A Revised Conceptual Framework for the Canadian Public Sector

Transcription

1 Statement of Concepts A Revised Conceptual Framework for the Canadian Public Sector May 2018 COMMENTS TO PSAB MUST BE RECEIVED BY November 28, 2018

2 An online response form, linked to this document, has been provided to assist you in submitting your comments to PSAB. Alternatively, you may send comments via (in Word format), to: addressed to: Michael Puskaric, MBA, CPA, CMA Director, Public Sector Accounting Public Sector Accounting Board 277 Wellington Street West Toronto ON M5V 3H2 This Statement of Concepts reflects proposals made by the Public Sector Accounting Board (PSAB). It presents key concepts that the Board expects to include in a future exposure draft. Individuals, governments and organizations are invited to send written comments on the Statement of Concepts. Comments are requested from those who agree with the Statement of Concepts as well as from those who do not. If your comments relate to a specific paragraph or group of paragraphs or a specific question PSAB has asked, please provide that reference to help us better understand and analyze your feedback. Any comments that express disagreement with the proposals in the Statement of Concepts should clearly explain the problem and include a suggested alternative, supported by specific reasoning. All comments received by PSAB will be available on the website shortly after the comment deadline, unless confidentiality is requested. The request for confidentiality must be stated explicitly within the response.

3 Introduction This Statement of Concepts should be read before the Statement of Principles, A Revised Reporting Model for the Canadian Public Sector, as this Statement of Concepts sets the foundation for the revised reporting model. Highlights The Public Sector Accounting Board (PSAB) proposes, subject to comments received on this Statement of Concepts and following its due process, to expose a proposed revised conceptual framework that would include 10 chapters. The proposed revised conceptual framework is intended to replace FINANCIAL STATEMENT CONCEPTS, Section PS 1000, and FINANCIAL STATEMENT OBJECTIVES, Section PS 1100, as illustrated by the following diagram. Existing Conceptual Framework FINANCIAL STATEMENT CONCEPTS, SECTION PS 1000 FINANCIAL STATEMENT OBJECTIVES, SECTION PS 1100 Proposed Conceptual Framework Chapter 1: Introduction to the Conceptual Framework Chapter 2: Characteristics of Public Sector Entities Chapter 3: Financial Reporting Objective Chapter 4: Role of Financial Statements Chapter 5: Financial Statement Foundations Chapter 6: Financial Statement Objectives Chapter 7: Qualitative Characteristics and Related Considerations Chapter 8: Elements of Financial Statements Chapter 9: Recognition and Measurement Chapter 10: Presentation Concepts The revised conceptual framework would apply to public sector entities that prepare their general purpose financial statements in accordance with public sector generally accepted accounting principles (GAAP) as set out in the CPA Canada Public Sector Accounting (PSA) Handbook. Main features The following diagram summarizes the main features of the proposals in this Statement of Concepts and how the proposals are interconnected with the proposals in the Statement of Principles. i

4 Chapter 1 The Foundation for Principles-Based Standards A conceptual framework is a coherent set of interrelated objectives and fundamentals that lead to consistent standards or the application of consistent concepts in the absence of specific standards. Chapter 2 Characteristics of Public Sector Entities Public sector entities exist to serve the public. Their key characteristics are: unique governance structures; multiple public interest objectives; inherent public accountability; nature and use of public resources; and volume and financial significance of non-exchange transactions. Characteristics and user needs lead to the accountability objective and the broad financial reporting accountabilities. Chapter 3 Financial Reporting Objective The overriding characteristic of public sector entities is the need for public accountability. The objective of financial reporting is to provide financial information for accountability purposes to primary users. Primary users = the public and its elected or appointed representatives. Broad financial reporting accountabilities: Comparison to legislative authorities. Financial condition. Financial performance. Financial statements provide some of the information needed to meet the broad accountabilities. Financial Statement Concepts Role of Financial Statements Help fulfil a public sector entity s duty to be publicly accountable. Chapter 4 Chapter 5 Financial Statement Foundations Identifiable reporting entity Control Service capacity = capacity to serve Monetary unit = Canadian $ with no adjustment for changes in purchasing power Basis of accounting = accrual accounting Chapter 6 Financial Statement Objectives Scope of financial statements = reporting entity Reporting financial position = ability to serve the public in terms of economic resources and economic obligations (financial position consists of multiple components) Reporting changes in financial position = sources, allocation and consumption of the entity s economic resources (including cash requirements) Comparison to budget Reporting non-compliance with legislative authorities Reporting risks and uncertainties Objectives are met through reporting model. Chapter 7 Qualitative Characteristics and Related Considerations Qualitative Characteristics Relevance Confirmatory and predictive value Faithful representation Substance over form Completeness Neutrality Free from material error Verifiability Comparability Understandability Timeliness Related Considerations Benefit versus Cost Materiality Prudence Chapter 8 Elements of Financial Statements Assets Liabilities Revenue Expenses No deferrals that are not assets and liabilities. No equity element. Certain revenue and expense of a period may be recognized outside surplus or deficit of that period (i.e., in a component of net assets or net liabilities). Recognition Recognition criteria include: Element definition met. Future economic benefits expected to be obtained or sacrificed. Item can be measured. Chapter 9 Measurement Historical Cost = primary measurement attribute. Other measurement attributes, such as fair value, may be determined by PSAB to better serve the accountability objective. Going concern assumption. Presentation (including Disclosure) Concepts Chapter 10 Reporting Model Standards Level (GAAP) Revisions to Section PS 1201 ii

5 Summary of the main changes proposed Chapter 1: Introduction to the conceptual framework This chapter features new content. It defines a conceptual framework and it outlines the need for and objectives of the conceptual framework. There is no equivalent content in the existing PSA Handbook. PSAB felt that it was important for this chapter to set the foundation for the conceptual framework itself. Chapter 2: Characteristics of public sector entities This proposed chapter builds on and would replace Appendix A, Unique Characteristics of Government, to FINANCIAL STATEMENT OBJECTIVES, Section PS Appendix A identifies the implications for financial statement reporting, but does not fully describe the characteristics of the public sector environment. Identifying the characteristics of public sector entities will result in concepts and standards that are appropriate to the public sector. Chapter 3: Financial reporting objective This chapter builds on and improves the text in paragraphs PS , entitled Users and User Information Needs. Stakeholders asked PSAB to identify the primary users to be the public and its elected or appointed representatives. Paragraph PS refers to elected representatives of the public as the primary users of financial information. The public, as resource providers and recipients of public goods and services, should also be the primary users. After all, public sector entities exist to serve the public. Paragraphs PS list the information users want. The broad accountabilities proposed in this chapter and the financial statement objectives in Chapter 6 are based on user-needs studies, the characteristics of public sector entities and the responsibilities set out in those characteristics. Users want information based on an overriding objective: the need to provide information for accountability purposes. The existing conceptual framework mentions this objective, but does not evaluate its implications. Identifying a financial reporting objective is important because it identifies a goal and purpose for the reporting. The qualitative characteristics of financial information and the concepts for recognition, measurement and presentation follow logically from that objective. Chapter 4: Role of financial statements This chapter features new content. Its purpose is to create a link between financial reporting and financial statements, as the remainder of the conceptual framework focuses on the concepts and foundations necessary for financial statement reporting. Chapter 5: Financial statement foundations Most of the content in this chapter is new. While the foundations underlie the existing conceptual framework, not all of them are clearly identified; so PSAB feels that it is important to clearly identify and better explain them. Specifically, more information about what is being measured in public sector financial statements (i.e., service capacity) and the concept of control, is being provided. iii

6 Chapter 6: Financial statement objectives PSAB proposes the following amendments to the financial statement objectives set out in existing FINANCIAL STATEMENT OBJECTIVES, Section PS 1100: Objective 2: Reporting Financial Position: Remove the requirement to report net debt on the statement of financial position, revise the net debt calculation, recognize that most entities will be required to present the net debt indicator and require reporting of the various components of net assets or net liabilities. Objective 3: Reporting Changes in Financial Position: Remove the requirement to report the changes in net debt and acknowledge that not all changes in the net assets or net liabilities position of an entity in the period are included in periodic surplus or deficit. Objective 4: Legislative Control and Government Financial Accountability: Separate into two objectives, one related to actual-to-budget comparison and the other pertaining to reporting on noncompliance with legislative authorities. New Objective: Add a new objective that requires a description of the risks and uncertainties that could affect the entity s financial position or changes in financial position. Chapter 7: Qualitative characteristics and related considerations The major changes proposed to the qualitative characteristics in comparison to the ones in the existing conceptual framework include: replacing reliability with faithful representation; removing conservatism as an aspect of a qualitative characteristic but adding prudence as a related consideration; identifying verifiability and timeliness as separate characteristics; explaining the application of comparability in the public sector, with specific reference to actual-tobudget comparisons; and emphasizing the understandability characteristic. PSAB feels that financial statements aim to achieve an appropriate balance among the qualitative characteristics. Aside from the benefit-versus-cost consideration included in the existing conceptual framework, the Board also proposes to include materiality and prudence as additional considerations. 1 Chapter 8: Elements of financial statements PSAB has made some improvements to the asset, liability, revenue and expense definitions, including making them singular and adopting a parallel structure. With respect to the revenue definition, it now requires that the changes in assets and liabilities result in an increase in net assets or decrease in net liabilities. Similarly, the expense definition requires that the changes in assets and liabilities result in a decrease in net assets or an increase in net liabilities. In the existing conceptual framework, this effect is only recognized in the guidance accompanying the revenue and expense definitions. 1 A discussion of materiality is currently included in the Introduction to Public Sector Accounting Standards, paragraph.26, and in FINANCIAL STATEMENT PRESENTATION, paragraph PS Materiality is not a new concept in the proposed revised conceptual framework. iv

7 Chapter 9: Recognition and measurement PSAB proposes that the general recognition criteria and the measurement attribute remain substantively the same as in the existing conceptual framework. The PSA Handbook sets out exclusions from recognition in financial statements in the conceptual framework. These exclusions relate to: natural resources and Crown lands inherited in right of the Crown; all intangibles; and works of art and historical treasures. The Board proposes that these exclusions from recognition in financial statements be moved to the assets standard, ASSETS, Section PS 3210, until the Board considers the topics. Such exclusions are standards-level decisions, not concepts underlying financial statements. Chapter 10: Presentation concepts Some of the concepts in this chapter are based on paragraphs that exist in Section PS 1201 (see Appendix F). PSAB felt that some of the paragraphs were more conceptual in nature and should be moved to, or foreshadowed in, the conceptual framework. New presentation concepts, for example the disclosure of the methods, assumptions and judgments, have also been added to promote the preparation of understandable financial statements to meet the accountability objective. Glossary PSAB proposes a revised definition for government. Comments Requested PSAB welcomes comments from individuals, governments and organizations on all aspects of the Statement of Concepts. When comments have been prepared as a result of a consultative process within an organization, it is helpful to identify generically the source of the comment in the response; for example, if comments take into account the perspective of those who prepare the budget. This will promote an understanding of how the proposals affect various aspects of an organization. Supporting reasons for your comments are most valuable when they demonstrate how the Statement of Concepts proposals, or your alternatives: produce more relevant information for accountability and decision making by users; improve the representation of the substance of the underlying transaction or event; contribute to improved measures and understanding of financial position and periodic financial performance; facilitate enhanced comparability; and provide sufficient information for users to understand the financial statements. Please respond to the following questions after considering the proposals in detail and the Board s reasons for proposing them: 1. Does the proposed conceptual framework provide a stronger foundation for creating standards or preparing financial statements that meet the needs of the primary users? 2. In the absence of a standard relevant to a particular accounting question would the proposed conceptual framework better help you to determine an approach? v

8 Chapter 2: Characteristics of public sector entities 3. Do you agree that these characteristics generally apply to all or in part to all public sector entities? 4. Do you agree with how each characteristic is described? Chapter 5: Financial statement foundations 5. Do you agree that the concept of control should be described as proposed at the conceptual level (recognizing that specifics are set out at the standards level)? 6. Do you agree that financial statements of a public sector entity provide a measure of the entity s service capacity and changes in it during the accounting period? Chapter 6: Financial statement objectives You may want to consider these questions in conjunction with your review of the Statement of Principles. 7. Do you agree with the removal of the net debt indicator from Objective 2? 8. Do you agree with the removal of the requirement to present the change in net debt from Objective 3? 9. Do you agree with the new proposed Objective 4? 10. Do you agree with the new proposed Objective 5? 11. Do you agree with the new proposed Objective 6? Chapter 7: Qualitative characteristics and related considerations 12. Do you agree with relevance, faithful representation, verifiability, comparability, understandability and timeliness as the qualitative characteristics of information reported in financial statements? 13. Do you agree with the considerations (benefit versus cost, materiality and prudence) to take into account in striving to achieve a balance among the qualitative characteristics in providing information in financial statements? Chapter 8: Elements of financial statements 14. Do you agree with the asset definition as presented in paragraph 8.21? 15. Do you agree with the liability definition as presented in paragraph 8.27? 16. Do you agree with the revenue definition as presented in paragraph 8.33? 17. Do you agree with the expense definition as presented in paragraph 8.35? Chapter 9: Recognition and measurement 18. Do you agree with the general recognition criteria? 19. Do you agree with the derecognition concept? 20. Do you agree that the exclusions from recognition should be removed from the conceptual framework and be moved to the asset standard, ASSETS, Section PS 3210? Chapter 10: Presentation concepts 21. Do you agree with the presentation definition? 22. Do you agree with the presentation objective? vi

9 Glossary 23. Do you agree with the definition of government? Other 24. Are there additional matters requiring PSAB s consideration in finalizing a revised conceptual framework for the Canadian public sector? Background Why review and amend the conceptual framework and financial statement presentation standard A Joint Working Group comprising selected PSAB members and Deputy Ministers of Finance suggested that the conceptual framework in the PSA Handbook required review, with a focus on reporting the financial performance of public sector entities. The Board agreed. The objective of the Concepts Underlying Financial Performance project is to review and amend, if necessary: (a) the concepts underlying financial performance in the public sector conceptual framework, FINANCIAL STATEMENT CONCEPTS, Section PS 1000, and FINANCIAL STATEMENT OBJECTIVES, Section PS 1100 (refer to diagram on page ii); and (b) the reporting model in FINANCIAL STATEMENT PRESENTATION, Section PS The proposals related to a revised reporting model are included in the Statement of Principles, A Revised Reporting Model for the Canadian Public Sector. This Statement of Concepts details the proposals in relation to the review of the conceptual framework. The Statement of Principles and this Statement of Concepts are issued at the same time, as the principles and the concepts being proposed are interrelated. The proposals in the Statement of Principles operationalize the proposals in this Statement of Concepts. PSAB has identified the review of the concepts underlying financial performance as part of its strategic plans since Task Force Consultation Papers Since the project s inception, the Concepts Underlying Financial Performance Task Force issued three Consultation Papers. In August 2011, the Task Force issued Consultation Paper 1, Characteristics of Public Sector Entities. Its purpose was to refine and better describe the characteristics of governments and other public sector entities. Through this Paper, the Task Force was able to gather feedback on the key characteristics of public sector entities that have financial reporting implications and create Chapter 2 of this Statement of Concepts. These characteristics are intended to ground the development of concepts and principles in the realities of the public sector environment. In October 2012, the Task Force issued Consultation Paper 2, Measuring Financial Performance in Public Sector Financial Statements. It articulated the objective of public sector financial reporting, the primary users of those reports, broad financial reporting accountabilities and more specific financial statement accountabilities. It also asked for stakeholders views on three possible reporting model approaches. Through this Paper, the Task Force was able to gather feedback to create Consultation Paper 3 and Chapter 3 of this Statement of Concepts. vii

10 In March 2015, the Task Force issued Consultation Paper 3, Conceptual Framework Fundamentals and the Reporting Model. It highlighted many of the concepts and principles proposed for a revised conceptual framework and reporting model. The Paper s intent was to solicit early feedback on these preliminary concepts and principles and a proposed reporting model that was built on those concepts and principles. The feedback from this Paper provided guidance to develop the reporting model proposed in the Statement of Principles and the concepts in this Statement of Concepts. The proposals developed to date not only considered all of the feedback received from the three Consultation Papers, but they also considered international developments with conceptual frameworks in the public and private sectors, the Board s proposals in other projects on its technical agenda, the Board s strategic objectives in its Strategic Plan and the Joint Working Group s recommendations. Intended Outcomes and Expected Effects A more complete, clear and updated set of concepts will help PSAB to develop standards that better meet the needs of the primary users. The proposals in this Statement of Concepts have a direct effect on FINANCIAL STATEMENT PRESENTATION, Section PS This is why the Statement of Principles, which aims to revise Section PS 1201, and this Statement of Concepts are being issued at the same time. PSAB will not automatically change existing standards as a result of the changes to the conceptual framework. If an existing standard works well in practice, the Board will not propose an amendment to that standard simply because of an inconsistency with the revised conceptual framework. Any decision to amend an existing standard would require the Board to go through its normal due process. Approach of this Statement of Concepts This Statement of Concepts is referred to as a statement of concepts rather than a statement of principles because it proposes concepts, rather than principles, to be included in a revised conceptual framework. A conceptual framework is a set of interrelated concepts underlying accounting and financial reporting standards. According to PSAB s Due Process Procedures, a statement of principles, or its equivalent, includes the Board s preliminary views, with a rationale for those views. The preliminary views are identified within each chapter of this Statement of Concepts. The rationale is highlighted in the Background section of each chapter, and further elaborated on in the appendices, where appropriate. Purpose The purpose of this Statement of Concepts is to explain, and seek stakeholder feedback on, the proposals for a revised conceptual framework. Scope The proposed revised conceptual framework is intended to replace FINANCIAL STATEMENT CONCEPTS, Section PS 1000, and FINANCIAL STATEMENT OBJECTIVES, Section PS A conceptual framework is outside of but forms the foundation and touchstone for GAAP. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES, Section PS 1150, and GOVERNMENT REPORTING ENTITY, Section PS 1300, are outside the scope of this project. Section PS 1300 is part of GAAP. Section PS 1150 is the bridge between the conceptual framework and GAAP. It describes GAAP and its sources. viii

11 It points to the conceptual framework and the primary sources of GAAP as the boundaries within which accounting treatments for transaction or other events or items encountered by a public sector entity must be determined when GAAP is silent. ix

12 STATEMENT OF CONCEPTS FOR A REVISED CONCEPTUAL FRAMEWORK FOR THE CANADIAN PUBLIC SECTOR TABLE OF CONTENTS Chapter 1: Introduction to the Conceptual Framework...2 Chapter 2: Characteristics of Public Sector Entities...5 Chapter 3: Financial Reporting Objective Chapter 4: Role of Financial Statements Chapter 5: Financial Statement Foundations...21 Appendix A: Explanations of the Key Proposals...29 Chapter 6: Financial Statement Objectives Appendix B: Explanations of the Key Proposals Chapter 7: Qualitative Characteristics and Related Considerations Appendix C: Explanations of the Key Proposals...54 Chapter 8: Elements of Financial Statements...58 Appendix D: Explanations of the Key Proposals...63 Chapter 9: Recognition and Measurement...70 Appendix E: Explanations of the Key Proposals...77 Chapter 10: Presentation Concepts...79 Appendix F: Explanations of the Key Proposals...87 Glossary

13 CHAPTER 1: INTRODUCTION TO THE CONCEPTUAL FRAMEWORK TABLE OF CONTENTS PARAGRAPH BACKGROUND A CONCEPTUAL FRAMEWORK NEED FOR A CONCEPTUAL FRAMEWORK APPLICABILITY OF THE CONCEPTUAL FRAMEWORK OBJECTIVES OF THE CONCEPTUAL FRAMEWORK COMPONENTS OF A CONCEPTUAL FRAMEWORK IMPORTANCE OF OBJECTIVELY DETERMINED CONCEPTS AND STANDARDS Background 1.01 This chapter defines a conceptual framework and outlines the need for and the objectives of the conceptual framework Many aspects of this proposed introduction were covered in the Concepts Underlying Financial Performance Task Force s Consultation Paper 1, Characteristics of Public Sector Entities, and have already been commented on by PSAB stakeholders. There was support for most of the topics in Consultation Paper 1 and very few substantive changes have been made to that material The only topic in this introduction that was not dealt with in Consultation Paper 1 was the importance of objectively determined accounting concepts and standards. For financial statements to be credible, readers need to have confidence that the financial statements are prepared based on concepts and standards established by an independent standard-setting body through a consultative, inclusive and objective due process Concepts provide a meaningful foundation for formulating principles and developing standards. Standards comprise the principles and other guidance that are applicable in specific situations. A Conceptual Framework 1.05 A conceptual framework is a coherent set of interrelated concepts underlying accounting and financial reporting standards. It prescribes the nature, function and limits of financial accounting and reporting. A conceptual framework is the foundation on which standards are developed and professional judgment is applied. The conceptual framework is not a standard. Need for a Conceptual Framework 1.06 The adoption of a conceptual framework represents a deliberate choice of a principles-based, standard-setting approach. A principles-based system requires the exercise of professional judgment. Professional judgment is judgment exercised by an experienced and knowledgeable person with due care, objectivity and integrity, within a framework of professional standards. Chapter 1: Introduction to the Conceptual Framework 2

14 1.07 A conceptual framework is intended to be a set of core concepts to help set sound, internally consistent standards. It also helps stakeholders understand and apply standards and contribute to their development A conceptual framework serves the public interest by providing structure and direction including: (a) providing a set of common concepts as a basis for discussion; (b) providing precise terminology; (c) helping to ask the right questions; (d) guiding the exercise of professional judgment in making choices that are consistent with the conceptual framework and excluding from consideration potential solutions that are in conflict with it; and (e) imposing intellectual discipline on the reasoning process used to develop standards The conceptual framework will lead to increased public confidence in financial statements by supporting the development of a cohesive set of accounting standards for public sector entities in Canada. Applicability of the Conceptual Framework 1.10 The conceptual framework is applicable to public sector entities that prepare general purpose financial statements in accordance with the CPA Canada Public Sector Accounting (PSA) Handbook. The Introduction to Public Sector Accounting Standards defines general purpose financial statements and provides direction as to which public sector entities should use the PSA Handbook Nothing in the conceptual framework overrides any specific standard. PSAB will apply the conceptual framework when developing standards. Any inconsistency between the conceptual framework and existing standards will be reviewed when the relevant standard is re-examined. Any inconsistency between the conceptual framework and new standards will be justified and explained in the relevant basis for conclusions documents. Objectives of the Conceptual Framework 1.12 The objectives of this conceptual framework are to assist: (a) the standard setter in developing future accounting standards and guidance and reviewing existing standards and guidance; (b) stakeholders in evaluating proposed standards as part of the due process of standard setting; (c) preparers of financial statements in: (i) applying accounting standards; (ii) applying and interpreting a standard when professional judgment is required; and (iii) accounting for transactions and events that have yet to form the subject of a standard; (d) auditors in forming an opinion regarding compliance with accounting standards; (e) users of financial statements in interpreting the information contained in financial statements; and (f) those who are interested in the work of the standard setter with information about its approach to setting accounting standards. 2 General purpose financial statements are called financial statements for the remainder of the Statement of Concepts. Chapter 1: Introduction to the Conceptual Framework 3

15 Components of a Conceptual Framework 1.13 The main components of this conceptual framework include: (a) characteristics of public sector entities; (b) objectives of financial reporting; (c) primary users of financial reporting; (d) expectations of those users; (e) the role of financial statements; (f) financial statement foundations and objectives; (g) qualitative characteristics of information and related considerations; (h) definitions of elements; (i) general recognition criteria; (j) general measurement concepts; and (k) general presentation concepts. Components (a) (d) are relevant to all financial reporting. Components (e) (k) relate solely to the reporting in financial statements. Importance of Objectively Determined Concepts and Standards 1.14 Being responsible for managing and allocating public money means that public sector entities owe accountability to the public in relation to the discharge of their responsibilities. This fundamental concept of public accountability requires public sector entities to fairly present financial information to the public and its elected or appointed representatives. For financial statements to offer a fair presentation of the economic circumstances, readers need to have confidence that the financial statements follow objectively determined concepts and standards As a matter of policy, the merits of proposed concepts and standards are assessed from a position of neutrality. The soundness of concepts and standards is not evaluated on the grounds of their possible impact on behaviour (i.e., a behaviour to promote or discourage certain activities). The primary justification for concepts and standards is based on improving accountability. In either formulating or implementing objective concepts and standards, the primary concern is the quality of the information that results, not the effect that the requirements may have on a particular interest. Chapter 1: Introduction to the Conceptual Framework 4

16 CHAPTER 2: CHARACTERISTICS OF PUBLIC SECTOR ENTITIES TABLE OF CONTENTS PARAGRAPH BACKGROUND The need for improvement Applicability to government organizations PURPOSE OF PUBLIC SECTOR ENTITIES CHARACTERISTICS OF PUBLIC SECTOR ENTITIES DESCRIPTION OF THE CHARACTERISTICS Unique governance structures Multiple public interest objectives Inherent public accountability Nature and use of public resources Volume and financial significance of non-exchange transactions Background 2.01 This chapter identifies the key characteristics of public sector entities that have financial reporting implications The majority of the material set out in this chapter is based on material issued for comment in Consultation Paper 1. There was general support for most of the characteristics identified. However, the explanation of and categorization of the characteristics have been modified from what was presented in Consultation Paper 1. The need for improvement 2.03 This proposed chapter builds on and would replace Appendix A, Unique Characteristics of Government, to FINANCIAL STATEMENT OBJECTIVES, Section PS The characteristics in Appendix A identified the implications for financial statement reporting, but did not fully describe the characteristics of the public sector environment. The public sector environment is seen as a crucial context for developing a conceptual framework, for setting public sector financial reporting standards, and for understanding public sector financial statements. Identifying the characteristics of public sector entities, which include governments, government components, government organizations and government partnerships, will result in concepts and standards that are appropriate to the public sector. Applicability to government organizations 2.04 Government components and government organizations may have some unique characteristics that are different from those of the government. These characteristics were considered. Regardless of these differences, PSAB concluded that at a conceptual level, the key characteristics of government components and organizations for financial reporting purposes are the same as many of the key characteristics of governments. Chapter 2: Characteristics of Public Sector Entities 5

17 Purpose of Public Sector Entities Purpose of public sector entities Public sector entities exist to serve the public This responsibility is the lens through which key characteristics of public sector entities for financial reporting purposes are identified. Characteristics of Public Sector Entities Characteristics of public sector entities The key characteristics of public sector entities are: (a) unique governance structures; (b) multiple public interest objectives; (c) inherent public accountability; (d) the nature and use of public resources; and (e) the volume and financial significance of non-exchange transactions. A public sector entity s inherent public accountability is the overriding characteristic of public sector entities Public sector entities vary. However, they share the key characteristics that have financial reporting implications. Governments are likely to have all of the characteristics. On the other hand, an individual government organization may not have all of these characteristics The decisions of a government will affect the objectives, structure, operations, and financing of its components and organizations. Government components and organizations are created through government policy, legislation or bylaws. There is a spectrum of accountability relationships between a government and its components and organizations, with organizations generally having greater autonomy than components. Both types of entities are extensions of government and their role is to implement government policy and fulfill government responsibilities Government components are integral to government and essentially form the core of government. Depending on their objective(s), they may have some or all of the characteristics of government. Some may have only a few of the characteristics identified, functioning merely as an administrative unit of government. Others may have more of the characteristics because of their broad and multiple objectives, delegated powers and responsibility for significant government programs The structure of government organizations and their accountability relationship with the government vary across the country. Schools, universities, colleges, and hospitals are typically government organizations that deliver a significant part of government services. Similar to other government organizations, they do not have the power to tax. They may be financially dependent on allocations of tax revenue from the government even though they also receive resources from external sources. As a result, they are accountable to the government and external resource providers, such as donors. They may be governed by appointed or elected boards and may benefit from volunteer efforts Government organizations may have some unique characteristics that are different from that of the government; however, they exhibit many of the same key characteristics of a government. Chapter 2: Characteristics of Public Sector Entities 6

18 2.11 The characteristics of public sector entities have financial reporting implications. There are characteristics that fundamentally shape the objective of public sector financial reporting, such as unique governance structures, multiple public interest objectives and inherent public accountability. There are characteristics that specifically affect financial reporting, such as the nature and use of public resources and the volume and financial significance of non-exchange transactions. Description of the Characteristics Unique governance structures 2.12 Governance for public sector entities ultimately derives from the Constitution, legislation and the public through elected officials and their appointed representatives For governments, the governance structure comprises elected officials or appointed representatives: (a) For federal, provincial, and territorial governments, governance is provided by the legislature. (b) For local and Indigenous governments, governance is provided by the elected council or its equivalent. This same structure generally forms the governance structure for government components For government organizations, the board of directors or other administrative body grants the authority for the organization s financial and operating processes in accordance with the authority, mandate and overall policies of the government. These governing bodies have a variety of structures and means of electing or appointing members. How an organization s governing body is structured, and how authority and responsibility have been delegated to it, will affect the nature and extent of the accountabilities demanded of it Governance structures in the public sector share the following distinct features: (a) The structures are based on the Canadian Constitution. (b) There is a political dimension to governance as it involves elected or appointed public officials managing public resources. (c) There is an obligation to comply with the operating and financial frameworks set out in legislation. (d) Services often are provided in a monopolistic environment. (e) There is a lack of or minimal equity ownership. Constitutional structure of Canada 2.16 The unique constitutional structure of Canada includes two levels of sovereign government with distinct constitutional responsibilities. Major projects or initiatives often involve complex, shared funding arrangements and political announcements at various levels The federal and provincial governments are sovereign under the Constitution. The Constitution also sets out their areas of responsibility The territories are creations of Parliament, and exercise devolved and not sovereign power Local governments fall under the jurisdiction of the provinces and territories, which are responsible for creating local governments and setting out their responsibilities. Chapter 2: Characteristics of Public Sector Entities 7

19 2.20 The Constitution recognizes and affirms existing Indigenous and treaty rights of the Indian, Inuit and Métis peoples of Canada. Indigenous government jurisdiction is established, affirmed or recognized in Canada by federal and, where applicable, provincial and territorial governments through legislation. Political dimension to governance 2.21 In Canada, elections for governments are held at all levels federal, provincial, territorial, local and Indigenous Canada and its provinces have a multi-party, democratic, Westminster parliamentary system of governance, including the potential for majority or minority Parliament, election calls in jurisdictions without fixed election dates, and prorogation of Parliament or legislature The political dimension to governance in the public sector may also be a factor for government components and organizations as they are controlled by government The political dimension of governance in the public sector reinforces the need for public accountability. The ultimate accountability to the public is accomplished through the electoral process. Operating and financial frameworks set out in legislation 2.25 Operating and financial frameworks are established by legislation to help document the nature of an entity s authority and responsibility for serving and protecting the public interest The various operating and financial frameworks across the country have some similarities and differences. Such frameworks are established to reflect the policy choices and underlying structures of individual jurisdictions Public sector entities must operate within, and demonstrate their compliance with, their operating and financial frameworks. Transparency and public accountability for the promises and policies set out in, or flowing from, legislation is a fundamental part of public sector reporting Legislated frameworks may impose restrictions on a public sector entity s ability to incur expenses or commit to future actions, prohibit certain actions or require others. They may also establish accountability requirements. Monopolistic environment 2.29 Public sector entities provide services that would generally not be provided by the private sector at the quantity, quality and price considered appropriate by public policy. More importantly, many services provided by public sector entities are in areas of responsibility established in the Constitution or devolved to other levels of government or delegated to government components or organizations such that private sector entities, other government organizations or other levels of government may not provide them. This monopolistic environment may lack some of the checks and balances of a competitive environment. The lack of competition for many public sector outputs means there may be no independent indication of their cost to recipients. Lack of or minimal equity ownership 2.30 Public sector entities are not created to enhance the economic position of those with an equity ownership, but may do so to maintain or enhance the ability of an entity to continue to meet its public interest objectives. Most public sector entities are created: (a) through the Constitution (i.e., federal and provincial governments); (b) by a constitutional government (i.e., territorial, local and Indigenous governments); Chapter 2: Characteristics of Public Sector Entities 8

20 (c) by a government (i.e., government components and organizations); or (d) by a contractual arrangement between the government or a government organization and a party or parties outside of the reporting entity (i.e., government partnership). Public sector entities are normally created without equity ownership or with nominal equity ownership to consummate their incorporation. Multiple public interest objectives 2.31 Public sector entities tend to have multiple objectives to meet the public expectations of how the public interest is served. Some government components or organizations have a single, rather than multiple, public interest objective(s). Nevertheless, that objective is generally consistent with the government s overarching objective of serving the public interest The multiple public interest objectives include: (a) provision of public goods and services; (b) resource reallocation; (c) stewardship of public resources; and (d) peace, order, and good government Policy development and implementation are the tools through which these objectives are accomplished and the public interest served. Provision of public goods and services 2.34 Public sector entities generally exist to provide public goods and services. Resource reallocation 2.35 Resource reallocation is often characterized as a redistribution of wealth to jurisdictions, entities and individuals that require financial assistance or to more equitably distribute resources across the economy of a jurisdiction. Resource reallocation occurs in accordance with policy objectives, such as welfare, economic stimulus and equalization. Stewardship of public resources 2.36 Public sector entities are expected to maintain the public resources entrusted to them, including the capital infrastructure that supports the economic activities of a jurisdiction. Stewardship of public resources means that they are managed with the intent of ensuring the capability of these systems to survive and adapt to support current and future generations. Peace, order and good government 2.37 Peace, order and good government is a phrase included in the Constitution to capture any responsibilities not contemplated when the Constitution was written or revised. It is interpreted to include emergency powers and is a residuary power in the sense that any matter not constitutionally conferred on the provinces that is of national dimension or importance comes within the power of Parliament. Chapter 2: Characteristics of Public Sector Entities 9

21 Inherent public accountability Public accountability The public is entitled to and demands accountability from governments and their components and organizations because of: (a) the governments power to tax; (b) their ability to exercise other powers rights and responsibilities in the public interest; (c) their capacity to issue debt given its impact on sustainability; and (d) the commitments made for which reporting against the budget becomes an important mechanism for ensuring accountability Public accountability requires justifying the raising of public resources and how those resources are used, managed and maintained. Public accountability is based on the premise that the public has a democratic right to receive openly declared facts that may lead to debates by the public and its elected or appointed representatives. The need to demonstrate public accountability is the overriding characteristic of public sector entities. Financial reporting plays a major role in fulfilling a public sector entity s duty to be publicly accountable Being publicly accountable for a conferred responsibility normally involves: (a) setting and communicating measurable goals; (b) planning what needs to be done to achieve the goals; (c) doing the work and monitoring the progress; (d) reporting on the achievement of the goals; and (e) evaluating results and providing feedback Public accountability is enhanced if goals and responsibilities are clearly defined. It would be difficult to hold entities accountable for their performance if goals and responsibilities are vague and ambiguous The complexity of a government and the varied relationships between the government and its components and organizations adds to the need for public accountability Accountability is strengthened when financial information is presented in a transparent manner. Power to tax (constitutional, devolved, delegated) 2.43 The power to tax represents the ability to levy tax, for example, on income, capital gains, property or activities Taxation is confiscatory in that: (a) it involves the exercise of a power provided for in the Constitution or devolved or delegated through legislation or bylaws; (b) it does not involve negotiation with, or agreement by, the individual taxpayer; and (c) taxes paid are generally not commensurate with the value of services received by each taxpayer A government s power to tax is an important consideration in assessing a government s resource-generating potential, even if it has been delegated to one of its components or organizations. Chapter 2: Characteristics of Public Sector Entities 10

22 2.46 The power to tax is significant because it allows a government or a government component or a government organization through a government or a government component, to obtain economic resources without consideration. As resource providers, the public is interested in the use of that power and, as a result, demands public accountability regarding the use of funds raised through taxation. Other powers, rights and responsibilities (constitutional, devolved, delegated) 2.47 Aside from being able to tax, governments have also been granted the authority, among other things, to: (a) penalize and fine; (b) issue licenses to act, use or access; (c) make and enforce laws and regulations; (d) employ unique resources; (e) charge royalties for the use or consumption of public resources; (f) issue debt; (g) set monetary policy; and (h) set fiscal policy In return, governments are responsible for: (a) meeting constitutional, devolved or delegated duties; (b) setting policies to manage the issues of the jurisdiction in an economic, efficient, effective, sustainable and transparent manner through the stewardship and application of the public resources entrusted to them; (c) delivering services and reallocating resources to meet identified policy objectives; (d) acting as a residual risk holder in the jurisdiction by assuming risks arising in extraordinary circumstances and risks to the public that are otherwise unassumed or uninsured, regardless of whether the public sector entity has a contractual requirement to bear the risk; (e) being accountable for the economic, efficient, effective, sustainable and transparent management, stewardship and use of the public resources entrusted to it; and (f) being good, ongoing and perpetual managers of the economy and the business of government The rights, powers and responsibilities of governments, which may be exercised or accomplished through their components or organizations, give them the ability to directly and indirectly affect the environment and the economy they operate in, as well as the nature and extent of the public accountability they provide. As a result, the need for transparency and accountability to the public and its elected or appointed representatives regarding the exercise of these powers and rights, and the accomplishment of these responsibilities, is critical to the integrity of the democratic process. Debt capacity 2.50 The debt capacity of federal and provincial governments is limited by the ability of the tax base of their jurisdiction to bear the debt burden and the financial community's assessment of that ability. Territorial, local and Indigenous governments, and some government organizations, have legislated restrictions on the amount and type of debt that can be issued. Public accountability regarding the debt burden is necessary as these debts will be paid through the use of public resources and will have an impact on future generations and the sustainability of future services and programs. Chapter 2: Characteristics of Public Sector Entities 11