37 annual reprts were reviewed. Use f: SORP-1, Financial Statement Discussin and Analysis, in 25 reprts; SORP-2, Public Perfrmance Reprting, in ne reprt; 11

12 SORP-3, Assessment f Tangible Capital Assets, in ne reprt; and SORP-4, Indicatrs f Financial Cnditin, in 24 reprts. (Nte: SORP-2 and SORP-3 can be applied t infrmatin presented utside f an annual reprt. Only annual reprts were reviewed as part f the envirnmental scan.) The Internatinal Public Sectr Accunting Standards Bard (IPSASB) has issued tw Recmmended Practice Guidelines (RPGs): RPG 1,Reprting n the Lng-Term Sustainability f an Entity's Finances; and RPG 2,Financial Statement Discussin and Analysis. IPSASB is wrking n a third RPG, Reprting n Service Perfrmance Infrmatin. The Gvernment Finance Officers Assciatin's Canadian Award fr Financial Reprting prgram encurages applicants t apply SORP-1 when preparing a Financial Statement Discussin and Analysis. The Grup s Discussin The Directr, Public Sectr Accunting, explained the histry and purpse f SORPs. T help readers better understand financial statements, SORP-1 prvides guidance fr a financial statement discussin and analysis, which explains the amunts reprted. SORP-2 was issued in respnse t interest in the reprting f perfrmance infrmatin. It is a "hw t" guide fr cmmunicating the imprtant wrk f a public sectr entity, explained in nn-financial terms. SORP-3 was issued in part t address the limitatins with using histrical cst when reprting n tangible capital assets. When reprting f tangible capital assets was under discussin, lcal gvernments were particularly interested in hw t cmmunicate infrmatin abut asset cnditin. The lw adptin rate indicated in the survey figures is understandable given the limited number f lcal gvernment financial statements selected fr review. SORP-4 was develped t braden the perspective f readers. It encurages the presentatin f a range f indicatrs in additin t the basic measures f surplus r deficit and net debt. One Grup member nted that smaller municipalities cntinue t fcus n imprving the verall quality and accuracy f infrmatin n their tangible capital assets. Given limited resurces, their principal fcus is n cmplying with generally accepted accunting principles and supplementary infrmatin mandated by the Ministry f Municipal Affairs. Other Grup members nted that SORP-3 requires the invlvement f specialists. Assessments f asset cnditin can be judgmental. An underlying cncern is readers may inapprpriately cnclude a liability exists when this is nt the case. Grup members discussed the value f SORPs already issued by PSAB. Mst Grup members fund value in sme r all f the SORPs. Other Grup members nted SORPs can lead t tensin as there is a desire t "tailr" the presentatin f infrmatin. On ccasin, applicatin f SORP guidance is seen t cmpete with ther frms f cmmunicatin, such as budgets and business plans. Debates abut applicatin and custmizatin lead t tensin. Varying perspectives were expressed n the future f SORPs. Several Grup members cmmented that PSAB needs t make addressing cmplex financial reprting issues its principal pririty. One 12

13 Grup member suggested PSAB evaluate hw SORPs serve the public interest. Other Grup members nted users f nn-financial infrmatin are interested in understanding the scpe f the challenges gvernments face in planning fr the replacement f utdated infrmatin systems and wrn-ut infrastructure. Requests t gvernment rganizatins fr mre infrmatin abut their nnfinancial perfrmance are increasing. One Grup member nted there is a desire t breathe new life int SORPs. PSAB may need t d mre t infrm cnstituents abut the benefits that can arise frm their applicatin. Effrts t supprt the applicatin f SORPs have fallen ff since the SORP-4 was issued in When existing SORPs are updated r new nes prepared, Grup members suggested due prcess needs t invlve experts utside f the accunting cmmunity. This is needed as the SORPs fcus n nn-financial matters. This frm f reprting is bund t tread n plicy initiatives, as cmmunicated in budget r ther dcuments f the gvernment. One Grup member nted that many gvernment rganizatins reprting n nn-financial perfrmance are ften reluctant t lk beynd methdlgies prvided by the ministries f the gvernments they are accuntable t. Perhaps the aim f SORPs is simply t influence hw gvernments apprach the presentatin f supplementary infrmatin and the guidance ministries and departments give t gvernment rganizatins. SORPs are a surce f recmmended practices rather than requirements. Standard Setting in the Public Interest In its missin statement, PSAB states its aim is t establish standards and ther guidance fr financial reprting in a manner that serves the public interest. Issue What is in the public interest? PSAB s Terms f Reference state: "The Public Sectr Accunting Bard (PSAB) serves the public interest by establishing standards and ther guidance fr financial reprting by all Canadian entities in the public sectr and by cntributing t the develpment f internatinally accepted public sectr financial reprting standards. The missin f PSAB shall be t cntribute t supprting infrmed decisin-making and accuntability by maintaining a framewrk that prvides a basis fr high-quality infrmatin abut rganizatinal perfrmance reprted by Canadian public sectr entities." Frm time t time, standard setters and thse cmmenting n the prpsals f standard setters will advcate a view r apprach as being in the "public interest". On ccasin, views f what is in the public interest can be cnflicting. It may well be that the public interest is an abstract ntin and the characteristics f what is in the public interest is multi-faceted. There appears t be n widely accepted definitin. The Grup s Discussin Fr the past few years, PSAB has mre explicitly addressed the public interest as part f due prcess. The Chair f PSAB explained the Bard challenges itself t cmplete the phrase, "this is in the public interest because " 13

14 The Chair f PSAB explained the purpse f the Grup's discussin was t: infrm the Bard f factrs t cnsider when discussing whether the develpment f a standard is in the public interest, t imprve Bard discussins; help put tgether language that wuld explain and/r cmmunicate why the actins the Bard is undertaking are in the public interest; imprve the dcuments issued at each stage f due prcess by explicitly addressing the ntin f public interest; and issue a standard that is in the public interest. Grup members discussed tw imprtant aspects f public interest. Wh is the public? What is in the public interest? The public culd pssibly include all individuals and rganizatins that rely n the financial statements f an entity t make decisins. Members f the public may have less access t intermediaries, such as investment analysts, t interpret financial reprts fr them. Cnsequently, fr standards t be in the public interest, they must result in recgnizing and reprting transactins in an understandable manner. Grup members discussed the value f creating a dcument t supprt discussins f why a particular standard is in the public interest. During the discussin, Grup members reflected n the Internatinal Federatin f Accuntants (IFAC) Plicy Psitin 5, A Definitin f the Public Interest. In this dcument IFAC states that: T determine whether an actin, decisin, r plicy has been undertaken in the public interest, an assessment can be made against public interest criteria, being cnscius f the dimensin f bth utcme (net benefits) and prcess. That is, IFAC cnsiders that there are tw general assessments: The Assessment f Csts/Benefits The extent t which, fr sciety, as a whle the benefits f the actin, decisin, r plicy utweigh the csts; and The Assessment f Prcess The extent t which the manner f cnsidering the actin, decisin r plicy was cnducted with the qualities f transparency, public accuntability, independence, adherence t due prcess, and participatin that includes a wide range f grups within sciety. Grup members discussed these tw dimensins and cnsider bth dimensins imprtant. Outcmes need t be assessed. Failure t reslve imprtant issues des nt lead t standards that are in the public interest. There was a lt f discussin arund the fact that the utcme f a standard shuld be t imprve the infrmatin being prvided n the financial statements. Hwever, it was nted that the view f what cnstitutes an utcme that is in the public interest is subjective. It was als nted that an utcme that appears t be in the public interest at present may nt be in the public interest at sme pint in the future. It is fr this reasn that standards need t be revisited t ensure they cntinue t be in the public interest. Assessing due prcess is critical as a gd prcess shuld lead t an utcme that is in the public interest. Hwever, this may nt always be the case. As a result, sme Grup members suggested that 14

15 the fcus shuld be n achieving a gd utcme. Other Grup members suggested that a check pint in the due prcess is whether due prcess has garnered the supprt and cnfidence f thse affected by the standard. Grup members als nted that independence is a key element fr a gd due prcess and standard setters shuld strive fr independence. The PSA Discussin Grup plays a valuable rle in the assessment f utcmes as it is a mechanism that prvides feedback t PSAB. Pst-implementatin reviews can be useful as they t assess whether the standard is accmplishing what was intended. Grup members cnsidered whether a public interest analysis shuld be explicitly embedded in due prcess. Sme Grup members suggested cautin fr varius reasns. Reasns included a perceptin that the analysis may be seen as advcating ne s wn interests. As well, it can be challenging t capture what is in the public interest when there are a variety f views. Other Grup members suggested each expsure draft address this questin fr stakehlder cmment. Cmments may identify issues that wuld therwise be verlked. Ultimately, a better utcme will ccur. Grup members als suggested: including applicatin guidance; increasing effrts t engage stakehlders at each stage f due prcess; and summarizing PSAB's assessment that the standard is in the public interest. The standard-setting prcess is an evlving practice. Imprvements need t be cntinuus. Standard setters strive fr independence and they d their best in develping and apprving standards that are in the public interest having cnsidered different factrs. 15