Financial Information Strategy Accounting Manual

Transcription

1 Financial Information Strategy Accounting Manual Published: Jul 01, 2001

2 Her Majesty the Queen in Right of Canada, represented by the President of the Treasury Board, 2001 Published by Treasury Board of Canada, Secretariat 90 Elgin, Ottawa, Ontario, K1A 0R5, Canada Catalogue Number: BT32-49/2001E-PDF ISBN: This document is available on the Government of Canada website, Canada.ca This document is available in alternative formats upon request. Aussi offert en français sous le titre : Manuel de comptabilité selon la SIF

3 Financial Information Strategy Accounting Manual Disclaimer This Financial Information Strategy (FIS) Accounting Manual is under review and is being replaced by the new Government of Canada Accounting Guide. * Asterisks denote the updated sections; please refer to the Table of Contents of the Guide for the most recent updates. Acknowledgements This manual reflects the collaborative efforts of over 45 people representing some 24 departments within the Federal Government. It is not practical to acknowledge individually all those people who gave so freely of their time to put this manual together. Invariably some would be missed. However, each of them is well aware of their contribution and can take great pride in seeing the results of their hard work. To each of them, we say well done and thank you. Preface This manual: a. Defines differences between accrual accounting, authorities accounting, and reporting by objects. b. Describes a variety of accounting transactions and indicates how to code them with supporting rationale in the three Scenario s indicated above. c. Outlines reporting and presentation requirements for departmental financial statements. Amendment Record Sheet Please note: Each new release may contain minor and/or major revisions. Grammatical corrections and clarifications can be considered minor, while major revisions include coding changes, additions and deletions that are significant or new in nature. Release no July 12, Revision - the reference to FIS has been returned to the title of the manual. 2. Revision - Prepayments - the description relating to transfer payments has been revised. 3. Addition - Capital Assets - Scenario G provides an example of the write-down of a capital asset. 4. Addition - Capital Assets - Scenario E provides an example of an optional entry for trade-ins to adjust the authority code related to the proceeds from disposal of surplus crown assets. 5. Revision - Capital Leases - Scenario A, entry 3a, 3b and 5b, the economic object for the recognition of interest expense has been corrected to conform to an expenditure basis. 6. Addition - Future Site Restoration Costs - section has been added. 7. Revision - Compensation - Scenario A and C (entry 1 and 2a), Scenario F and G (entry 1), the economic object code has been corrected to record the economic object on an expenditure basis. Scenario F and G, entry 2a has been added to reverse the accrual in entry 1. Release no April 27, Revision - the reference to FIS has been removed from the title of the manual. 2. Revision - Unconditional Repayable Contributions - details of the example provided have changed. Entries 3 and 5 have been deleted. Amortization of entire amount of discount is done on a straight-line basis. 3. Revision - Tangible Capital Assets - Scenario A, Entry 2, economic object 7099 has been added as an alternative for the recording of accumulated amortization. 4. Revision - Capital Leases - Scenario A Entry 1, the economic object used when capitalizing the asset has changed to Entry 2 and 5a, the economic object for the reduction in the lease obligation has changed from 6299 to Entry 4, economic object 7099 has been added as an alternative for the recording of accumulated amortization. 5. Revision - Capital Leases - Scenario B Entry 7, economic object 7099 has been added as an alternative for the recording of accumulated amortization. The economic object used for informatics equipment has changed from 1226 to Revision - Loan Guarantees, Entry 2b, the FRA to record the loan receivable has changed to Entries 2c and 3 have been added to present the recording of an allowance for doubtful accounts and the write-off of the loan receivable. 7. Revision - Unrestricted Gifts, Bequests, Donations - 8. Scenario B1, Scenario B2 - Entry 2, Scenario C - Entry 3, Scenario D: FRA Donated assets to the Crown has been replaced by FRA Gifts to the Crown.Addition - SPAs Cost-Sharing/Joint Project Agreements - an example of a costsharing/joint project agreement to be accounted for under Scenario A has been added. More guidance has been provided in the introduction on choosing between accounting for these agreements under Scenario A or B. 9. Revision - Foreign Currency Transactions - Scenario C Entry 1, authority code for loss on foreign exchange has changed to A-126.

4 Entry 2, authority code for gain on foreign exchange has changed to D Revision - alternative entries have been added for the accounting of expenses incurred by the Spending Department. The yearend entries for both the Funding and Spending departments have changed. Release no. 9 - February 28, Revision - Prepayments Scenario A, Journal Entry 2) - Authority Codes were changed from F999 to F119 on the debit side and F313 on the credit side. Scenario B, Journal Entry 2) - Same as above. Scenario C, Journal Entry 2) - Same as above. Using a more specific code will aid the departments with their reconciliation. Please note departments do have the discretion to use F999 or a more specific code, either way there is no impact on authorities. 2. Addition - Prepaid Expenses - alternative entries to record a prepayment have been added. 3. Addition - the GST component has been added to all applicable accounting entries throughout the Manual. 4. Revision - Accounts Receivable - Scenario B, Entry 1, the economic object for bad debt expense has been changed from 3462 to 3215/ Revision - Unconditional Repayable Contributions - the definition of "significant" in the introduction has been revised. 6. Addition - section 3.3 Inventories. 7. Revision - Tangible Capital Assets - Scenario A entry 1, the entry to record freight has been revised. Scenario F, entry 1 - the FRA to record the loss has changed as well as the object code. 8. Addition - Tangible Capital Assets - alternative entries to record the purchase of an asset have been added to Scenario A, C, D. 9. Revision - Capital Leases - Scenario A, entry 1 and 2, the object code used for the obligation entry has been corrected. Entry 3a and 3b, the object code used to record the interest component has been corrected. Scenario B, entry 7, the object code used to record accumulated amortization has been corrected. 10. Revision - Accounts Payable - Scenario A, entry 1,2 and 3, the amount recorded for accounts payable has been corrected. 11. Revision - Deferred Revenue - all entries, the FRA used for deferred revenues has been changed from to Revision - Net Assets (Liabilities) - Introduction has been re-written. Accounting for donations and bequests accounts has been changed to reflect change in accounting treatment for SPAs. Adjustments have also been made to the amounts presented. 13. Addition - section on Unrestricted Gifts, Bequests and Donations revenue has been added as section Deletion - Grants and Contributions - Section on contingent recoveries and Scenario B has been deleted. Information on contingent gains can be found in section 9.4 on contingencies. 15. Addition - Compensation - various examples of compensation related accruals have been added. 16. Deletion - Opening Balances has been removed. 17. Revision - section 9.1 Specified Purpose Accounts has been revised. The significant changes include: for SPAs which earn interest, the two-sided IS entry is presented; each SPA has its own authority code assigned to it - entries have been modified to reflect this; cost-sharing and joint project agreements, two alternatives are presented on how to account for these; and the entries related to donations and bequests of capital assets and donations and bequests of funds without restrictions have been moved to section Revision - Foreign Exchange Gains and Losses - description of accounting for exchange gains and losses in introduction has changed to remove reference to the deferral and amortization of gains. 19. Addition - Funds Administered by Departments on Behalf of OGD's has been added as section 9.9. Release no. 8 - September 29, Addition - Prepayments (including Prepaids and Deferred Charges) 2. Addition - Loan Guarantees 3. Addition - Pension Superannuation Liabilities (see Compensation section) 4. Addition - Compensation 5. Addition - Court Awards 6. Addition - Pension Accounts (see Compensation section) 7. Addition - Foreign Currency Transactions 8. Addition - Sales Tax 9. Addition - Contingencies 10. Addition - List of Acronyms 11. Revision - Respendable versus Non-Respendable Revenue, Scenario A1, Journal Entry 1, Object Coding Rationale. 12. Revision - Loans Receivable-General Scenario A, Journal Entry 3, FRA code for Loans receivable was changed to from Revision - Assets under Construction- There were both minor and major revisions made to this section, they are as follows: Scenario A - minor - added an assumption to the Scenario. Scenario A, Journal Entry 1), FRA Coding Rationale and Authority Rationale - minor Scenario A, Journal Entry 2a), FRA Coding Rationale and Authority Rationale - minor Scenario A, Journal Entry 2b), FRA Coding Rationale - minor Scenario A, Journal Entry 2b), Authority Coding was changed from F999 on both sides of the transaction to B14A on the debit side and B11A/B12A on the credit side. The corresponding rationale has been changed to reflect that the salaries and wages must be re-allocated from the program or operating vote to the capital vote. Scenario A, Journal Entry 3), FRA Coding Rationale - minor Scenario A, Journal Entry 4), FRA Coding was changed from to 16122

5 Scenario A, Journal Entry 4), Object Coding was changed from 1226 on both sides of the transaction to 3425 on the debit side and 3717 on the credit side. The object rationale was changed to reflect this. Release no. 7 - August 31, Addition - Loans Receivable - General 2. Addition - Unconditional Repayable Contributions 3. Addition - Assets Under Construction 4. Addition - Commitments 5. Addition - Financial Statements 6. Revision - Net Assets (Liabilities) -Changes were made to reflect the notion that Endowments are not closed directly to equity but flow through a revenue account (FRA Donations and bequests to endowment accounts) and is subsequently closed to a separate equity account (FRA Endowment accounts). As a result, an additional journal entry (1e) was added to Scenario B, Journal Entry 1 and the FRA Coding Rationale was modified. As well, the Introduction section - "Accounting for Restricted Net Assets" was modified to reflect this. Other coding changes include: "42624 Donations and bequests to other trust accounts" was changed to " Donations and bequests to other accounts" and will now be "Donations and bequests to endowment accounts" "51624 Payments from other donations and bequest trust accounts" was changed to " Payments from other donations and bequest accounts" and will now be Payments from endowment accounts" (note that code is not used in the manual). 7. Revision - Endowments - Changes were made to reflect the notion that Endowments are not closed directly to equity but flow through a revenue account (FRA Donations and bequest to endowment accounts) and is subsequently closed to a separate equity account. As a result, Scenario A, Journal Entry 1 was modified as was the FRA Coding Rationale to reflect this change. As well, the Introduction section - "Accrual Accounting Perspective" was changed to explain these modifications. 8. Revision - Transfers - Minor changes to Reference section 9. Revision - Conditional Repayable Contributions - The concept of contingent recoveries is replacing contingent gains since the repayment of these contributions are considered recoveries of expenses. Therefore, modifications have been made to the Introduction section, Departmental Financial Statement and Disclosure Requirements Section, References section, and Scenario B, Journal Entry 1 to accommodate the change. As well, when portions of the transfer payment are to be repaid, the credit will be to Transfer Payment expense (FRA 511XX) instead of revenue (FRA 42719) and the Accounts receivable (FRA 11221) will be replaced by Accounts receivable for refunds of program expenses (FRA 11231) see Scenario C, Journal Entry 1). 10. Revision - Grants and Contributions - The concept of contingent recoveries was expanded. Modifications were made to the Introduction section and the Departmental Financial Statement and Disclosure Requirements Section. As well, when portions of the transfer payment are to be repaid, the credit will be to Transfer Payment - Scholarship (FRA 51119) instead of revenue (FRA 42719) and the Accounts receivable (FRA 11221) will be replaced by Accounts receivable for refunds of program expenses (FRA 11231) see Scenario C, Journal Entry 1). 11. Revision - Tangible Capital Assets - The term informatics equipment has been changed to informatics hardware. See Scenario C, Journal Entry 1a), 1b), Scenario E, Journal Entry 1). Scenario D, Journal entry 1) - FRA coding change from to Release no. 6 - August 1, Revision - The term DRAFT has been removed from the manual. This does not indicate that the manual is yet complete. The manual should be considered to be and "evergreen" document which will require constant updates to reflect new policies, changes in codes, additional Scenario s etc. 2. Revision - Limitation of Manual: References made to indicate that the codes used in the Manual should only be used in Addition - Net Assets (Liabilities) 4. Addition - Transfers 5. Addition - Conditional Repayable Contributions 6. Addition - Grants and Contributions 7. Addition - Services Provided Without Charge 8. Addition - Control Accounts 9. Addition - Cost Sharing Arrangements 10. Addition - Gifts, Bequests, and Donations 11. Addition - Endowments 12. Addition - Brief Introductions added to Assets, Receivables, Liabilities, Revenues, and Expenses 13. Addition - Environmental Liabilities 14. Revision - There have been recent revisions to the Object Codes in the Chart of Accounts The following journal entries have been changed:

6 Section Scenario Journal Entry Old OBJ New OBJ Accounts Receivable A Accountable Advances B 2a Accountable Advances B 2b Tangible Capital Assets E Capital Leases A Capital Leases A Capital Leases A 5a Capital Leases A 5b Capital Leases B /7099 Deferred Revenue B 1b Respendable versus Non Respendable Revenue A Respendable versus Non Respendable Revenue B Respendable versus Non Respendable Revenue B Respendable versus Non Respendable Revenue B1 2b Revision - Trust Accounts, Scenario A, Journal Entry Revision - Lexicon: Definition of "Net Assets and Liabilities" revised. 17. Deletion - Federal/Provincial Arrangements. No examples were forthcoming from departments, therefore we have removed the section from the table of contents in this release. 18. TBAS 1.3, Departmental and Agency Financial Statements, will be re-issued as TBAS 1.2, Departmental and Agency Financial Statements. Release no. 5 - July 14, Addition - Specified Purpose Accounts 2. Addition - Prepayments 3. Addition - Trust Accounts 4. Addition - Deposit Accounts 5. Addition - Lexicon 6. Revision - Due to the recent streamlining of the Object Codes in the Chart of Accounts, there have been numerous changes to the Object Codes. All cash accounts are reflected as "5299-Net Increase or Decrease in Cash Accounts" As well, codes that were previously used for Payables (623x and 625x) have been changed to "6299-Net Increase or Decrease to Other Liability accounts". Also, object codes that were previously used for Accounts receivables (531x) have been changed to "5399-Net Change to Accounts Receivable". Since these changes are too numerous, it is not practical to list them individually on the amendment record sheet. 7. Revision - Debt Deletions, Introduction and Reference Sections 8. Revision - Accountable Advances Scenario B, Journal Entry 2b, CR Accountable Advances changed to $ Release no. 4 - June 20, Addition - Accounts Receivable Section 3.2.1

7 1. Addition - Accounts Receivable Section Addition - Debt Deletions Section Addition - Respendable versus Non Respendable Revenue Section Addition - Sales Tax Section 9.4 (only portion of section is completed) 5. Addition - References Section added to Sections 2.0, 3.1, 3.3.2, 3.6, , 4.1, 4.2, 7.1 and Revision - Cash Section 3.1, Scenario A, Journal Entry 3, Object Coding Rationale 7. Revision - Tangible Capital Asset Section 3.6.1, Introduction 8. Revision - Capital Leases , Scenario A, 3a and 3b, FRA Coding Rationale 9. Revision - Accounts Payable 4.1, Scenario A, 1and 3 Release no. 3 - May 19, Addition - Capital Leases Section Addition - Non-Monetary Transactions Section Deletion - Working Capital Advances Section Addition - Accountable Advances Section Revision (major) - Deferred Revenue Section Revision (minor) - "ECON" heading (all journal entries) changed to "OBJ". 7. Revision (minor) - "Economic object coding rationale" headings changed to "Object coding rationale" (all journal entries). 8. Revision (minor) - Preface Paragraph a) 9. Revision (minor) - Introduction Sections Revision (minor) - Accounting Principles Sections 2.0, 2.3, 2.4, Revision - Cash Section 3.1, Scenario A, Journal Entry Revision (minor) - Tangible Capital Assets Section Revision (minor) - Accounts Payable Section 4.1 (including coding change to Scenario A, Journal entry 3) 14. Revision (minor) - Operating Expenses Section 7.1 Release no. 2 - April 14, Addition - Capital Assets Section Addition - Tangible Capital Asset Section Addition - Cash Section 3.1 Scenario C, journal entries 2 and 3 4. Addition - Operating Expenses section 7.1, Departmental Financial Statement Presentation and Disclosure Requirements 5. Revision - Accounts Payable Section 4.1, Introduction, paragraph 1 6. Revision - The title "Presentation and Disclosure Requirements" has been changed to "Departmental Financial Statement Presentation and Disclosure Requirements" 1.0 Introduction 1.1 Objectives of the Manual The objectives of this Manual are to: provide general information and guidance on accrual accounting; assist departmental staff in understanding differences among accrual accounting, accounting for authorities and reporting by objects; assist departmental staff in recording both routine and complex transactions particular to government, from the accrual, authorities and object of expenditure perspective. This is important since all accounting transactions must be recorded to indicate: a) accrual accounting basis; b) appropriations or other authorities basis; and, c) object of expenditure basis; and, assist departments with respect to recognition and disclosure requirements for the production of their departmental financial statements on a full accrual basis. 1.2 Limitation of Manual It should be noted that the Manual does not purport to cover all possible accounting transactions and Scenario s. This is considered to be neither desirable nor possible because of the number of permutations and combinations that can exist. This is especially so for the use of authority codes because they depend to a great extent on specific departmental legislation and other authorities including Estimates. As a result, the Manual cannot be considered authoritative. The transactions presented must be considered in light of this and may not be the only possible way of handling a specific transaction. Thus, the Manual only provides general direction on the majority of transactions that Departments will encounter. However, the transactions covered together with the explanations should provide departmental personnel with the necessary guidance to handle most transactions. In circumstances where this is not possible, the advice of TBS should be sought. To use this Manual effectively, departmental personnel should refer to: the Chart of Accounts Manual the FIS Transition Protocol Recommendations for the inclusion of other types of transactions in the Manual should be made to the Government Accounting Policy Division of TBS, Telephone (613) , Facsimile (613)

8 1.3 Applicability of the Manual This Manual will be useful to all government departments as defined in Section 2 of the Financial Administration Act (FAA). "Department" means a. any of the departments named in Schedule I of the FAA. b. any of the divisions or branches of the public service of Canada set out in column I of Schedule I.1 of the FAA. c. a commission under the Inquiries Act that is designated by order of the Governor in Council as a department for the purposes of the FAA. d. any departmental corporation (Schedule II) The contents of this manual do not override legislation, regulations or Treasury Board policy relating to financial administration. When there are any conflicts between this manual and legislation or regulations or policy, the latter will apply. 1.4 Description of Accrual Accounting, Accounting for Appropriations and Other Authorities and Reporting by Objects With the full implementation of the Financial Information Strategy on 1 April 2001, departments will be required to account for economic events specific to their department on: a) an accrual accounting basis; b) an authority basis to identify the appropriations or other authorities; and, c) an objects of expenditure basis. Although there may be similarities amongst these three requirements, there are many differences. Consequently, they will be considered separately. The underlying bases of accounting differ to some extent between accrual accounting and appropriation accounting. Currently appropriations are on a partial accrual basis. Consequently, reporting in financial statements will need to be on both a full accrual accounting and partial accrual accounting bases. Under the partial accrual basis now used for amounts reported in the Estimates, some expenses are accrued but not all; respendable revenues are on a pure cash basis; and, non-financial assets are expensed on acquisition. For example, Payables at Year End (PAYE) are accrued, as are salaries, while other items like employee benefits are not accrued. Transactions that get recorded on an accrual accounting basis may or may not affect appropriations and vice versa. In these cases, the appropriate coding and journal entries must be made to ensure that appropriations are not improperly affected. Departments will also be required to record transactions on an object of expenditure basis. It is best to consider these three elements i.e., accrual, authority and objects as separate and distinct since there are many circumstances where there is not a direct correlation amongst or between them Accrual Accounting Accrual accounting recognizes transactions when the underlying economic event occurs, not just when cash is received or paid. In accrual accounting, transactions are classified as assets, liabilities, equity, revenues or expenses. The objective of accrual accounting is to ensure that events that affect a department's financial statements are recorded in the periods in which they occur, rather than in the periods in which the department uses its appropriation. Accrual accounting means recognizing revenue when earned (rather than when cash is received) and recognizing expenses when incurred (rather than just when paid). Over the long run, trends in expenses and revenues, since they reflect the underlying economic consequences of operating decisions for a time period are generally more meaningful than trends in payments and cash receipts or charges to an appropriation. The accrual basis provides users with information about such matters as the resources controlled by the department, the cost of its operations and other information useful in assessing its financial position and changes in it over a particular time period, and in assessing whether a particular organization is operating economically and/or efficiently. It should be noted that Financial Reporting Accounts (FRAs) were developed as separate accounts in the Chart of Accounts to code transactions for accrual accounting purposes Accounting for Appropriations and other Authorities An appropriation is an authority of Parliament to pay money out of the Consolidated Revenue Fund (CRF). Therefore, an appropriation is required before moneys can be spent by the government. Some authorities are given in the form of annually approved limits through appropriation acts. Other authorities come from other legislation in the form of statutory spending authority for specific purposes (for example, employee benefits). Appropriation authority is the means by which Parliament controls the outflows of money from the CRF. However, there are a number of transactions which are charged to a current year appropriation but which do not affect the CRF until a later date or not at all, such as: a. certain goods received or services rendered prior to or on March 31 of a fiscal year, but not paid for until after that date; b. charges made by one government department on another; and c. write-off, forgiveness, etc. of loans, investments or advances. As a general rule, transactions are recorded against an appropriation on an "expenditure basis". However, there are certain expenditures which are not charged to an appropriation until a payment is required e.g. various allowance or provision

9 accounts currently set up by Treasury Board Secretariat such as employee benefit costs for accrued vacation pay, severance pay, etc. Currently, accounting for the use of appropriations provides parliamentarians with control over most expenditures of the Government, for both amount and purpose. However, it does not give a complete financial picture of the government since it lacks information on assets and some liabilities and skews information on program costs. For example, if a department purchases a building, the department will record the full expenditure against a particular appropriation in the year acquired notwithstanding that the building will provide benefits over a number of years Reporting by Objects To measure the impact of government transactions on the economy, expenditures are classified according to the type of resources (goods and services) acquired, revenue earned or the transfer payments made. Identification of detailed economic objects, combined with information from other sectors of the economy, makes possible economic analysis, on a national basis, of the effects of government spending. The economic objects are the base code for the object classification and are required for government-wide statistical purposes. They may be used by departments as departmental line objects, but departments may need more detail for their own purposes. To accommodate the need for differing degrees of detail, several levels of classification by object are used. In descending order of aggregation, they are: categories, sub-categories; reporting objects; economic, source and class objects; and departmental (line) objects. Standard objects, which are the highest level for Parliamentary reporting, can be related to specific categories or sub-categories. 1.5 Identifying Important Differences In order to understand the primary differences between accrual accounting and accounting for the use of appropriations, terminology becomes increasingly important. It is necessary to distinguish between certain terms, to ensure that all users are consistent when describing a transaction, preparing a journal entry or providing rationale for various accounting treatments Expenditures versus Expenses versus Disbursements As per the Canadian Institute of Chartered Accountants Public Sector Accounting Handbook (PS) , expenditures are the cost of goods and services acquired in the accounting period whether or not payment has been made or invoices received and include transfer payments due where no value is received directly in return. Examples would include the payment of grants, contributions, the acquisition or construction of capital assets, and the acquisition of operating supplies etc. Expenses, as per PS are the cost of resources consumed in and identifiable with the operations of the accounting period. Expenses include the costs associated with: the purchase of goods and services; government transfers; grants, contributions and donations (non-repayable); and consumption of an asset e.g. amortization of a capital asset, consumption of inventory or prepaid expenses. Expenses do not include: the acquisition or construction of a capital asset; the repayment of debt; and investments in other entities (both loans and capital injections) To further clarify the difference, an expenditure refers to the acquisition of a good or service whereas an expense refers to the use of the good or service acquired. For example, the acquisition cost of a tangible capital asset would be an expenditure and the amortization of the cost of that asset would be an expense in the Statement of Operations for the period. Conceptually, the cost of an asset is deferred and recognized as an amortization expense over the period when the assets are used in delivering government programs. A disbursement is an outlay of cash. Such disbursements may be in the form of cheques, warrants or through the electronic transfer of funds Revenues versus Receipts Revenues, from an accrual accounting perspective, are defined as increases in economic resources, either by way of inflows of or enhancements to assets or reductions of liabilities, resulting from the ordinary activities of a department. As per PS , revenues should be accounted for in the period in which the transactions or events occurred that gave rise to the revenues. For example, user fees should be recorded in the period the goods or services are provided, sales and excise taxes should be recorded in the period when the sales are made, and transfer payments for shared cost agreements should be recorded in the period the costs are incurred. Items not practicably measured until cash is received would be accounted for at that time. Accounting for all of government's revenues ensures that related financial assets are accounted for in the period they

10 are created. Revenues include amounts earned from: taxes; the provision of goods and services; and interest. Revenues do not include receivables inflows e.g. payments received for accounts receivables or loans; refunds of expenditures; and custodial receipts e.g. deposit and trust accounts, etc. Revenue earned which is not yet collected in the year would be an accounts receivable. Receipts refer to moneys received, whether through cash, cheque or by electronic transfer of funds. 1.6 Guidance on Accrual Accounting The purpose of this section is to provide an overview of accrual accounting in the government environment. Accounting standards "Departments" will follow generally accepted accounting principles (GAAP) as defined in the Canadian Institute of Chartered Accountants Public Sector Accounting (PS) Handbook. Specifically, departments will use the "expense basis" of accounting as referred to in the handbook (PS ). Subject to modifications or interpretations by the Treasury Board Accounting Standards (TBAS), the PS Handbook will be the authoritative reference manual. In situations where a specific item is not covered in the PS Handbook, then the Canadian Institute of Chartered Accountants (CICA) Handbook will be used. This FIS Accounting Manual refers to accounting standards where they are relevant. These are part of GAAP. Where appropriate, the text contains a brief description of the requirements of the standards, together with details of any additional or alternative accounting treatments. The relevant accounting standards should be consulted for a full understanding of their requirements. 1.7 Other guidance As mentioned in section 1.2, not every possible Scenario is covered in this Manual. Furthermore, the PS and CICA Handbooks may not be explicit enough in certain circumstances. Therefore, it may be necessary to consult alternative sources to determine the most appropriate treatment for a particular transaction. An intermediate or advanced accounting textbook would be a most valuable source of information, since a variety of Scenario s would be described in sufficient detail to aid departments. As well, the Canadian Institute of Public Real Estate Companies (CIPREC) Handbook can serve as a useful guide to help departments with real property issues. In addition, there will be specific guidance, which will be the responsibility of, and be developed by, departments themselves. This means that each department should have an accounting guideline that is sufficiently detailed to deal with its own unique circumstances. 1.8 Departmental Reporting Each department, as defined by Section 2 of the FAA, will produce annually a full set of financial statements as at March 31 that can withstand the test of audit. These statements will consist of a Statement of Financial Position, a Statement of Operations, and a Statement of Cash Requirements, together with required Notes and Schedules. The financial statements, accompanied by a Statement of Management Responsibility and Auditor's Report, (if required by legislation or policy), must be available to the Receiver General for Canada by June 15 th of each year. Departments will publish these financial statements in their Departmental Performance Report. To the extent possible, department specific financial information now contained in the Public Accounts will be included in either the departmental financial statements or the supplementary financial information attached thereto. All financial information required on a government-wide basis would continue to be included in the Public Accounts. 2.0 Accounting Principles To prepare financial statements, there are certain basic accounting principals that need to be generally recognized and understood before individual transactions can be analyzed. 2.1 Going Concern The going concern principle is applied on the expectation that a department will continue to operate for the foreseeable future and there is no intention to curtail its operation.

11 The implications of this going concern principle are critical. The historical cost principle (described below) would be of limited usefulness if it were not for the going concern principle. For example, amortization policies are only justifiable and appropriate if we assume continuity of the department. 2.2 Historical Cost The determination of the measurement base on which an item is to be recognized in financial statements has been one of the most difficult problems in accounting. A number of bases exist on which an amount for a single item can be measured e.g. replacement cost, net realizable value (net amount that would be received from selling an asset), present value of future cash flows, market value, original cost (less amortization, where appropriate) etc. Generally, under existing GAAP, transactions and events are recognized in financial statements at the amount of cash or cash equivalents paid or received or the fair value ascribed to them when they took place; i.e., historical cost. By using historical cost as the basis for record-keeping, financial statements will contain objective and verifiable information. Historical cost provides financial statement users with a stable and consistent benchmark that they can rely on to establish historical trends. This concept is especially critical since there is a great deal of controversy about valuation of real property and other tangible assets carried by departments for many years. The historical cost is not always available or relevant to the users of the financial statements and must be supplemented by other financial information relevant to the decision making. 2.3 Matching Principle The matching principle requires that revenue and expenses be accrued; that is, they are recognized as they are earned or incurred, not just when they are received or paid or when they affect an appropriation. Under the matching principle, inclusion or exclusion of an item of revenue or expenses will depend on the period to which it relates, the period in which it was received or performed, or the period in which it was consumed, used or lost, subject in all cases to materiality considerations. In general accounting literature, the matching principle normally refers to the matching of revenue and expenses. However, with minor exceptions, departments do not generate major amounts of non-tax revenue but are funded through appropriations. As such, the matching principle must take on a slightly different interpretation. Consequently, revenues should be recognized when the goods and/or services have been rendered and expenses should be matched to program delivery outputs of services to the public. For example, in the case of tangible capital assets, a systematic and rational allocation policy is used to approximate the matching principle. This type of expense recognition involves making assumptions about the benefits that are being received as well as the cost associated with those benefits. The cost of a long-lived asset is allocated over the accounting periods during which the asset is used because it is assumed that the asset contributes to the generation of program outputs throughout its useful life. 2.4 Consistency There should be consistency of accounting treatment of like items within each accounting period and from one period to the next. This is particularly important if users are to compare successive years' accounts, for example, to identify trends in revenue and expenses. Changes in accounting policies and practices should generally only be made when those changes will result in fairer presentations of financial results. Any changes that have a significant impact on departmental and or consolidated results should only be made after prior discussion with TBS. Consistency does not mean that different organizations must apply the same accounting methods. This may be thought to improve comparability between departments. However, requiring such uniformity may result in dissimilar circumstances between departments being reported as being similar. For example, amortization policies should be developed on the basis of what best reflects the consumption of the asset in its particular operating environment. There may be different operating environments in each department. 2.5 Materiality Materiality is a term used to describe the significance of financial statement information to users. It is a matter of judgement in the particular circumstances. An item, or an aggregate of items, is material if it is probable that its omission or misstatement would influence or change a decision. In short, it must make a difference or it need not be disclosed. It is difficult to provide firm guidelines to help judge when an item is or is not material because materiality depends on the relative size of the item compared to the size of other items and the nature of the item itself. In determining whether an item or an aggregation of items is material, the following factors should be considered: the size of the item; nature of the item - for example, irregularities or illegal acts by departmental personnel would be material even if the amounts were small; and, cumulative effects - the total effect of individual amounts on the financial statements taken as a whole. It should be noted that specific disclosures in annual financial statements required by legislation must be complied with regardless of the amounts involved.

12 Care should be taken in reporting immaterial items since reporting them could otherwise impair the clarity and understandability of the financial statements and notes. 2.6 Substance over Form Financial statements should present the economic substance of transactions and events even though their legal form may suggest a different treatment. As such, departments must ensure that transactions and events affecting their entity are presented in the financial statements in a manner that is in agreement with the actual underlying transactions and events. Thus, transactions and events are accounted for and presented in a manner that conveys their substance rather than necessarily their legal or other form. For example, a) capital leases should be accounted for by the lessee as an acquisition of an asset and an assumption of an obligation, since the lease transfers substantially all of the benefits and risks of ownership related to the leased property from the lessor to the lessee. b) repayable contributions may appear to be an expense for the period but some of them are in fact loans. Therefore those, which meet the definition of a loan according to the PS Handbook, should be accounted for as a loan receivable. Depending on the terms of the agreement, some of them may need to be treated as concessionary loans. 3.0 Assets Assets are economic resources controlled by a government as a result of past transactions or events and from which future economic benefits may be obtained. Assets have three essential characteristics: they embody a future benefit that involves a capacity, singly, or in combination with other assets to provide future net cash flows, or to provide goods and services; the government can control access to the benefit; and the transaction or event giving rise to the government's right to, or control of, the benefit has already occurred. PS Assets appear on a Department's Statement of Financial Position, and they are divided into either of two categories, Financial Assets and Non-Financial Assets. Financial Assets Financial assets are those assets on hand at the end of an accounting period, which are expected to be turned into cash. They are not intended for consumption in the normal course of operations. Examples of these assets include cash, accounts receivables, loans and advances, inventories held for resale, etc. Non-Financial Assets Non-financial Assets are assets that have economic lives that may extend beyond the accounting period and are intended for consumption in the normal course of operations. They generally are converted into expenses in future periods. Examples of these assets include capital assets, inventories of supplies, and prepayments, including transfer prepayments. 3.1 Cash Introduction From a departmental perspective, "cash" includes cash on hand, cash in transit, and cash on deposit. It should be noted that the main focus of the "cash" component would be that of a typical department's day-to-day handling of public money to the credit of the Receiver General for Canada. Cash related entries specific to the Receiver General for Canada and foreign currency cash will not be addressed in this manual. References PS TBAS 1.1, 1.2 Receiver General Manual-Chapter 5 "Bank Facilities System (BFS) and Departments", Chapter 10 "Departmental and Central Accounting Entries under Full FIS" Scenario A - Department receives money for services rendered The Department receives a $25,000 cheque in the mail from a customer for services rendered by the Department. 1) Department receives cash in from customer ***

13 DR Cash in Hands of Depts awaiting deposit to RG 25, R CR Revenue or Accounts Receivable etc. 25,000 * * * * See Accounts Receivable section for coding FRA coding rationale: (PS ) - The Department records the cash as being in hand awaiting deposit to a Chartered Bank. The credit entry offset is to either a revenue item or against accounts receivable. Authority coding rationale: The authority code is "R300-All other assets and liabilities". Although there is no impact on the authority side for "cash", the system requires that a code be used. Object coding rationale: To record the net impact on Cash Accounts, 5299 would be used. 2) Cash Deposited by the Department in a Chartered Bank *** DR Deposits in Transit to RG 25, R CR Cash in Hands of Depts awaiting deposit to RG 25, R FRA coding rationale: (TBAS 1.1, PS ) - The Department deposits the cash in a Chartered Bank and records the cash as being in transit to RG. The credit entry offset is to reflect the transfer from "in hands" to that of being "in transit" to the RG. Authority coding rationale: The authority code is "R300-All other assets and liabilities". Although there is no impact on the authority side for "cash", the system requires that a code be used. Object coding rationale: To record the net impact on Cash Accounts, 5299 would be used. 3) Department receives notification from the RG confirming that cash has been sent from the Chartered Bank to the Bank of Canada. DR Cash Deposit Control Account 25,000 62DDD** CR Deposits in Transit to RG 25, R ** DDD: Department number FRA coding rationale: (PS ) - The Department records the cash as being received by the RG resulting in the offset debit entry being reflected in the Cash Deposit Control Account. Authority coding rationale: The authority code is 0000 for the "Cash Deposit Control Account" and "R300-All other assets and liabilities" for Deposits in Transit to RG. There is no impact on the authority side for "cash" but the system requires that a code be used. Object coding rationale: All RG interface Control Accounts are zero filled (0000), with the exception of I/S Control Accounts, at the object level. To record the net impact on Cash Accounts, 5299 would be used. Scenario B - Department books cash at time of Deposit to Chartered Bank *** Note: If the Department books cash at time of deposit to a Chartered Bank then the entry would be a combination of the Scenario A 2) DR entry and the Scenario A 1) CR entry identified above. 1) Department books cash at time of deposit ***

14 DR Deposits in Transit to RG 25, R CR Revenue or Accounts Receivable etc. 25,000 * * * * See Accounts Receivable section for coding 2) Department receives notification from the RG confirming that cash has been sent from the Chartered Bank to the Bank of Canada. See journal entry in Scenario A 3) Scenario C - Department receives overpayment by supplier The Department receives a $500 cheque in the mail from a supplier with a note indicating it had been overpaid by this amount. 1) Department receives $500 from a supplier, it is discovered this is an overpayment. DR Cash in Hands of Depts awaiting deposit to RG R CR GST - refundable advance account G CR Operating expenses XX FRA coding rationale: (PS ) - The Department records the cash as being in hand awaiting deposit to a Chartered Bank. The credit entry offset is to Operating expenses since this amount had been originally charged as an expense. The GST - refundable account is charged for portion of GST which was overpaid. Authority coding rationale: The authority code is "R300-All other assets and liabilities". There is no impact on the authority side for "cash" but the system requires that a code be used. Since GST does not affect a departmental appropriation, it is recorded to a special authority, G111. If the money is received in the same year as the overpayment was made, it would be necessary to credit the correct appropriation, e.g. B11A - operating vote or B12A - program vote. However, if the money is received in a year after it was charged to the appropriation then the credit entry should be made to "D311-Other statutory non-tax revenue - refund of a prior years expenditures". Object coding rationale: To record the net impact on Cash Accounts, 5299 would be used. The GST must be reflected by using "8171-Payment of GST on purchases". For the credit side, the appropriate economic object would be used depending on the nature of the good or service in question. Note: if the authority code used is D311 and your system cannot handle the use of an expense object code with a revenue authority code, object " Refunds of expenditures pertaining to purchased operating goods" may be used. 2) See journal entry (2) in Scenario A above. 3) See journal entry (3) in Scenario A above. Departmental Financial Statement Presentation and Disclosure Requirements The expectation is that all cash would be cleared and deposited at year-end. Therefore, with possible minor exceptions, there should be no cash shown in the Department's Statement of Financial Position as at 31 March (TBAS 1.2). 3.2 Receivables Receivables are financial assets in the form of claims held against customers and others for money, goods, or services. Receivables include accounts receivables, loans receivables and accountable advances. Receivables should be valued at net realizable value, which is the net amount expected to be received in cash, which is not necessarily the amount legally receivable. Determining net realizable value requires an estimation of uncollectible receivables.