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September 24, 2004 153049 Via E-mail: [e-mail] Ron Salole, Director Accounting Standards Public Sector Accounting Board 277 Wellington Street West Toronto ON M5V 3H2 Dear Mr. Salole: Thank you for the opportunity to respond to Government Transfers - Associates' Draft to Revise Section 3410 prepared by the CICA Public Sector Accounting Board. Our general comments and more specific responses are attached. Should you wish any further explanation of our comments, please contact Barbara Reuther, or myself. Yours truly, Arn van Iersel Comptroller General pc: Provincial Comptrollers Auditor General of British Columbia Barbara Reuther Attachment Ministry of Finance Office of the Mailing Address: Comptroller General PO Box 9413 STN PROV GOVT www.gov.bc.ca Victoria BC V8W 9V1 Province of British Columbia Response to Government Transfers - Associates' Draft to Revise Section 3410 CICA Public Sector Accounting Board General Comments Generally Accepted Accounting Principles (GAAP) should establish a principle-based approach that promotes sound decision-making; it should not drive business decisions. There should be an emphasis on achieving representational faithfulness, to ensure transactions and events affecting the entity are presented in financial statements in a manner that represents the substance of underlying transactions and events rather than their legal form. ...

Informations

• Publié par: Nichor
• Nombre de lectures: 12
• Langue: English

Extrait

Ministry of Finance

Office of the

Comptroller General

www.gov.bc.ca

Mailing Address:

PO Box 9413 STN PROV GOVT

Victoria BC

V8W 9V1

September 24, 2004

153049

Via E-mail: [e-mail]

Ron Salole, Director

Accounting Standards

Public Sector Accounting Board

277 Wellington Street West

Toronto ON

M5V 3H2

Dear Mr. Salole:

Thank you for the opportunity to respond to Government Transfers - Associates' Draft to Revise Section 3410

prepared by the CICA Public Sector Accounting Board.

Our general comments and more specific responses are attached.

Should you wish any further explanation of our

comments, please contact Barbara Reuther, or myself.

Yours truly,

Arn van Iersel

Comptroller General

pc:

Provincial Comptrollers

Auditor General of British Columbia

Barbara Reuther

Attachment

Province of British Columbia

Response to Government Transfers - Associates' Draft to Revise Section 3410

CICA Public Sector Accounting Board

General Comments

Generally Accepted Accounting Principles (GAAP) should establish a principle-based

approach that promotes sound decision-making; it should not drive business decisions.

There should be an emphasis on achieving representational faithfulness, to ensure

transactions and events affecting the entity are presented in financial statements in a

manner that represents the substance of underlying transactions and events rather than

their legal form.

Frequently, the determination of the substance of a transaction or event

will be a matter of professional judgment in the circumstances.

We would like to emphasize two areas that require attention to ensure accounting

represents the substance of transactions rather than the results of prescriptive guidance.

Exchange type transfers

The Province of British Columbia strongly disagrees with operating and capital transfers

being treated differently as detailed in this revised Section PS 3410.

The differentiation

between capital and operating transfers is an artificial distinction that compromises the

representational faithfulness of the transaction where in substance, they have the same

outcome (i.e. buying a service over time).

Funding the construction of capital assets

where the government has a residual claim, is in effect, an investment in future service

potential in the same way that funding a program to be run over multiple future periods

is.

They are both in the nature of exchange transactions and should be accounted for

under a consistent set of principles.

We believe that transfers should be recognized over the same period that service potential

is recognized where there are definable purpose restrictions.

We disagree with the

prescriptive approach to defining restrictions, as professional judgement is required to

best determine the true substance of the transfer.

There can be no "silver bullet" or

universal standard that adequately defines the complexities of government transfers.

Alternately, where there is no residual claim, the expense should be recognized

immediately, if there are no conditions, or as the progress conditions are met.

The donor

should not be held to the construction schedule of the recipient unless the donor chooses

to include progress conditions.

The Province endorses the approach that recognizes these transfers as revenue or

expenses/expenditures over the periods funded by treating the funding as a prepaid

capital advance when it is given.

Therefore, we disagree with the proposed sections

3410.15 through 3410.29, and the corresponding sections of Appendix B and C that

flowchart these sections, that could necessitate recognition of revenue/expense in the year

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Province of British Columbia

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Response to Government Transfers - Associates' Draft to Revise Section 3410

CICA Public Sector Accounting Board

the transfer is authorized or at best over the period of construction of the capital asset.

Fundamentally, we must ask what is it that we are purchasing.

If it is a service to be

delivered over a number of years, then both the operating and capital components should

be treated the same and expensed over the service period.

Non-exchange type transfers

Substance over form should also be the guiding principle in determining the recognition

of non-exchange type transfers.

If the criteria established are too restrictive, professional

judgement cannot be applied, in consideration of practicality and intent, to appropriately

represent the transaction to the users of the financial statements.

In particular, the

accountability requirements that require explicit or implicit consequences, such as the

return of the asset, will be difficult to apply in all transfer situations.

We believe that a

binding right or obligation can be established without the firm requirement of a penalty

clause.

Since receipt of the funds does not in itself trigger a liability, expenses may not be

recorded in the same year as the revenue is received.

This is contrary to the matching

principle, as these are special purpose transfers not regular tax transfers.

Failure to

recognize a liability in situations where a substantive liability exists is not consistent with

conservatism in that revenues are overstated while liabilities are understated and

expenses are not matched with the related revenues. While the province is obligated to

deliver program services and constrained by practicality to do so in a future period the

guidance does not require the recognition of a liability.

If a liability and related expense

were recognized at the same time as the revenue the transaction would be consistent with

accounting principles and allow governments to manage their resources effectively in

accordance with the intent of the funding.

It is our belief that there must be flexibility available to both the donor and recipient of

transfers, to arrange their affairs so that accounting for the transfers best reflects their

intentions and appropriate program costing.

Specific Items

Definitions

3410.03 - .09

We find the definitions helpful, clear and concise.

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Province of British Columbia

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Response to Government Transfers - Associates' Draft to Revise Section 3410

CICA Public Sector Accounting Board

3410.04

The Province of British Columbia supports the exclusion of flow-through type

arrangements from the definition of government transfers.

The arrangements as

described in 3410.04

"where a government agrees to act merely as an intermediary to

administer funds on behalf of another party and has no ability to make decisions

regarding the use of the funds"

are clarified in that revenue/expense recognition

conditions do not apply in these circumstances.

Recognition

3410.10

We agree that the basis for determining the amount to be recognized for any particular

transfer should be applied consistently from year to year.

We agree with the statement

"Judgement will be required to account for transfer in a manner that best reflects the

substance of the underlying events rather than the form or funding pattern."

3410.13

We concur with the statement that

"Recipients of government transfers with stipulations

may account for the transfer in different time periods than the transferring government."

However, there also needs to be flexibility in recognizing the existence of stipulations.

Provincial governments may find that, for accounting purposes, they have to recognize

revenue where the required expense flow will occur in future periods.

Recognition - transferring / recipient government

Purpose restrictions - capital

3410.15 through .29

The Province of British Columbia is in agreement with the criteria if the interpretation of

stipulations is amended to recognize the expenditure over the useful life of the asset

where the Province has a residual claim, rather than during the construction of the asset.

The Province asserts that the expenditure should be recognized over the useful life of the

asset as it is not only the development of the service capacity that is of concern it is the

investment in service potential, providing the service throughout the useful life of the

asset, that is of real significance to the province.

None of the proposed stipulations (e.g.

penalty clause) in and of themselves should be a "silver bullet".

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Province of British Columbia

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Response to Government Transfers - Associates' Draft to Revise Section 3410

CICA Public Sector Accounting Board

Authorization

3410.30 through .34

We favour approach (a), which is the approach that requires formal authorization of a

transfer by the financial statement date.

We disagree with approach (b), the constructive

obligations approach specified in the Liabilities Exposure Draft (ED).

The Province concurs with the recognition of the primacy of the role of the legislature in

authorizing the actions of the government of the day.

We support the conclusion that the

provision of a transfer remains discretionary until final legislation.

The legislature or

local government council must have approved regulations or by-laws and required

approvals under those authorities have been exercised.

The practicality of attempting to recognize obligations under the Liabilities ED definition

of constructive obligations would be difficult to achieve on a consistent basis and could

undermine the reliability of the financial statements.

The constructive obligation

references to

"inferences… from the situation"

or consideration of a

"government making

a promise to others and should have reasonably expected them to rely upon the promise"

promotes uncertainty and could hinder governments ability to effectively communicate.

Conditions

3410.38

The conditions as established are too restrictive.

While the purpose restriction and time

constraint stipulations are appropriate, we disagree with the very narrow definition of

performance requirements.

The need for consequences or penalties is not representative

of the relationship between transferring and recipient governments.

In many situations,

the nature of transfer programs precludes either the opportunity to apply explicit penalties

or the need for them.

Because the transferring government has the freedom to apply

stipulations the recipient government could be forced to respond contrary to sound

management principles.

Again, you need to look at the overall substance with no one

stipulation as a "silver bullet".

If for example, you insist on a penalty clause, this may

serve as an incentive for governments to put one in simply to meet the requirement.

Presentation and Disclosure

3410.51

We agree with this paragraph since the intention of the donor may be different from the

recipient.

It is appropriate that there would not necessarily be symmetry between the

two.

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Province of British Columbia

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Response to Government Transfers - Associates' Draft to Revise Section 3410

CICA Public Sector Accounting Board

3410.52

The explanation of when there is a duty to disclose commitments is a useful inclusion in

PS 3410.

Appendices

We find the examples and further explanations found in the appendices useful and would

support their inclusion as part of a final standard.