Issue Paper #2

The Reporting and Budgeting Entity

 

 

 

 

 

 

 

 

 

 

 

 

The Budget Process Review Panel

An independent panel appointed to recommend improvements

to the budgeting and financial management
of the Province of British Columbia

 


 

Table of Contents

Issue................................................................................................................................................................................................. 2

Suggested Reading............................................................................................................................................................... 2

Terms of Reference and OAG Recommendations.......................................................................................... 3

Discussion................................................................................................................................................................................... 4

Why the Reporting Entity Matters....................................................................................................................... 4

History of the Reporting Entity............................................................................................................................. 5

The PSAB Guideline and the SUCH Sector............................................................................................................ 8

What is PSAB?........................................................................................................................................................................ 8

What is the PSAB Guideline on the Reporting Entity?....................................................................................................... 9

What is the British Columbia Reporting Entity?............................................................................................................... 10

Treatment of Capital Contributions................................................................................................................ 12

The Budget and Estimates Process...................................................................................................................... 13

Is the CRF Still Relevant?.......................................................................................................................................... 15

Summary of Consultations........................................................................................................................................ 16

External Input.................................................................................................................................................................. 16

Immediate Public Sector Input............................................................................................................................... 16

Options........................................................................................................................................................................................ 19

The Reporting Entity.................................................................................................................................................... 19

The Budgeting Entity................................................................................................................................................... 19

Inclusion of Non-CRF Bodies in the Estimates............................................................................................... 20

Relevance of the CRF.................................................................................................................................................... 20

Appendix 2-A - Excerpt from CICA Public Sector Accounting Handbook.................................. 21

Appendix 2-B ? Statement of Organizations and Enterprises............................................................. 24


 

Issue

The term ?entity? is an accounting construct that refers to the organizations that together comprise the thing upon which budgeting and financial reporting is done.? For example, in the private sector, where a corporation has subsidiaries, it is required by Generally Accepted Accounting Principles (GAAP) to prepare its financial statements on a consolidated basis.? That means that the financial results of the parent and the subsidiaries are combined on a line-by-line basis, adjusted as appropriate to eliminate double counting.? Both the parent company and each of the subsidiaries are entities in their own right and have their own financial statements.? However, the appropriate overall reporting entity is the consolidated entity.

The same situation occurs in the public sector.? The provincial public sector is comprised of a wide variety of public bodies with a wide variety of corporate and other legal forms, including the direct provincial government,[1] crown corporations, various boards, commissions and agencies and other levels of government established by the provincial government.? In the case of the public sector, the entity question will go beyond financial reporting to also influence the scope of government accountability for results.

There are four issues facing the Panel related to the entity.?

1.???????? What combination of provincial public sector bodies should be consolidated for financial reporting purposes to represent the overall size and scope of the provincial government?

2.???????? Given the reporting entity, what should be the scope of the entity used for the preparation of the budget and for the purposes of the accountability regime?

3.???????? How should the budget process apply to those entities beyond the direct provincial government, if any, that become subject to the budget process?

4.???????? Is the CRF still relevant and should its financial statements be reported?

 

Suggested Reading

The Panel has been provided with a number of documents as background reading:

?        Chapter 2 of the report of the Auditor General includes some discussion of the budgeting entity issue.

?        The Government Reporting Entity, Office of the Auditor General (OAG), October 1997.? This explains the OAG position on the reporting entity in more detail.

?        Accounting Standards of the Public Sector Accounting Board (PSAB).? This is an excerpt from the PSAB handbook on the purpose of financial statements and the entity question.? The PSAB handbook is a document prepared by the accounting profession to provide guidance on public sector accounting issues, analogous to the Canadian Institute of Chartered Accountants (CICA) handbook, which articulates GAAP for the private sector.

?        The Government Reporting Entity in BC: Applying the Principles of Accountability and Control or Ownership, Office of the Auditor General, October, 1997.? This applies the Auditor General?s recommended approach to the specific public bodies in the British Columbia public sector.

?        The Reporting Entity of the Province of BC - Presentation to the Select Standing Committee on the Public Accounts, Ministry of Finance and Corporate Relations, November, 1997. ?This document sets out the government position in 1997 on the reporting entity issue and provides some inter-jurisdictional comparisons.

Terms of Reference and OAG Recommendations

The relevant section of the Panel?s Terms of Reference is:

Specifically the panel will be asked for advice on:

A.??????? Which public sector bodies should be included in government?s annual budget plan and reports and what information should be provided on these bodies in the budget plan and reports.

The relevant recommendations in the Auditor General?s report are:

2.1?????? The annual Estimates include budgets or fiscal plans of all organizations and enterprises that make up the complete government reporting entity.

2.6?????? The government prepare long-term fiscal and business plans for its activities and public finances, as an integral part of the Estimates process.

2.11???? As part of Estimates and budget reporting, the government provide the Legislative Assembly and the public, on a timely basis, with all information that is relevant to communicate its fiscal plan?including information relating to fiscal sensitivities of economic and program assumptions, performance expectations, and government financial activities outside the Consolidated Revenue Fund.

Note that the Auditor General?s recommendations in the report on the Estimates process do not address the first issue, the reporting entity.? Rather the report concentrates on the second and third issues identified, the ?budgeting entity? and how the various public sector agencies should be included in the Estimates (and thus the budget process).? However, the Auditor General does comment on this issue in his annual report on the Public Accounts and the Panel?s Terms of Reference clearly brings the first issue into play.? In any event, given that the question of the reporting entity has been a longstanding source of concern about the credibility and usefulness of the budget and reporting processes, it would be difficult to address only the second and third issues.

Discussion

Why the Reporting Entity Matters

The reason the reporting entity issue is key is that it defines, at least for accounting purposes, what government is and what it is responsible and accountable for.? Because of the influence that financial reporting has on the management of government programs, the definition of the entity will also have implications for program management and service delivery that go well beyond financial management issues.

The problem with the current budgeting entity, the Consolidated Revenue Fund (CRF) is that there is a long history of adjusting the entity so that it appears that:

?        government is smaller than it would be using a different entity,

?        government is growing more slowly than it would be using a different entity, and

?        the deficit is smaller or the surplus is larger than it would be using a different entity.

Although its use is an oversimplification, perhaps the single most important factor used to judge a government?s performance at present is the deficit.? That provides a tremendous incentive for government to try to make the budgeted deficit and the actual results as favourable as possible.? Although it may not be appropriate to place as much emphasis on the deficit as is currently the case, it is important that the measured deficit be based on the aggregated financial results for all of the operations for which government is directly responsible, by having an appropriate definition of the entity.

The manipulation of the apparent size of government and the deficit has been accomplished by defining the entity in accounting policy as being comprised of certain specified public bodies and then creating new bodies to perform functions previously done inside the entity.[2]? By not also re-defining the entity to include the new bodies, the result can be that the size of government or the deficit apparently decreases.

That is not to say that there are not valid management arguments in favour of changes to government organization.? There are many valid reasons why it may be preferable to use a different organizational form.? However, if the change also distorts the apparent size of government or reduces accountability for the results of a government function that is still a use of taxpayer funds, that is not appropriate.

Another problem is that there are currently two definitions of the entity (the CRF and the Summary Entity, discussed further below) and therefore two sets of financial statements.? That creates confusion about government?s financial results.

History of the Reporting Entity

In British Columbia and other Canadian jurisdictions, the elements that comprise the reporting entity have been undergoing adjustment for decades to manipulate the apparent size of government and the deficit.

Originally, the budgeting and reporting entities were known in British Columbia as the ?General Fund.?? This was effectively the government?s bank account and, since government accounting was done on a cash basis, that was appropriate.? It also reflected a simpler government in terms of services provided, in the context of a much smaller and simpler economy.

In addition to the General Fund, a number of special funds and accounts were established by legislation.? These earmarked part of the General Fund, and often specific revenue streams, for specific purposes.? The result was that the financial results related to the activities operated through these special funds and accounts were removed from the General Fund results.? Many of those funds and accounts were collapsed into the General Fund in the early 1980?s as a result of concerns about financial control.? Some of those funds continued to serve other valuable purposes though and were retained.?

The accounting issue was resolved by changing the budgeting and reporting entity to the ?Consolidated Revenue Fund? (CRF), which is effectively the consolidation of the General Fund and the related special funds and accounts.? Since that time, other funds and accounts have been created from time to time.? While the operation of special funds and accounts has sometimes been difficult to understand, creation of these vehicles within the CRF has not served to distort financial reporting since they are included as part of the budgeting and reporting entity.

The integrity of the accountability and financial reporting regimes have been affected over the past two decades or so by the practice of removing functions and associated revenues and/or expenditures from the CRF and transferring them to various types of agencies.? Recent examples include the creation of Forest Renewal BC, the creation of the BC Transportation Financing Authority and the movement of the Motor Vehicle Branch to ICBC.? In every case there are both management and accounting implications.? The problem is that, even if there are valid management reasons and objectives, the fact that this type of change serves to distort accountability and financial reporting calls the motivation for the changes into question and reduces the overall credibility of government.

To address that problem, another broad entity has been created, known as the ?Summary Entity.?? The Summary Entity as currently defined includes the CRF, all Crown corporations and a number of other public bodies owned or controlled by the Province. [3]? The Summary Entity is, and has been for a number of years, the basis upon which government?s financial results are reported in the Public Accounts, in the form of summary financial statements.? The Summary Entity is meant to encompass all of the public bodies and entities for which the provincial government has direct responsibility. ?The PSAB Handbook suggests that the Summary Entity be used by all provincial governments, and both the Auditor General and the Provincial government (i.e. the Office of the Comptroller General and Treasury Board) agree that is the appropriate starting point for establishing the reporting entity.

Table 2-1, taken from the 1997/98 Public Accounts, shows the effect of moving from the CRF to the Summary Entity for reporting purposes.

There remain two problems:

?        Although government and the Auditor General agree that the PSAB Guideline provides an appropriate basis for defining the entity, they have been disputing for the past several years about how that guideline should be applied.? The Auditor General favours inclusion of all the bodies currently included plus schools, universities, colleges and health regions (the SUCH sector).? The government has so far maintained that these entities should be included only to the extent they are funded from the CRF.[4]? This issue is discussed further below under The PSAB Guideline and the SUCH Sector; and

?        Government continues to budget on the CRF basis.? Although some forecast Summary Entity information is provided in budget documents, the documents and communications materials focus attention on the CRF.? As a result, the CRF is generally used as the measuring stick for the size of government, the growth of government and the size of the deficit.? In addition, when comparisons of actual results to budget are made, they are naturally also done on a CRF basis.

In 1995/96, as a result of a change to the PSAB guidelines that would otherwise have resulted in the Auditor General issuing a qualified opinion regarding the use of fiscal agency loans[5] to public bodies such as schools, hospitals and universities, British Columbia expanded the Summary Entity to include the SUCH sector and became the first Province in Canada to do so.?

In 1996/97 that decision was reversed and the Summary Entity was returned to its previous basis.? As a result, the Auditor General has, since 1996/97, ?qualified? the Summary Financial Statements because the entity differs from the Auditor General?s interpretation of the PSAB guideline.?

 

Table 2-1 - Reconciliation of the Consolidated Revenue Fund and Estimates
to the Summary Financial Statements[6]

 

In Millions

 

1997/98 Estimated [7]

1997/98? Actual

1996/97? Actual

Consolidated Revenue Fund (CRF)

$

$

$

Revenue

20,286

20,285

20,209

Expense

(20,471)

(20,437)

(20,546)

CRF Net Operating Revenue (Expense)

(185)

(152)

(337)


Summary Financial Statements

GOVERNMENT ORGANIZATIONS

 

 

 

Revenue

 

3,195

3,126

Expense

 

(3,226)

(3,054)

Net Expense of Government Organizations

 

(31)

72

Net elimination of inter?entity transfers and other adj.:

 

 

 

Revenue

 

45

(178)

Expense

 

(360)

(257)

Government Organizations Net Revenue (Expense)

 

(346)

(363)


GOVERNMENT ENTERPRISES

 

 

 

Revenue

 

8,284

7,884

Expense

 

(6,957)

(6,809)

Net Earnings

 

1,327

1,075

Less: transfers and dividends included in CRF revenue

 

(1,260)

(1,141)

Accounting policy and other adjustments

 

(1)

13

Increase (decrease) in unremitted earnings of Government Enterprises

 

66

(53)

Government Organizations and Enterprises Net Revenue (Expense)

(701)

(280)

(416)

Summary Financial Statement Net Revenue (Expense)

(886)

(432)

(753)

 

 

Table 2-2 shows how inclusion of the SUCH sector would have affected the 1997/98 Summary Statement of Operations.


Table 2-2 ? Schedule of Impact of Change in Reporting Entity
on the Statement of Operations[8]

 

In Millions ? 1997/98

 

Summary Statements
$


S.U.C.H.
$

Adjust-
ments
$


Total
$

Net Effect
$

 

Revenue

 

 

 

 

 

Taxation

13,440

112

(1)

13,551

111

Natural resources

2,681

 

 

2,681

 

Fees and licenses

2,027

852

(30)

2,849

822

Investment earnings

583

111

(480)

214

(369)

Miscellaneous

489

703

(51)

1,141

652

Contrib. from prov. govt./govt. enterprises

1,260

9,599

(9,599)

1,260

 

Contrib. from federal government

1,931

134

 

2,065

134

Recoveries

1,114

 

(19)

1,095

(19)

Total Revenue

23,525

11,511

(10,180)

24,856

1,331

Expense

 

 

 

 

 

Health

7,364

4,743

(4,287)

7,820

456

Social service

3,181

 

 

3,181

 

Education

5,787

6,172

(5,433)

6,526

739

Protection of persons and property

950

 

 

950

 

Transportation

1,699

 

 

1,699

 

Natural resources and econ. development

1,566

 

 

1,566

 

Other

921

 

 

921

 

General Government

357

 

 

357

 

Debt servicing

2,198

493

(507)

2,184

(14)

Total operating expense

24,023

11,408

(10,227)

25,204

1,181

Net operating expense for the year

(498)

103

47

(348)

150

Non-Operating Transactions

 

 

 

 

 

Increase (decrease in unremitted earnings of government enterprises

66

 

 

66

 

Consolidated Net (Expense)

(432)

103

47

(282)

150

 

The PSAB Guideline and the SUCH Sector

What is PSAB?

The Auditor General, in the briefing book prepared for the British Columbia Public Accounts Committee, describes PSAB[9] as:

The Public Sector Accounting and Auditing Board (PSAB) of the Canadian Institute of Chartered Accountants was established in 1981 to improve and harmonize public sector accounting and auditing practice.? Its creation followed extensive consultation with federal and provincial governments and legislative auditors, and an in-depth study of government financial reporting.

That study found wide disparities in government reporting practices.? Government financial statements often reported fragmented and incomplete information, leaving out major operating units and liabilities.? Furthermore, similar transactions were reported very differently from one government to another.? Consequently, information contained in the financial statements was inadequate for decision-making, accountability and comparison with others.? What was needed were accounting standards for financial reporting in the public sector.?

?? Standards are developed by those people knowledgeable about and affected by them; deputy ministers, assistant deputy ministers, comptrollers, auditors general, municipal finance officers and executives of government organizations.? Two-thirds of the members of PSAB and its task forces are selected from among those responsible for government financial reporting and auditing.? This helps to ensure PSAB?s accounting standards are indeed appropriate for governments.

What is the PSAB Guideline on the Reporting Entity?

The PSAB guideline on the reporting entity is reproduced in Appendix 2-A to this Issue Paper.? The key elements of the guideline are:

.07 ?? The government reporting entity should comprise the organizations that are accountable for the administration of their financial affairs and resources either to a minister of the government or directly to the Legislature, or local government council, and are owned or controlled by the government.

.11 ?? A government owns an organization when it has created or acquired the organization and, directly or indirectly, holds title to:

(a) ??? a majority of the organization's shares carrying the right to appoint at least a majority of the members of the board of directors; or

(b) ??? the organization's net assets such that the government has an ongoing right to access them.

.14 ?? A government controls an organization when, without requiring the consent of others or changing existing legislative provisions, it has the authority to determine the financial and operating policies of that organization. The authority of a government to determine the financial and operating policies of an organization allows it to establish the fundamental basis for the conduct of the organization's financial affairs, as well as the deployment of its resources.

It should be noted that under this guideline, even though government has some residual power to control local governments,[10] they do not usually pass the test for inclusion in the provincial government entity.? Legally, local governments are a creature of the Province, created by provincial legislation.? The argument for not including them in the entity is that they are primarily supported by their own-source revenues and are directly accountable to the people for the revenue they raise and uses to which it is put.? The Province is generally considered to neither be accountable for the local governments or to control them.

What is the British Columbia Reporting Entity?

Appendix 2-B of this Issue Paper lists all of the bodies that are included in the Summary Entity.? In the 1997/98 Public accounts the accounting policy on the reporting entity states:

(a) REPORTING ENTITY

These financial statements include the accounts of organizations which are accountable for the administration of their financial affairs and resources either to a minister of the government or directly to the Legislature, and are owned or controlled by the government. Accountability to a minister or directly to the Legislature, for purposes of the reporting entity, does not include those entities that are part of a province?wide program yet are locally based and have an initial accountability to a local board. A list of organizations included in these consolidated financial statements may be found on A51?A52. Trusts administered by the government or a government organization are excluded from the government reporting entity.[11] (Emphasis added)

The sentence in Italics represents the policy under which the SUCH sector is excluded from the reporting entity.?

The government takes the view that its accounting policies should be based on the PSAB guidelines but that government has the authority to adopt policies that vary from the guidelines where there is a reason.? They have characterized this as one of those cases.? That is, because the government believes that consolidation of the SUCH sector would affect the degree of autonomy of the public bodies in the sector, they have chosen to adopt the policy outlined above, with the full knowledge that it is different from the PSAB guideline.? There is also a difference in opinion about interpretation of the guideline with respect to universities, which can legitimately be argued both ways.? It is possible that not all universities should be treated the same under the guidelines, since the more recently created universities may be more rigorously controlled than some of the longer established universities.

The dispute between the government and the Auditor General about the reporting entity is then primarily a dispute about whether this, or any reason, is a valid reason for not complying with the PSAB guideline.

Table 2-3 reproduces a chart complied by the Office of the Comptroller General comparing the treatment of the reporting entity in other Canadian jurisdictions as of March, 1999.

 

Table 2-3 - Comparison of Current Provincial/Territorial Reporting Entities
As at Match, 1999

Province

Reported As Following PSAB

Includes Schools

Includes Colleges

Includes Univ.

Includes Health Auth.

Audit Qualified for Entity

Anticipated Trend

British Columbia

no

no

no

no

no

yes? 1996/97

no change contemplated

Alberta

yes

no

no

no

no

yes[12]

no change contemplated

Saskatchewan

yes

no

yes

no

3 of 32

no

possibly more health authorities

Manitoba

yes

no

yes

2 of 4

no

no

health auth. to be included in 1999/00

Ontario

yes

no

no

no

no

no

possibly schools

Quebec

yes

no

no

no

no

no

no change contemplated

New Brunswick

yes

yes

yes

no

no

no

possibly health authorities

Prince Edward Island

yes

yes

no

no

yes

no

no change contemplated

Nova Scotia

no

no

no

no

no

no

possible change 1999/00

Newfoundland

yes

yes

yes

no

yes

no

possibly universities

Northwest Territories

yes

no

yes

n/a

no

no

possibly health authorities

Yukon Territory

yes

yes

no

n/a

no

no

no change contemplated

 

 

It is interesting to note that, although no other Canadian Province or territory fully consolidates the SUCH sector in their reporting entity, British Columbia is the only jurisdiction that has received a qualified audit opinion on its summary financial statements.[13]? The British Columbia Auditor General seems to have been more strict because the entity was expanded for one year and then the decision reversed.

It is also notable that, because all of the public bodies in the sector are prohibited from running a deficit except in certain exceptional circumstances, whether or not the sector is included will have little impact on the consolidated deficit.? In fact, Table 2-2 shows that in 1997/98, the effect of including the sector is to reduce the reported deficit significantly, from $432 million to $282 million.

PSAB only provides for two ways of consolidating public bodies into the Summary Entity.? One is full consolidation on a line-by-line basis for all public bodies in the Summary Entity, except commercial Crown corporations.? Line-by-line consolidation is analogous to the consolidation methodology used in the private sector for subsidiaries.? Commercial Crown corporations are ones that are not dependent on taxpayer support from the Province.? These are consolidated on an ?equity? basis, which means that their net revenue and net equity are included on the appropriate financial statements as one-line entries.

There may be other methods of consolidation that could be considered for some public bodies.? For example, in the private sector, there are different consolidation rules that apply to partnerships and joint ventures.? It may be that some public bodies such as school districts and universities are more analogous to partnerships or joint ventures than to subsidiaries.? Consideration of the implications of this are beyond the scope of this issue paper, but it is raised for possible future discussion.

Treatment of Capital Contributions

British Columbia is unique in the way it accounts for capital contributions to schools, health care, universities and colleges and has been for about three decades.? Beginning in the late 1960?s British Columbia began to use financing authorities for the capital financing of assets in the SUCH sector.? Effectively, the provincial government borrowed the money required and lent it to the financing authority, which in turn lent it to the specific public body making the capital expenditure.? These were known as fiscal agency loans.? The public body would repay the loan through its annual operating grant from the Province.

This practice was implemented in order to capitalize the expense of capital assets.? The Province?s expenditure to build schools, hospitals etc. was spread over a period consistent with the useful life of the asset.

The alternative accounting treatment used in other Canadian jurisdictions was to treat money contributed to these public bodies for capital expenditure as ?capital grants,? treating the full cost as an expense in the year the funding is provided.? That is consistent with the cash basis of accounting used in most jurisdictions for most of the period.?

The British Columbia approach was recognized and authorized by early versions of the PSAB guidelines as an acceptable practice.? However, in the early 1990?s PSAB became concerned that, because the fiscal agency loans could only be repaid with funds provided by the lender (the province) the loans did not represent real assets.? The guidelines were then changed to require fiscal agency loans to be accounted for as capital grants.

It became clear that unless the government made a change in its accounting practices, the Auditor General would qualify the Summary Financial Statements because of the Province?s fiscal agency loan practices.? Therefore, in 1995/96 the Province moved to an expanded Summary Entity that included the SUCH sector.? By doing this, concerns about the fiscal agency loans were eliminated because the schools, hospitals etc. were clearly assets of the Summary Entity.? The financial transactions associated with the fiscal agency loans were all eliminated through adjustments made in the consolidation process.

When the Summary Entity was reduced in 1996/97 to once again omit the SUCH sector, another mechanism was needed to deal with this problem.? The Province did not feel it would be appropriate to treat capital contributions as grants.? It has been moving toward full accrual accounting and Capitalization of assets as a much preferable way of accounting for capital costs in general, with the full support of the Auditor General and consistent with private sector GAAP.? Moving to a capital grant approach would be inconsistent with that direction.?

The approach adopted was to consider the contributions as ?prepaid capital advances.?? Because the Province maintains a residual claim on the assets, which may not be disposed of without permission from the Province, it was argued that the Province has an interest in the assets throughout their life.? Therefore, the contributions are treated not as loans but advances, which are amortized over a reasonable period, writing down the value of the provincial asset and writing up the value of the SUCH public bodies assets over time.? This approach is acceptable under PSAB guidelines, has the support of the Auditor General and is consistent with the move to full capitalization of assets.? However, British Columbia continues to be the only Province that uses this approach.

The implication of all this is that expanding the Summary Entity to include the SUCH sector will not have a significant impact on the amount of expense or on the deficit as a result of the treatment of capital.?

The Budget and Estimates Process

As background to the discussion of how additional entities should be included in the budget and Estimates process, it may be useful to provide some background about those processes.? The provincial budget is built on a cycle that takes from 12 to 14 months.? The internal process of building the budget and how that should be changed will be addressed in other issue papers.? This discussion will provide background about what the budget and Estimates are and how they are used by the Legislative Assembly as an accountability tool.

On budget day, the government presents a number of documents.? The budget speech itself, read by the Minister of Finance and Corporate Relations, is in fact the first reading or introduction speech of a piece of legislation.? The legislation is comprised of the Estimates, which is a document that sets out the government?s expenditure plans in units known as votes.? Government may only spend money where there is an appropriation, which is legislation approving expenditure.[14]?? Some expenditure is approved on an ongoing basis within legislation of general application and is known as statutory authority.? The majority of spending approval is annual approval granted through the passing of votes in the Estimates.

The Estimates includes all of the CRF expenditure, both statutory and voted appropriations.? Where there is both voted and statutory authority, if the voted authority runs out, the statutory authority may be used for additional expenditure on the specific function in question without any further authorization.? An example is the authority for fighting forest fires.

Following the budget speech, the Opposition has a chance to respond.? There is then a set time for the ?Budget Debate,? which is debate of the budget in principle or second reading of the Estimates legislation.? When the Budget Debate is complete, the Estimates are referred to the Committee of the Whole for the committee stage debate, which usually takes place in two separate sessions of the committee that meet simultaneously.? This is what is known as the ?Estimates Debate? and is one of the primary mechanisms the legislative Assembly has for holding the government to account.

During the Estimates Debate, discussion is not limited to the financial information provided in the Estimates regarding the Vote in question.? Rather, Ministers may be questioned about any issue related to the programs or activities funded by the Vote, including outcomes or results and specific circumstances or cases.? For the Vote that includes funding the Minister?s office, debate can include all of the Minister?s responsibilities, such as Crown corporations for which the Minister is responsible and other responsibilities that do not directly relate to the work of the ministry.? In that sense, the Estimates Debate provides a mechanism for publicly holding the government accountable for activities within government?s control.? The effectiveness of this accountability mechanism and ways of improving the effectiveness of accountability are addressed in other issue papers.

The point of this discussion is that the budget and Estimates process is built around the need for legislative approval of annual spending authority.? That provides a rationale for using the CRF as the budgeting entity and leads to questions and concerns about the nature of the process as it might apply to Crown corporations or other bodies if the budgeting entity ? e.g. would Crown corporation expenditure budgets need to be voted?

Is the CRF Still Relevant?

If the Panel recommends that the budgeting entity should be the same as the reporting entity and should therefore be the Summary Entity, that leaves a question of whether the CRF is any longer relevant as an accounting construct.

On one hand, the CRF is the aggregate of the spending authorities that are placed each year before the Legislative Assembly for approval.? Doesn?t that mean that the CRF will have to continue to exist?? Apparently not.?

Alberta uses, as an alternative, the ministry as the building blocks from which the Summary Entity is constructed.? Effectively there are financial statements for each ministry.? In the Estimates, the Crown corporations that each minister is responsible for are presented along with the ministry information.? There is no aggregate CRF reported, with the only consolidation being the Summary Entity full consolidation of ministries and Crown corporations.

If a similar approach were taken in British Columbia, it would not mean that government would not be able to produce CRF financial statements for its own purposes.? Such statements would be useful for government to see what the financial situation is for the part of government most directly under government?s control.? If done for that purpose, government could arbitrarily choose to also include public bodies over which it has the most influence, such as those with few or no outside appointees on the board (e.g. BC Assets and Lands Corporation which has a board comprised entirely of government officials).? So long as the purpose is financial control and not public reporting, that would not matter.

The question is whether it is important for the public to know what the CRF results are distinct from the Summary Entity results.? The reason would be to disclose what is happening in direct government from an aggregate financial perspective.? The arguments against are that:

?        if it continues to be publicly reported, there will continue to be an incentive for manipulation of the entity;

?        the confusion over which entity really represents government? and which financial statements to look at would continue; and

?        the Summary Entity is the best indicator of the overall financial status of government.

If CRF statements are to no longer be reported, there may a valid reason to continue reporting on both the CRF basis and the Summary Entity basis for a transitional period.? On of the principles adopted by the Panel is comparability.? That means that results should be comparable over time.? The 1999/2000 budget sets fiscal targets on a CRF basis and comparability means that the results should be reported on the same basis.? Also, the Summary Entity deficit is significantly different from the CRF deficit.? It seems to make sense to continue to produce CFR statements for a transitional period so that people can understand how the new basis compares to the old basis.? A two year transition period should be sufficient.? During that period, it would still be important that the focus of information on the fiscal situation be presented on the Summary Entity basis.

Summary of Consultations

To date, input from consultations is comprised largely of the results of interviews with officials in the immediate public sector (that part of the public sector within or close to the direct provincial government, including, in this case, the OAG).? This section will be revised to reflect broader input as it becomes available.

External Input

Of the input received to date, the Chartered Accountants of British Columbia (CABC), the Certified General Accountants of British Columbia and the Canadian Bankers Association have commented on the entity issue.? All are strongly in favour of using the Summary Entity for reporting and budgeting purposes.? The CABC have also recommended that the Summary Entity be expanded to include the SUCH sector so as to ?provide a more complete picture of the government?s financial condition, and that doing so will enhance credibility and accountability in provincial financial reporting.? The Canadian Bankers Association notes that commercial Crown corporations should be treated differently than other entities, as required by PSAB.

Immediate Public Sector Input

There seems to be general agreement throughout the provincial government on a number of points:

?        the appropriate reporting entity is the Summary Entity;

?        the appropriate budgeting entity is the same as the reporting entity;

?        there are issues to be resolved regarding the inclusion of bodies not currently covered in the Estimates but, provided the governance of those bodies is not adversely affected and the appropriate Summary Entity is used, it will be possible to resolve those issues.? This may imply different types of information being reported for different types of public bodies.

It was also suggested at least once that information should no longer be provided on a CRF basis either in the budget or in any reporting documents.

The issue about which there is not a consensus within the immediate public sector is whether the Summary Entity should be expanded beyond the current Summary Entity to include the SUCH sector or part of it. [15]

There seem to be two primary arguments in favour of a broad or expanded Summary Entity:

?        The accounting argument is that, by applying the PSAB guideline to the SUCH sector as currently organized, the bodies in the sector should be included.? Further, it is important to have a simple, uniform test or rule for use in determining the entity to prevent future arbitrary changes to the definition for the purposes of manipulating financial results and avoiding accountability for what is achieved and the PSAB guideline meets that test.

?        A more public policy-based argument is that, if the objective is as stated in Issue Paper #1:

?The objective of the budget process and the other elements of a government accountability regime is to provide appropriate information to the public about revenues raised by government and the uses to which those revenues are put, thereby creating an incentive to be efficient and effective in achieving intended results.?

then the use by the SUCH sector of public revenues requires that information be provided about their activities in order to hold government accountable and that means the SUCH sector should be part of the Summary Entity.? In other words, the functions being performed (education, post secondary education and health care) are generally considered to be a provincial government responsibility.

There are several arguments against including the SUCH sector in the Summary Entity:

?        The practical argument is that, since all agree the reporting and budgeting entity should be the same, it would not be practical to include these bodies in the Estimates since they are not able to set their budgets until after their allocations from the provincial budget have been provided, which is well after the budget itself.? In addition, at least schools have a fiscal year different from the provincial government.? However, some who raised this concern believe that it would be possible to report results for the SUCH sector in the Public Accounts but ?below the line.?[16]?

?        The public policy argument is that, for the most part (schools, most universities and health regions) the bodies in the SUCH sector are sufficiently autonomous from government that, even though government has some responsibility the initial accountability is by the locally appointed boards.? It would therefore distort the independent governance of these bodies and the appropriate accountability of their governing boards to include them in the summary entity.? For those parts of the SUCH sector for which this is not true (colleges, some universities) they should not be included in the Summary Entity for consistency and comparability with other similar bodies.

?        Another argument containing elements of both the above is that the SUCH sector should not be included because that would encourage government to exert more control over the public bodies in the sector than it now does in an effort to protect politicians from being held accountable for issues and problems in the sector.? That is, it would not be in the public interest to subject the SUCH bodies to the type of input controls and policy micro-management applied to ministries and the immediate public sector and that would be an inevitable consequence of including the bodies in the Estimates process.?

?        The consistency argument is that, in spite of the PSAB handbook discussion, no other jurisdiction in Canada currently includes in its reporting entity the part of the SUCH sector that PSAB would seem to require.? In British Columbia the Auditor General has qualified the audit opinion on the summary financial results on that basis but in other provinces the Auditor General has been more lenient.? Alberta has asked PSAB to review its guideline, but PSAB has declined for the present.? The argument is that, until this becomes more of a standard practice across Canada, including the SUCH sector in the reporting entity would make British Columbia?s results more difficult to compare with other provinces.

The arguments depend in part on how the public bodies are included in the budget process.? Putting the accountability process aside for the moment, it is not difficult to include the SUCH sector at the summary level for the purposes of forecasting the overall financial results in the budget process.? This was done in 1995/96 and can be done in future based on reasonable assumptions, just as direct provincial government revenues and expenditures are now forecast.? It is also not difficult to disclose information based on both including and excluding the sector, as is done in the Public Accounts (see Table 2-2 above).? That way, the comparability of British Columbia?s results with other Provinces need not be affected.

There was also some discussion about the appropriateness of the PSAB guideline.? Some expressed concern about it being too mechanical and accounting-based without sufficient grounding in the public policy objectives of the financial statements.? Concern was also expressed that by defining a rule, one may be encouraging effort to find creative ways of circumventing the rule.? On the other hand, the alternative of trying to guide such a specific decision as which bodies make up the Summary Entity through a statement of the public policy objective also seems to be subject to manipulation and alternative interpretations.

Options

The Reporting Entity

The Panel seems to have several options for dealing with the question of how the reporting entity should be defined:

1.???????? The reporting entity could be defined to be the entity established by the PSAB guideline, interpreted conservatively or inclusively.? That is some or all of the SUCH sector would be included,[17] so long as the current level of control continues to be exercised.

2.???????? The reporting entity could be defined to be the entity established by the PSAB guideline, interpreted conservatively or inclusively but would be phased in by bringing individual components of the SUCH sector in over time, say four years.

3.???????? The reporting entity could be defined to be the entity established by the PSAB guideline, interpreted conservatively or inclusively but would not be implemented until either more than two other Canadian Provinces have implemented it or performance accountability has been fully implemented for the current Summary Entity, which ever comes first.

4.???????? The existing accounting policy could be maintained and left to be adjusted over time through discussion between the government and the Auditor General.

5.???????? The reporting entity could be defined by setting out specifically which bodies should be included in it rather than by reference to a rule.

The advantage to using the PSAB guideline as the basis for establishing the reporting entity is that it is a living work that will be adjusted over time and is being used as the basis for public sector accounting policy across Canada.? Either an arbitrary list of bodies or a made in British Columbia rule would seem subject to manipulation and not conducive to consistency and comparability.

If the PSAB guideline is used as the basis for defining the reporting entity then that seems to imply inclusion of some or all of the SUCH sector, at least as it is currently organized.? The question then seems to be when.? Depending on what other changes arise from the Panel?s recommendations, there may be valid reasons for a phase-in of implementation over time.? It should be noted that there is less scope for accounting manipulation related to the question of whether the SUCH sector should be included or not than there is around the use of the CRF as the budgeting entity and inclusion of the SUCH sector will have relatively little impact on the deficit.

The Budgeting Entity

The issue of the budgeting entity seems clear.? So far, no arguments have been made for anything other than a budgeting entity that is the same as the reporting entity.? However, to make that change effective will require not only that the Estimates and budget documents be prepared with information for the entire Summary Entity but that the communications materials and budget speech use the Summary Entity as the source for the numbers that are publicized, such as the deficit/surplus.?

Inclusion of Non-CRF Bodies in the Estimates

It seems clear that there is no need or desire to change the scope of voted appropriations as a result of broadening the budgeting entity.? Given that, what information should then be included in the Estimates and budget documents about bodies which will not have their budgets voted on?? Certainly, the budget documents should provide estimated summary financial results for the year comparable to the actual results that will be included in the Public Accounts.? However, this Issue Paper has provided little insight into how those bodies should be included in the accountability for results regime of which the budget and Estimates form part.

It is suggested that this issue be deferred until some of the other issues facing the Panel have been addressed.? It seems likely, for example, that the Panel?s discussion on performance measurement and accountability will have a bearing on this issue, as will the discussion of form and content of the documents and the nature of the budget and reporting processes.

Relevance of the CRF

There are two options:

1.???????? Continue to provide financial statements of the CRF basis;

2.???????? No longer provide any financial information on a CRF basis:

3.???????? After a transition period of 2 years, no longer provide any financial information on a CRF basis


Appendix 2-A - Excerpt from CICA Public Sector Accounting Handbook

Section 1300 of the Public Sector Accounting Handbook below defines the government reporting entity.

INTRODUCTION

.01 This Section defines the scope of the reporting entity in terms of the organizations whose financial affairs and resources should be accounted for in a government's financial statements and recommends how to account for the financial affairs of those organizations in the government's financial statements. It also recommends how to account for long-term investments and trusts under administration.

.02 The Recommendations are intended to apply to the financial statements of the federal, provincial, territorial and local governments. Each of these governments is a separate financial reporting entity and would be excluded from the financial reporting entity of any other government.

.03 OBJECTIVES OF FINANCIAL STATEMENTS - FEDERAL, PROVINCIAL & TERRITORIAL GOVERNMENTS, Section PS 1400, and OBJECTIVES OF FINANCIAL STATEMENTS - LOCAL GOVERNMENTS, Section PS 1700, state that government financial statements should provide an accounting of the full nature and extent of the financial affairs and resources for which the government is responsible including those related to the activities of government agencies and enterprises. They also state that those financial statements are a principal means by which a government demonstrates its accountability for the financial affairs and resources entrusted to it and should provide information useful in evaluating a government's performance in the management of financial affairs and resources.

.04 Governments carry out their policies and deliver services through various forms of organization. Some organizations, such as departments or ministries, are integral to the operations of the government in directly performing its executive function. They are subject to direct ministerial or council, and budgetary control. They carry out government operations, provide services to government and receive all or most of their financial resources and operational direction from government.

.05 Other organizations, such as boards, commissions and Crown corporations, have broad financial powers and operational authority delegated to their management under legislation and are more autonomous. They generally have more discretion in establishing their systems and practices and are not bound by all of the directives and guidelines that apply to ministries, departments, or funds. Some of these organizations are enterprises whose principal activity is carrying on a business.

.06 These organizations may prepare separate financial statements which constitute important accountability reports by their managements. However, only summary financial statements for the government as a whole that present aggregated information for all such government organizations can provide an understandable overview of the full nature and extent of the financial affairs and resources for which the government is responsible.

DEFINING THE GOVERNMENT REPORTING ENTITY

.07 The government reporting entity should comprise the organizations that are accountable for the administration of their financial affairs and resources either to a minister of the government or directly to the Legislature, or local government council, and are owned or controlled by the government. [JUNE 1996]

?Accountability

.08 Government organizations receive their operating authority from their incorporating or other enabling legislation. They are accountable either directly to the Legislature or local government council, or indirectly to them through a minister or senior official, for management's overall actions, operations and administration of the organization's financial affairs and resources.

.09 Evidence of accountability may be embodied in legislative provisions that require a government organization to answer for how it discharged its responsibilities. Government organizations are not only answerable for demonstrating compliance with funding arrangements, or government regulations, but also for management's overall actions, operations and administration.

.10 Many organizations are financially dependent on or regulated by government, but their responsibility to the government may be limited only to the way they use government funding or compliance with government regulations. Unless such organizations are also accountable for the overall administration of their financial affairs and resources to the government, they would not be included in the government's reporting entity.

Ownership

.11 A government owns an organization when it has created or acquired the organization and, directly or indirectly, holds title to:

(a) a majority of the organization's shares carrying the right to appoint at least a majority of the members of the board of directors; or

(b) the organization's net assets such that the government has an ongoing right to access them.

.12 Evidence of title to the net assets of an organization may be embodied in the provisions of relevant legislation, such as:

(a) those allowing the transfer of net assets or net liabilities to the government at the government's discretion; or

(b) those designating the organization as a "Crown" corporation or government agency.

.13 Legislation allowing the transfer of an organization's net assets to a government only on the dissolution of the organization is not evidence of government ownership. In such circumstances, the government's ability to access the organization's net assets is contingent on a future event that results in a fundamental change in the status of the organization. It is only when the organization is dissolved that the government gains ownership of any residual net assets.

Control

.14 A government controls an organization when, without requiring the consent of others or changing existing legislative provisions, it has the authority to determine the financial and operating policies of that organization. The authority of a government to determine the financial and operating policies of an organization allows it to establish the fundamental basis for the conduct of the organization's financial affairs, as well as the deployment of its resources.

.15 Evidence of control may be found in legislative provisions, including regulations and bylaws, that provide the government with the authority to:

(a) determine the revenue-raising, expenditure and resource allocation policies of the organization; or

(b) appoint a majority of the organization's governing board or its senior management.

A government may choose not to exercise its authority or actively participate in the implementation of its policies; nevertheless, control exists by virtue of the government's ability to do so. Further, a government does not need to manage the organization's activities on a day-to-day basis to control the organization. It is the government's existing authority to determine the policies governing those activities that constitutes control.

.16 The presumption of control through appointment of the governing board may be negated by other factors. For example, control may not exist when the government's appointment of nominees selected by other groups is only a formality because the government does not have the right of refusal or removal.

.17 The fact that an organization is governed by a publicly-elected board is not, in itself, sufficient justification for excluding that organization from the government's reporting entity. The governing board may only be responsible for implementing and administering the government's financial and operating policies, rather than for determining those policies. In such cases, the government controls the organization even though it has a publicly-elected governing board. On the other hand, organizations with publicly-elected boards that have the authority to determine their financial and operating policies would not be included in a government's reporting entity.


Appendix 2-B ? Statement of Organizations and Enterprises[18]

for the Fiscal Year Ended March 31, 1998

GOVERNMENT ORGANIZATIONS

RECORDED ON A CONSOLIDATED BASIS

Consolidated Revenue Fund

Health Sector

B.C. Health Care Risk Management Society

British Columbia Health Research Foundation

British Columbia Regional Hospital Districts Financing Authority

Health Facilities Association of British Columbia

Education Sector

British Columbia Educational Institutions Capital Financing Authority

British Columbia School Districts Capital Financing Authority

Industrial Training and Apprenticeship Commission 1

Natural Resources and Economic Development Sector

B.C. Games Society

B.C. Pavilion Corporation

British Columbia Enterprise Corporation

British Columbia Securities Commission

British Columbia Trade Development Corporation

Columbia Basin Trust

Creston Valley Wildlife Management Authority Trust Fund

Discovery Enterprises Inc

Downtown Revitalization Program Society of British Columbia

Duke Point Development Limited

Fisheries Renewal BC 1

Forest Renewal BC

Okanagan Valley Tree Fruit Authority

Pacific National Exhibition

Science Council of British Columbia

Tourism British Columbia 1

Transportation Sector

BC Transportation Financing Authority

British Columbia Ferry Corporation

British Columbia Rapid Transit Company Ltd

British Columbia Transit

Victoria Line Ltd

West Coast Express Limited

Social Services Sector

British Columbia Housing Management Commission

Provincial Rental Housing Corporation

Other Sector

B.C. Festival of the Arts Society

British Columbia Arts Council 1

British Columbia Assessment Authority

British Columbia Buildings Corporation

British Columbia Heritage Trust

British Columbia Systems Corporation

First Peoples? Heritage, Language and Culture Council

Legal Services Society 2

 

 

GOVERNMENT ENTERPRISES

RECORDED ON A MODIFIED EQUITY BASIS

552513 British Columbia Ltd 1,4

B.C. Community Financial Services Corporation

BCIF Management Ltd 1

British Columbia Hydro and Power Authority

British Columbia Liquor Distribution Branch

British Columbia Lottery Corporation

British Columbia Railway Company

Columbia Power Corporation

Insurance Corporation of British Columbia

Provincial Capital Commission

W.L.C. Developments Ltd 3

1 These organizations were established during the current year.

2 The Legal Services Society is included in the Summary Financial Statements starting in the current year because of changes to its governing legislation. Legal Services Society now meets the definition of a fully consolidated entity.

3 As of June 1, 1998, W.L.C. Developments Ltd has changed its name to British Columbia Assets and Land Corporation.

4 This company owns shares in Skeena Cellulose Inc.

 



[1] ?Provincial government? is used rather loosely in this paper to refer to the overall machinery of the direct public service (i.e. ministries, etc.).?? More correctly ?government ? refers collectively to the Members of the legislative Assembly that form the government and that act through Cabinet but for these purposes the broader and more general usage of the term is being applied.?

[2] or transferring functions to existing bodies outside of the entity definition.

[3] Appendix 2-B to this issue paper lists all of the organizations consolidated into the 1997/98 Summary Financial Statements presented in the Public Accounts.

[4] i.e. not consolidated.? Funds appropriated in the Estimates and flowing to these bodies are reported as expenditure of the appropriate ministry but items such as assets, liabilities, own-source revenues and deficits are not consolidated into the Summary Financial Statements.

[5] The issue of fiscal agency loans to public sector bodies is discussed below under "The Treatment of Capital Contributions."

[6] Source: 1997/98 Public Accounts of British Columbia, Page A11

[7] 1997/98 Estimated figures are from page 1 of the 1997/98 Estimates and from page 25 of the Budget 97 Reports ?Summary Financial Statements and Accounting Policy Changes.?

[8] Source: 1997/98 Public Accounts of British Columbia, page A70

[9] Note that in October, 1998 the Public Sector Auditing and Accounting Board changed its name to the Public Sector Auditing Board.? The Auditor General?s briefing book was prepared before that change and thus uses the previous name.

[10] i.e. municipalities, regional districts, etc.

[11] Source: 1997/98 Public Accounts of British Columbia, page A26.

[12] at the Ministry level, but not the Summary level

[13] The Alberta Auditor General has issued a qualified opinion because of the entity question for the financial statements of some ministries but has not carried the qualification forward to the summary financial statements.

[14] A partial exception to this rule is the Special Warrant, which is an Order in Council which allows government to spend money ?urgently and immediately required for the public good.?? This Cabinet spending approval must be debated and approved by the Legislative Assembly along with the next year?s spending authority.? There is also a limited ability to account for costs associated with a year in the next year after the books for the first year have been closed.

[15] i.e. perhaps not including some or all universities based on the argument that do not pass test in the PSAB guidelines.

[16] i.e. not as part of the consolidated financial statements and not as part of the Summary Entity.

[17] depending on the interpretation of the guideline with respect to universities.

[18] Source, 1997/98 Public Accounts of British Columbia, Page A51.