item 62854

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Use of Appropriations

Prepared by:Public Sector Accounting Board

February 2012

Comments are requested by April 20, 2012

PSA

B

S

tatementofPrinciple

s

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Commenting on this Statement of Principles

This Statement of Principles is issued by the Public Sector Accounting Board. Themembers of the Board are drawn from government, public accounting practice, business

and academe. All members serve as individuals, not as representatives of their

governments, employers or organizations.

This Statement of Principles presents key principles that the Board expects to include in

a future exposure draft.

Individuals, governments and organizations are invited to send written comments to the

Board on this Statement of Principles. Comments are most helpful if they clearly

identify the preferred alternative supported by their reasoning.

All comments received will be available on this website shortly after the comment

deadline, unless confidentiality is requested.

For your convenience, a PDFresponse formhas been posted with this document that can

be downloaded here. You can save the form both during and after completion for futurereference. You are not restricted by the size of the interactive comment fields in the

response form and there is also a general comments section.

Alternatively, you may send written comments by e-mail in Word format to:[email protected]

To be considered, comments must be received by April 20, 2012, addressed to:

Tim Beauchamp, DirectorPublic Sector Accounting

The Canadian Institute of Chartered Accountants

277 Wellington Street West

Toronto, Ontario M5V 3H2
http://www.frascanada.ca/standards-for-public-sector-entities/documents-for-comment/open-for-comment/item62855.pdfhttp://www.frascanada.ca/standards-for-public-sector-entities/documents-for-comment/open-for-comment/item62855.pdfhttp://www.frascanada.ca/standards-for-public-sector-entities/documents-for-comment/open-for-comment/item62855.pdfmailto:[email protected]:[email protected]:[email protected]://www.frascanada.ca/standards-for-public-sector-entities/documents-for-comment/open-for-comment/item62855.pdf

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USE OF APPROPRIATIONS|i

Highlights

The Public Sector Accounting Board (PSAB) proposes, subject to comments received onthis Statement of Principles and following its due process, to expose a proposed new

Section on the use of appropriations. The Section would apply to government

organizations that base their accounting policies on the CICA Public Sector (PSA)Handbook and that directly access funding under authority of appropriations. Entities

that receive actual transfers of monetary assets or tangible capital assets under authority

of appropriations would apply GOVERNMENT TRANSFERS, Section PS 3410.

Main features

The main features of this Statement of Principles are as follows:

Appropriations should be reported in general purpose financial statements.

Appropriations should be accounted for in both the statement of financial positionand the statement of operations.

Appropriations would be recognized in the period in which the related authority is ineffect, and an eligible expenditure/expense has been incurred that complies with the

governing conditions under that authority.

Disclosures should include a reconciliation of amounts recognized in the financialstatements to actual amounts funded by appropriations, and between the actualamounts funded by appropriations and the original and final authorized amounts in

appropriations.

Comments requested

PSAB welcomes comments from individuals, governments and organizations on all

aspects of the Statement of Principles.

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 theresponse. This will promote understanding of how the proposals are affecting various

aspects of an organization.

Comments are most helpful if they relate to a specific principle, paragraph or group of

paragraphs and, when expressing disagreement, they clearly explain the problem andindicate a suggestion, supported by specific reasoning, for alternative wording.

Supporting reasons for your comments are most valuable when they demonstrate howthe Statement of Principles proposals, or your alternatives:

produce more relevant information for accountability and decision-making byexternal users;

improve the representation of the substance of the underlying transaction or event;

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ii|STATEMENT OF PRINCIPLES FEBRUARY 2012

contribute to improved measures and understanding of financial position andannual results;

facilitate enhanced comparability; and

provide sufficient information for external users to understand the financialstatements.

Please respond to the following question(s):

1. Do you support the need for a separate standard on accounting for the use ofappropriations?

If you answered yes to Question 1, please answer the following questions.

2. Do you agree that the proposed standard would only apply to those entities thatdirectly access the economic resources through the consolidated revenue fund or

equivalent?

3. Do you agree that an economic entity for financial reporting purposes is not limitedto separate legal entities?

4. Do you agree that the funding accessed directly under the authority of anappropriation would be recognized in financial statements?

5. If you answered yes to Question 4, do you agree that the use of appropriations wouldbe recognized in the statement of operations?

6. Do you agree with the proposed recognition criteria?

7. Do you agree that appropriations would be separately reported?

8. Do you agree with the proposed disclosures?

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USE OF APPROPRIATIONS|1

USE OF APPROPRIATIONS

TABLE OF CONTENTS

PARAGRAPH

Purpose and scope.......................................................................... .001 - .010Special purpose reports ...................................................................... .007 - .010

Nature of appropriations ................................................................. .011 - .015Need for a standard ......................................................................... .016 - .022Entity................................................................................................. .023 - .035Other standard setters .................................................................... .036 - .040Recognition ...................................................................................... .041 - .106

Reporting appropriations in financial statements .............................. .042 - .044

Alternatives considered ..................................................................... .045 - .097

Capital and income approach ....................................................... .047 - .050

Netting ......................................................................................... .051 - .059Statement of financial position liability .................................... .060 - .065

Statement of financial position equity/contributionfrom owners ................................................................................. .066 - .073

Statement of financial position direct credit to accumulated

surplus/deficit .............................................................................. .074 - .082Statement of changes in accumulated surplus/deficit .................. .083 - .086

Statement of cash provided by government authorities ............... .087 - .090

Statement of operations ............................................................... .091 - .095

Optional reporting ........................................................................ .096 - .097Recognition criteria ........................................................................... .098 - .100

Deferral .............................................................................................. .101 - .104Future use of appropriations .............................................................. .105 - .106

Presentation ..................................................................................... .107Disclosures ...................................................................................... .108 - .110Determining what constitutes a reporting entity .......................... Appendix

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2|STATEMENT OF PRINCIPLES FEBRUARY 2012

PURPOSE AND SCOPE

.001 The purpose of this Statement of Principles is to propose standards onaccounting for the use of appropriations in the separate financial statements of

public sector entities. This Statement of Principles proposes standards that

should be applied in the recognition, measurement, presentation and disclosureof the use of appropriations. For local governments, the equivalent of

appropriations is approved annual budgets.

.002 Guidance on presentation is not intended to indicate preferred formats or toprescribe standardized presentation or note disclosure. Preparers must determine

the appropriate format, ordering or terminology tailored to their users needs.

.003 An entity, unless required by law or other authority, is not required to prepareand present general purpose financial statements. Accountability and reporting

requirements in each jurisdiction may specify which entities are required toprepare separate general purpose financial statements.

.004 The amount of an approved appropriation generally benefits an entity in one oftwo ways. The funds can be transferred directly to the entity. That entity

maintains its own bank account and is responsible for disbursement of the funds.

Alternatively, liabilities incurred by an entity may be paid directly from theconsolidated revenue fund or equivalent. The majority of entities in this category

are organizational and accounting entities such as departments, special funds and

accounts that are integral to the overall government organization.

.005 The proposals in this Statement of Principles would apply to those entities thatdirectly access funding under the authority of appropriations and do not receive

the funds or other transfer as defined in GOVERNMENT TRANSFERS, SectionPS 3410. The proposals do not apply to government business enterprises or other

entities that are directed by the Introduction to Public Sector AccountingStandards, or that choose, to adhere to the standards applicable to publicly

accountable enterprises in Part I of the CICA Handbook Accounting.

.006 Other entities may elect to prepare and present separate financial statements. Forthe purposes of their reporting, these entities must determine the most

appropriate basis of accounting. The determination is based on an assessment ofusers' needs. Factors to consider in assessing users' needs would be those

outlined in FINANCIAL STATEMENT CONCEPTS, Section PS 1000, as well as

those in the Introduction to Public Sector Accounting Standards. The proposalsin this Statement of Principles would apply to those entities that determine the

standards in the CICA Public Sector (PSA) Handbook generally meet the needsof users of their separate general purpose financial statements.

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Special purpose reports

.007 This Statement of Principles does not deal with special purpose reports. Entitiesproduce many kinds of financial reports to comply with legislation or to measure

and report on the performance of individual funds, programs and activities. They

may be special purpose reports designed to meet particular needs of specificusers.

.008 For example, an entity may publish financial statements that provide acomparison of actual expenditures and revenues to planned results as set out in

budgets, estimates or appropriations for accountability purposes. The actual

amounts may be prepared on the same basis of accounting and for the samescope as used for the preparation of budgets or appropriations. These financial

statements constitute important accountability reports showing actual spending

against budgetary authorities granted by the legislature or equivalent authority.Their intended purpose is to provide assurance that operations were carried out

in accordance with the authorities and powers granted; however, these are not

general purpose financial statements.

.009 There may be circumstances where special purpose reports or other financialreports published are based on financial reporting concepts in the PSAHandbook, but they do not comply with all the requirements. It would be

inappropriate to imply full compliance with the PSA Handbook standards in

these reports.

.010 The PSA Handbook does not discuss objectives of the applicable financialreporting framework for the preparation and presentation of special purpose

financial statements or other financial reports published by an entity. The

standards in the PSA Handbook are designed to apply to the general purposefinancial statements of public sector entities. Nevertheless, an entity preparing aspecial purpose report would not be precluded from applying these proposals.

NATURE OF APPROPRIATIONS

.011 In making the proposals in this Statement of Principles, PSAB considered thenature of appropriations. Appropriations represent the legislative authority of the

government for the expenditure of a designated amount for a specific purpose, of

either an operating, capital, financing or investing nature. Appropriations are thevehicles by which the legislature controls finances, and represent the linkage by

which a legislature holds entities accountable for the management of financialaffairs and the use of resources within authorized budget allocations.

.012 Spending authorities can be divided into two categories; namely, voted andstatutory. Voted authorities are those for which the government must seek thelegislatures approval annually through an appropriation or supply act. Statutory

authorities are those that the legislature has approved through other legislation

and do not require authority under an appropriation or supply act.

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.013 Once approved, the voted authority and approved amounts become thegoverning conditions under which operating and capital expenditures may be

made. The voted authority does not create a commitment to spend the entireamount approved. All expenditures from the consolidated revenue fund must be

authorized by an appropriation, either through an Appropriation or Supply Act or

other legislation. Generally, expenditures cannot be made for a purpose otherthan that for which the appropriation was provided.

.014 The rules and practices related to the ability to draw on the appropriations of aprevious fiscal year in a subsequent year vary across jurisdictions. Under most

financial administration acts, the authority to make expenditures from the

unspent balance of an appropriation for a fiscal period lapses at the end of thatfiscal period. In other cases, these acts provide that a payment may be made

from an appropriation for the fiscal period to discharge a liability incurred before

the end of the fiscal year.

.015 Some jurisdictions allow vote-netting. Under vote-netting, the legislatureallows that entities can use certain of their revenues to finance their directlyrelated expenditures. The mechanics of vote-netting vary among jurisdictions.

THE NEED FOR A STANDARD

.016 An argument has been made that a separate standard is not required becauseGOVERNMENT TRANSFERS, Section PS 3410, would apply. This Section

establishes standards on how to account for and report government transfers to

individuals, organizations and other governments from both a transferring

government and a recipient government perspective. Government transfers

within the scope of Section PS 3410 are transfers of monetary assets or tangiblecapital assets. All government transfer programs are ultimately discretionary and

wholly under the direction of the transferring government. The transferringgovernment also has the ability to impose transfer terms called eligibility criteriaand stipulations.

.017 Contrary views hold that appropriations do not meet the definition ofgovernment transfers. Appropriations generally do not result in the actual

transfer of assets and largely affect organizations that are within the samegovernment reporting entity. This raises questions that are not answered by the

standards in Section PS 3410 as to when an entity gains control of the resources

associated with the use of appropriations that would trigger recognition.

.018 Use of appropriations requires additional disclosures to those required in SectionPS 3410. Appropriations may be prepared on a different basis of accountingand for a different scope of activities than that adopted for the financial

statements. For example, appropriations may be prepared on a cash requirements

basis. Accordingly, the entitys results of operations reported in financialstatements will differ from the amounts funded from appropriations and amounts

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authorized. In addition, appropriations are commonly amended by legislaturesand councils during the fiscal period to take into account unforeseen events andreallocations between programs. Consequently, users of financial statements

require the disclosure of information that helps them assess whether the

resources and financial affairs of the entity were administered in accordance

with legislative authorities.

.019 Although some of the same recognition principles in Section PS 3410 can beapplied, an appropriationis different from government transfers in manyrespects resulting in unique recognition, presentation and disclosure issues. An

appropriation is an annual and generally lapsing authorization by a legislative actof parliament or equivalent authority. This is different from eligibility criteria

and stipulations that affect the timing of recognition of a government transfer in

expenses by the transferor and in revenue by a recipient.

.020 Recognition issues may arise because appropriations are used by a legislature orother authority in a broader context than government transfers to control

finances and hold entities accountable for the management of financial affairsand the use of resources within authorized budget allocations. For example, an

entity may be allowed to retain revenue collected to be used to meet directlyrelated operating costs, but it still requires the authority of appropriations to

spend funds. An entity that receives a government transfer may have discretion

to use its other sources of financing without obtaining the authority of thetransferor.

.021 The current practice related to the reporting of the use of appropriations variesacross organizations and jurisdictions. The inconsistencies stem from the

differences of opinions about the nature of appropriations. It is argued that

appropriations are only budgetary authority to spend and they are not an inflowof economic resources that should be recognized in separate financial

statements. Appropriations do not represent transfers of funds in that, in the

majority of cases, the economic resources do not flow to the entity. Entities aresimply cost centres that are authorized to spend within their appropriation limits.

Appropriations are a source of financing and not revenue.

.022 PSAB is of the view that a separate standard is warranted. The reporting andaccounting issues are sufficiently different from those of government transfers,

due to the nature of appropriations, to justify a separate standard. The significantvariations in opinions that exist on how the use of appropriations should be

accounted for and the inconsistency of current reporting practices also justify aseparate standard.

ENTITY

.023 The Introduction to Public Sector Accounting Standards defines public sectoras including federal, provincial, territorial and local governments as well asgovernment organizations controlled by the government. GOVERNMENT

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REPORTING ENTITY, Section PS 1300, provides guidance on the interpretation

and application of control. Characteristics of a government organization that is a

public sector entity may include:(a) having been delegated the financial and operational authority to deliver a

specified mandate;

(b) having been provided the ability to raise, consume, deploy or managepublic resources;

(c) providing services, through either exchange or non-exchange transactions,to parties either within or outside of the government reporting entity, or

both;(d) receiving government funding to finance the provision of goods and

services; and

(e) having separate legal incorporation with the power to contract in its ownname and that can sue and be sued.

.024 Arguments have been made that the issue of accounting for appropriationsshould be put in the context of ministries and departments and whether theyconstitute an entity for the purpose of preparing general purpose financial

statements. It is argued that ministries and departments are cost centres and,therefore, it is inappropriate to consider them to be reporting entities. Financial

statements issued by ministries and departments are derived from de-

consolidation of the government reporting entitys financial statements. Theylook similar to general purpose financial statements as the bulk of the

transactions are based on the generally accepted accounting principles (GAAP)

of the government reporting entity.

.025 Others have questioned whether ministries, departments and other government

organizations that are not separate legal entities or that do not operate under alegislative framework could in fact issue general purpose financial statements.

Generally, the financial statements issued by these types of organizations are

intended to provide users with assurance that operations were carried out inaccordance with the authorities and powers granted. It is argued that general

purpose financial statements are not the best vehicle to accomplish this

objective. It is suggested that:(a) the PSA Handbook definition of other government organizations be

redefined for the purposes of reporting to exclude these organizations; or

(b) standards be developed that apply specifically to these organizations andtake into account their unique nature.

.026 For financial reporting purposes, an assumption is made that an economic entityexists. Common definitions of an economic entity state that it can be any

organization or unit in society. An economic entity is a clearly defined

organization or unit that engages in identifiable economic activities, controlseconomic resources and is distinct from the activities of other economic entities.

An economic entity is not limited to economic activities that are structured as

legal entities, but can include proprietorships, partnerships, associations and

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groups of entities. For example, consolidated financial statements include the

financial information of a group of economic entities and present it as those of a

single entity.

.027 Determining whether an economic entity exists is a question of fact that must bedetermined by reference to the definition and the particular circumstances of

each case. The characteristics of an economic entity include, but are not limited

to, the following:

(a) the activities of the entity can be kept separate from the activities of anyother economic entities;

(b) separate accounting records can be maintained;(c) transactions can be associated with the entity; and(d) assets and liabilities of the entity are not intermixed with those of other

entities.

Appendix A contains a decision tree that may be useful in making thisdetermination.

.028 For financial reporting purposes, a reporting entity is generally defined as anyeconomic entity that prepares general purpose financial statements. General

purpose financial statements are prepared for external users dependent on

information in those financial statements for accountability or decision-makingpurposes.

.029 Determining what constitutes a reporting entity is a preparer decision. PSABspublication, 20 Questions about the Government Reporting Entity, defines a

reporting entity as any unit or activity that uses resources to provide goods or

services. A unit or activity encompasses legal, administrative, economic,

accounting and other entities. A reporting entity may be an individual entity suchas a department or ministry. It may be an economic entity comprised of a

number of individual entities under common control such as the governmentreporting entity.

.030 Reporting entities within a jurisdiction may be specified in legislation.Alternatively, they may have evolved over time or have been established by

policy without any legislative underpinning. A reporting entity is generally

required to prepare financial statements that are in accordance with GAAP,audited, issued annually and available to all interested parties.

.031 Whether the reporting entity has a separate legal status or not does not affecthow transactions or events are recorded if the entity is issuing general purposefinancial statements.

.032 Some argue that an activity that is not a separate legal entity, such as adepartment, should issue special purpose reports and not be regarded as areporting entity for the purposes of financial reporting. They note that it is

difficult to establish the assets, liabilities, revenue and expenses of the non-legal

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entity from the larger entity of which it is a part. This makes assessments about

completeness and reliability difficult. In addition, because the entity is not aseparate legal entity, any creditor not only has recourse to that entity but also to

the larger entity of which it is a component.

.033 However, it has been said that focusing on legal form results in reporting basedon legal constraints rather than economic phenomena. Regardless of whether anentity is a separate legal entity, creditors can have access to assets beyond those

contained in the legal entity. For example, creditors may have recourse to

shareholders assets because of the terms of certain guarantees and creditors of

partnerships can access the personal assets of the partners.

.034 UNINCORPORATED BUSINESSES, paragraph 1800.01 in Part II of the CICAHandbook Accounting, notes minimum standards of disclosure that apply to

unincorporated business as well as incorporated business are dealt with in Part II

of the Handbook. The Preface to International Financial Reporting Standards(IFRSs), paragraph 9, notes that IFRSs are designed to apply to profit-oriented

entities whether organized in a corporate or other form. The Preface toInternational Public Sector Accounting Standards (IPSASs), paragraph 12, notes

that IPSASs are designed to apply to all public entities, which includedepartments. Since 1986, the PSA Handbook has made no such distinction that a

government organization needs to be a separate legal entity. GOVERNMENTREPORTING ENTITY, paragraph PS 1300.04, notes that governments carry outtheir activities through a variety of organizations. Organizations include

departments and ministries.

.035 PSAB is of the view that for the purposes of applying the standards in the PSAHandbook, a public sector entity can be either a separate legal entity or a defined

activity. Either type of entity can issue general purpose financial statements.

OTHER STANDARD SETTERS

.036 To assist in selecting the appropriate accounting and reporting policy, PSABconsulted other authoritative sources of GAAP. Other standard setters

1surveyed

have not specifically addressed the issue of accounting and reporting

appropriations in the separate financial statements of public sector entities.

.037 The Government Accounting Standards Board in its Basis of Conclusions toStatement 33, Accounting and Financial Reporting for Non-exchange

Transactions, states that a qualified recipient should recognize a receivable andrevenue when an appropriation for that program exists and the period to which

the appropriation applies has begun and all other applicable eligibilityrequirements have been met. It also states that in those cases, the provider

government should report a liability and expense.

1

Other standard-setters considered include the AcSB, IASB, IPSASB, FASB AICPA and AASB.

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.038 The International Public Sector Accounting Standards Board (IPSASB), inIPSAS 1, Presentation of Financial Statements, recognizes that public sector

entities are typically subject to budgetary limits in the form of appropriations2

orbudget authorizations (or equivalent), which may be given effect through

authorizing legislation. Public sector entities that make their approved budgets

publicly available are required to provide a comparison of budget and actualamounts in their financial statements to show whether resources were obtained

and used in accordance with the legally adopted budget. IPSASB does not

specify the accounting for appropriations in the separate financial statements of

public sector entities although IPSAS 1 states that the statement of cash flowshould report cash receipts from appropriations or budget authority made by a

central government or other public sector entities as one of the principle cash

generating activities from operations. IPSAS 18, Segment Reporting, statesthat segment revenue includes revenue from budget appropriations or similar

authority.

.039 The Australia Accounting Standards Board has issued AASB 1004,Contributions and Interpretation 1038, Contributions Made to Wholly-Owned

Public Sector Entities, that, in part, deals specifically with appropriations.AASB 1004 requires parliamentary appropriations over which the transferee

government department gains control during the reporting period be recognized

as:(a) income of that reporting period, irrespective of whether restrictions or

conditions are imposed on the use of the contributions;

(b) a direct adjustment to equity where the appropriation satisfies thedefinition of a contribution by owners; or

(c) a liability of the government department where the appropriation satisfies

the definition of liabilities.

.040 Although the "rule" is that appropriations are accounted for as income, thestandards do provide that there may be circumstances when appropriations couldbe considered "contributions by owners" and credited directly to equity.

Contributions would be contributions by owners only when the contributor

establishes, by way of the contribution, a financial interest in the net assets of theentity. Appropriations may be designated as contributions by owners by the

transferor in specific circumstances such as transfers of assets (or assets and

liabilities) between wholly-owned public sector entities within the same group ofentities that occur as a consequence of a government decision to restructure the

activities or functions of its controlled entities or for other purposes.

2

IPSASB defines an appropriation as an authorization granted by a legislative body to allocate funds for

purposes specified by the legislature or similar authority.

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RECOGNITION

.041 Some of the specific questions that entities are faced with when reporting the useof appropriations in their separate financial statements may include:

(a) Should the use of appropriations be reported in separate financialstatements?(b) If so, how should the use of appropriations be recognized?(c) What are the applicable recognition criteria?(d) Can an asset/receivable be recognized at the fiscal period end for liabilities

incurred under the authority of approved appropriations?

Reporting appropriations in financial statements

.042 PSAB analyzed the reporting issue in light of the objectives of public sectorentity financial statements in FINANCIAL STATEMENT OBJECTIVES, Section

PS 1100. The objectives of financial statements can be summarized as follows:

(a) financial statements should provide an accounting of the full nature andextent of the financial affairs and resources which the public sector entity

controls;(b) financial statements should present information to describe the public

sector entitys financial position at the end of the accounting period;

(c) financial statements should present information to describe the changes ina public sector entitys financial position in the accounting period; and

(d) financial statements should demonstrate the accountability of a publicsector entity for the resources, obligations and financial affairs for which it

is responsible.

.043 PSAB is of the view that a public sector entity controls the economic resourcesnecessary for carrying out its economic activities that are approved under the

authority of appropriations. Therefore, the use of appropriations should be

reported in general purpose financial statements.

.044 PSAB has based this view on the fact that an appropriationis authorization fordepartments and agencies to make expenditures or incur obligations of either anoperating, capital, financing or investing nature within the fiscal period of the

government, and to pay for them from general revenues or treasury funds of the

government. An entitycontrols the economic resources associated with theapproved authority under the appropriation. If it incurs expenditures in

accordance with the governing conditions, it can draw upon the consolidatedrevenue fund to settle the liability.

Principle 1

The funding accessed directly under the authority of appropriations should berecognized in a financial statement.

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Alternatives considered

.045 In accordance with FINANCIAL STATEMENT OBJECTIVES, Section PS 1100, ifseparate financial statements are to report on operations, they would show a

public sector entitys sources of revenues and all expenses by nature and purpose

to show the allocation and consumption of resources. The difference betweenrevenues and expenses measures the net change in a public sector entity's assets

and liabilities in the accounting period, and is important in explaining the change

in the public sector entity's financial position in the period.

.046 Obligations incurred and expenditures made under the authority ofappropriations should be recognized in financial statements according to theirnature as operating expenses, capital acquisitions, financing or investing

activities. In order to meet the objective of the statement of operations that it

measures the net change in a public sector entitys liabilities and assets in theaccounting period and that it articulate the changes, an offsetting credit must be

recognized. PSAB considered a number of alternatives for reporting the

offsetting credit as follows:(a) netted against expense or assets in the financial statements;(b) in the statement of financial position either as

(i) a liability;(ii) equity/contributions from owner; or(iii) a direct entry thorough accumulated surplus/deficit;

(c) in a new statement of changes in accumulated surplus/deficit;(d) in a new statement of cash provided by government authorities;(e) in the statement of operations; or(f) a choice of reporting as either a direct entry through accumulated

surplus/deficit or in the statement of operations.

Capital and income approach

.047 Two broad approaches, the capital approach and the income approach, have beensuggested to deal with the question of reporting the economic resources accessed

under the authority of appropriations. The capital approach would require that

the economic resources accessed under the authority of appropriations be treated

as a capital transaction and credited directly to accumulated surplus/deficit. Theincome approach requires that the economic resources accessed under the

authority of appropriations be reported as a credit in the statement of operations.

.048 Those favouring the capital approach argue:(a) Appropriations are a source of financing and not revenue.(b) Appropriations are a budgetary authority and, therefore, it is inappropriate

to reflect them in revenue for the reporting period. As such, appropriations

reflect government policies that may change during the accounting period.

(c) Appropriations are not increases in economic resources resulting from theoperations, transactions and events of the accounting period that should be

reported as revenues.

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(d) A department is a cost centre and not a reporting entity. The primaryobjective of public sector entities issuing separate financial statements isreporting on actual expenditures/expenses against legislative authorities for

accountability purposes.

.049 Those favouring the income approach argue:(a) Although appropriations may have "financing" characteristics, access to

resources under the authority of appropriations nevertheless confers a

benefit on an entity that should be reflected in the statement of operations.

(b) Reported results of operations should reflect the economic resourcesreceived.

(c) The statement of operations should reflect the annual operating resultstaking into account all factors that bear on the annual operating surplus or

deficit.(d) Economic resources accessed under the authority of appropriations are not

gratuitous. There are governing conditions attached to the appropriation

that must be complied with and affect operating results in the current orfuture periods.

(e) The statement of operations reports the net change in assets and liabilitiesin the accounting period in order to explain and articulate the change in theaccumulated surplus or deficit of an entity. Economic resources accessed

under the authority of appropriations result in changes to assets and

liabilities and should be reflected in the statement of operations.

(f) The statement of operations should show where a reporting entity gets itseconomic resources so users gain an understanding of how it financed its

activities and the extent to which the economic resources received have

been sufficient to maintain its net financial position in the period.(g) Economic resources accessed under the authority of appropriations would

not satisfy the definition of contributions by owners.

.050 The IASB and AcSB take an income approach to reporting governmentassistance whereby government assistance is recognized in profit or loss on a

systematic basis over the periods in which the entity recognizes as expenses therelated costs for which the grant is intended to compensate. Under this approach,

depending upon the nature of the government assistance, the credit could be

reported as:(a) direct increases in revenues, or reductions in expenses;(b) reduced depreciation and amortization charges based on reduced asset

costs; or

(c) amortization of deferred credits.It is argued that because government assistance is receipts from a source other

than shareholders, they should not be recognized directly in equity but should be

recognized in profit or loss in appropriate periods.

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Netting

.051 This alternative would report the credit for economic resources accessed underthe authority of appropriations netted against expenditures/expenses or as a

deduction from aggregate expenditures/expenses. Consequently, funding for the

acquisition of tangible capital assets under the authority of capital appropriationswould be netted against the cost of the asset and the net amount amortized to

operations over its useful life.

.052 Supporting this approach is the argument that an entity is acting as an agent ofthe government and, therefore, the expenditures incurred under the authority ofappropriations are not those of the reporting entity. Economic resources accessed

under the authority of appropriations are a reimbursement of eligible

expenditures/expenses. Therefore, netting reflects the economic substance of theappropriation. The expense and assets belong to the government that is funding

the expenditures. The government is ultimately responsible for the good or

service provided by the reporting entity. The reporting entity does not assumethe risks and rewards as a principal in providing goods and services. Therefore,

the reporting entity should not report gross revenues and expenses.

.053 Additionally, netting a capital appropriation against the cost of a tangible capitalasset would reduce volatility in financial statements. Under a full accrual model,

tangible capital assets are capitalized and amortized to expense over their usefullives while the funding provided through a capital appropriation could be

recognized all in the fiscal period the expenditure is made for the acquisition. By

netting the capital appropriation against the cost of the asset, the funding iseffectively recognized as the related asset is used to provide services.

.054 PSAB is of the view that netting would not meet the objectives of financialreporting and the qualitative characteristics of information to be reported in

financial statements. Financial statements should provide an accounting of the

full nature and extent of the financial activities authorized by the legislature andadministered through government departments, special funds, agencies and

enterprises.

.055 Expenses represent the cost of resources consumed in delivering governmentgoods and services in the period. Disclosure of gross expenses reflects the total

magnitude of an entitys consumption of, or reduction in, economic resources inthe period. The reporting of gross expenses assists users understand and assess

the cost of goods and services provided, and is useful in evaluating the major

types of expenses incurred in the period. This accounting provides informationfor evaluating goods and services.

.056 Similarly, the financial statements should report the extent to which revenues ofthe period were or were not sufficient to meet the expenses of that period. This

reporting assists users in gaining an understanding of an entitys finances by

showing its revenue sources and their relative contributions.

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.057 The full cost of tangible capital assets would not be presented on the statementof financial position and the full cost of providing goods and services would be

understated by the amount of the economic resources accessed under a capitalappropriation. Users would not have sufficient information to understand the

cost of using tangible capital assets in service provision or the financial effects

of maintaining those assets to sustain services. This information is necessary forassessing performance and for making resource allocations decisions.

.058 This treatment would be inconsistent with TANGIBLE CAPITAL ASSETS,Section PS 3150. Paragraph PS 3150.05(b) defines cost as the gross amount of

consideration given up to acquire, construct, develop or better a tangible capital

asset. Capital grants would not be netted against the cost of the related tangiblecapital asset.

.059 The function of financial statements is the communication of information tousers. To fulfil this function effectively, the information must be relevant and

reliable. Netting would result in relevant information for decision making andfor assessing accountability being omitted. Netting would also result inincomplete information that negatively impacts the reliability of financial

statements. Complete information about transactions is necessary to understand

the entity's finances. Netting omits information about transactions that assistsusers when comparing an entitys financial position and results of operations

with those of other entities within that government, other jurisdictions, and its

own performance and accountability objectives.

Statement of financial position liability

.060 Those favouring reporting the use of appropriations as a liability make many ofthe same arguments as cited in paragraph .048 above that support the capitalapproach. For capital appropriations, there is an argument that this treatment

would be similar to GOVERNMENT TRANSFERS, Section PS 3410.

Appropriations are deferred and recognized over the life of the related asset.

.061 A contrary argument is that the use of appropriations would not meet thedefinition of a liability. An appropriation is only the authority to spend so it

cannot be set up when approved. The entity controls the economic resource

when the entity makes an eligible expenditure in accordance with the governing

conditions of the appropriation. When this occurs, the entity does not have anobligation to external parties that will result in the future sacrifice of economic

benefits with the possible exception of expenditures for the acquisition of

tangible capital assets.

.062 Initially, a public sector entity will record a liability for all obligations incurredfor which it is responsible and expenditures made. However, once it uses its

authority under an appropriation to draw upon the general revenues of the

government or the treasury to settle the liabilities incurred, the liabilities would

be derecognized. At the point of settlement, the entity does not have a present

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obligation to others, the settlement of which is expected to result in the future

sacrifice of economic benefits.

.063 Alternatively, there could be an argument that obligations incurred andexpenditures made by a public sector entity are a liability of the general revenuefund or treasury of the government. In order to recognize the credit side of the

transactions in the financial statements of the reporting entity, it may be argued

that it has an obligation to the government. Again, this would not meet the

definition of a liability since the use of an appropriation will not result in thefuture sacrifice of economic benefits by the reporting entity to the government.

.064 Even if the argument that a public sector entity has a liability to the governmentis supportable, the standards in LOANS RECEIVABLE, Section PS 3050, may be

applicable. The term "loan" refers to both loans and advances. A "borrower"may be an individual, an organization (including a corporation), or another

government. A loan receivable does not include loans issued by governments in

the expectation that they will be repaid through future government funding to theborrower, loans with forgivable conditions and loans with significantconcessionary terms. In these cases, the loan is more in the nature of a grant and

would be recognized as an expense when the loan is made. It is PSABs view

that because it would not qualify as a loan receivable, an entity that uses anappropriation to settle its obligations would not have a loan payable to the

government.

.065 PSAB is of the view that the credit part of the transaction cannot be recognizedas a liability. PSAB next considered whether, as many have argued, the credit

could be treated as equity/contribution from owner.

Statement of financial position equity/contribution from owner

.066 Under this approach, an entity would report the economic resources accessedunder the authority of appropriations as a contribution from owners on the

statement of financial position or in a statement of equity. This reporting model

is similar to that included in the Federal Government Treasury BoardAccounting Standard that apply to financial statements prepared by government

departments and agencies published annually as part of the Departmental

Performance Reporting process.The Federal Government Treasury Board

Accounting Standard is based and draws on existing GAAP for the public sector,as applicable. The reporting model includes a statement of equity of Canada.

.067 Those favouring reporting the use of appropriations as an equity/contributionfrom owners cite many of the same arguments that support the capital approach

(see paragraph .048 above). Some supporters of this approach draw a parallel tobranch accounting where the balance in the head office account is flowed

through equity in branch financial statements.

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.068 Equity is generally defined as the residual interest in the assets of the entity afterdeducting all its liabilities. Investors put up capital in expectation of a return.

The financial interest of investors is represented by equity. Private sectorstandard setters consistently provide that, except for changes resulting from

transactions with owners in their capacity as owners such as equity contributions

and dividends, the overall change in equity during a period represents the totalamount of income and expense.

.069 Similarly, IPSASB requires that gross inflows of economic benefits or servicepotential received or receivable by the reporting entity, which represents an

increase in net assets/equity, other than increases relating to contributions from

owners is reported as revenue. IPSAS 1, Presentation of Financial Statement,defines contributions from owners as future economic benefits or service

potential that has been contributed to the entity by parties external to the entity,

other than those that result in liabilities of the entity. Contributions from ownersestablish a financial interest3 in the net assets/equity of the entity that:

(a) conveys entitlement both to:(i) distributions of future economic benefits or service potential by the

entity during its life, such distributions being at the discretion of theowners or their representatives, and

(ii) to distributions of any excess of assets over liabilities in the event ofthe entity being wound up; and

(b) can be sold, exchanged, transferred, or redeemed.Contributions from owners are reported as a direct credit through net

assets/equity.

.070 The inflow of resources resulting from the exercise of authority under

appropriations would not meet the generally accepted definition of equity/contributions from owners in the majority of cases. The goods and services

being funded through an appropriation are generally provided to public or other

entities within a group, and not directly to the government. Therefore, thegovernment funding would not be considered a contribution from owners.

.071 Economic resources accessed under the authority of appropriations are normallydepleted as a result of activities of the reporting entity. The resources do not

represent an investment by the owner that is intended to result in future revenues

sufficient to maintain the owner's equity. The transfer of resources does notgenerally establish a financial interest in the net assets/equity of an entity.

.072 Further, introducing equity/contributions from owners into public sector generalpurpose financial statements would require revision to the conceptual

framework. FINANCIAL STATEMENT CONCEPTS, Section PS 1000, states that

3There is no generally accepted definition of financial interest. For the purposes of this SOP, a financial interest isanything of economic or monetary value including, but not limited to, equity interests (stocks, stock options, or otherownership interests).

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there are two types of elements in financial statement: those that describe the

economic resources, obligations and accumulated surplus or deficit of a

government at a point in time, and those that describe changes in economicresources, obligations and accumulated surplus or deficit over a period of time.

Assets describe the economic resources controlled by an entity and liabilities

describe claims against those resources at a point in time. The differencebetween assets and liabilities represent the net economic resources or

accumulated surplus or deficit of the entity. As accumulated surplus or deficit is

the residual amount between assets and liabilities, financial statement concepts

currently do not provide for equity. All changes in net economic resources mustflow through the surplus or deficit from operations for the period.

.073 PSAB is of the view that it is not appropriate for an entity to record the creditside as a transaction directly to equity in general purpose financial statements

prepared in accordance with the standards in the PSA Handbook. Governmentsand government organizations generally do not have equity. In addition, PSAB

is currently reviewing the conceptual framework in conjunction with itsConcepts Underlying Financial Performance project. Pending the outcome of

this project, there did not appear to be a compelling argument for an exception tothe existing conceptual framework for public sector entities issuing separate

general purpose financial statements.

Statement of financial position direct credit to accumulated surplus/deficit

.074 Under this approach, an entity would report expenses and other own-sourcerevenues in the statement of operations with the net difference (net cost ofoperations) going to accumulated surplus or deficit. The offsetting entry in

accumulated surplus or deficit would be the financing provided by thegovernment under the authority of appropriations. This reporting model is

currently followed by the Government of Alberta in the audited consolidatedfinancial statements included in annual departmental performance reports.

.075 Those favouring reporting the use of appropriations as a direct credit toaccumulated surplus/deficit cite many of the same arguments that support a

capital approach (see paragraph .048 above). Supporters of this approachcontend that government organizations receive resources from the government

that controls them in its capacity as owner. Typically, the resources are provided

to allow the entity to provide goods and services to the public for a variety of

social and economic purposes or to provide goods and services to other entitieswithin the group. In some cases, the resources are used to increase the recipient's

capacity to provide goods and services (for example, capital appropriations).

Therefore, amounts received are in the nature of contributions from owners.

.076 Others argue that the standards in GOVERNMENT ASSISTANCE APPLICATION OF CICA HANDBOOK ACCOUNTING SECTION 3800, Section

PS 3800, withdrawn from the PSA Handbook in June 2010, could be analogized

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in developing a standard on the use of appropriations. Section PS 3800

established standards for government business enterprises and other similar

organizations in applying GOVERNMENT ASSISTANCE, CICA HANDBOOK ACCOUNTING Section 3800, when resources were received from the

government that controlled them (the owner). Under this standard, an investment

by an owner in the form of cash or other assets, or a settlement or cancellation ofliabilities could be treated as contributed surplus.

.077 Section PS 3800 only applied to government organizations that sold goods andservices as their principle activity and that, in the normal course of operations,

could maintain their operations and meet their liabilities from those revenues.

The Section defined contributed surplus as representing an investment by theowner that is intended to result in future revenues sufficient to maintain the

owner's equity without ongoing subsidies from the owner. Such investments

typically increase the recipient's capacity to provide goods and services or makeit self-sufficient.

.078 It is difficult to analogize the standards in Section PS 3800 to situationsinvolving the use of authority under appropriations. Appropriations, in the

majority of cases, would not meet the definition of contributed surplus.

Appropriations are generally depleted as a result of activities of the organization.The resources do not represent an investment by the owner that is intended to

result in future revenues sufficient to maintain the owner's equity without

ongoing subsidies. They do not generally establish a financial interest in the netassets/equity of an entity.

.079 Section PS 3800 also addressed accounting when amounts received from the

owner were not in the nature of contributed surplus as defined. The Sectionrequired that the amounts received that did not meet the definition of contributed

surplus be recorded as income. These amounts were required to be separatelyidentified and reported at gross in arriving at net income or loss for the period.

.080 Other standard setters also generally require that economic resource inflows bereported through surplus/deficit. IPSAS 23, Revenue from Non-exchange

Transactions (Taxes and Transfers) states that an inflow of resources from a

government transfer shall be recognized as an asset and revenue except to theextent that a liability is also recognized. If a liability is recognized, an entity

reduces the carrying amount of the liability and recognizes an equal amount in

revenue as it satisfies the obligation. The only exception would be transfers ofresources that meet the definition of contributions from owners (see paragraph

.069 above). With the exception of contributions from owners, GOVERNMENT

TRANSFERS, Section PS 3410, takes a similar approach.

.081 Reporting the use of appropriations as a direct credit to accumulatedsurplus/deficit would require that PSAB make an exception to existing financialstatement concepts and standards. Currently, operating results (the difference

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between revenues and expenses) is a measure of the change in net economic

resources for the period and must articulate that change. Consequently, public

sector entities should not have transactions directly credited to accumulatedsurplus/deficit in general purpose financial statements, except in specific

circumstances. All changes in the net economic resources must flow through the

surplus or deficit for the period from operations.

.082 Currently, PSAB is reviewing the conceptual framework in conjunction with itsConcepts Underlying Financial Performance project. Pending the results of thereview, PSAB does not see a compelling argument to make such an exception to

existing financial statement concepts. Such an exception would lead to

inconsistent reporting among similar public sector entities. UnderGOVERNMENT TRANSFERS, Section PS 3410, public sector entities that

receive appropriations as cash transfers from the portfolio ministry would

recognize the transfer as revenue in the period except when and to the extent thatthe transfer gives rise to an obligation that meets the definition of a liability in

LIABILITIES, Section PS 3200. The same entity that recognizes a liability wouldultimately recognize the transfer as the obligation is settled. The public sector

entity that has direct access to the consolidated revenue fund or equivalent wouldnot recognize the inflow of resources as revenue.

Statement of changes in accumulated surplus/deficit

.083 Under this approach, a separate statement would be used to reconcile theopening and closing accumulated surplus/deficit. The statement would show

separately the net cost of operations (expenses less other own-source revenues)from the statement of operations and the financing provided by the government

under the authority of appropriations. This is the reporting model currently usedby federal government organizations complying with the Federal Government

Treasury Board Accounting Standard.

.084 Alternatively, for presentation purposes, the reconciliation could be done on theface of the statement of operations. The statement of operations would show the

difference between own-source revenues and expenses as the net cost of

operations in the period. The amount of economic resources resulting from theexercise of authority under appropriations could be reported as a separate line

item after the opening accumulated surplus/deficit and before the end of period

accumulated surplus/deficit.

.085 It could be argued that FINANCIAL STATEMENT PRESENTATION, Section PS1200, accommodates both presentation options. Paragraph PS 1200.74 requiresthat the statement of operations report the accumulated surplus/deficit at the

beginning and end of the period, unless these figures are reconciled with the

surplus/deficit for the period on a separate statement. However, the sameparagraph requires that, for the statement of operations to aid understanding and

assessments of operations for accountability and decision-making purposes, it

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should account for the difference between revenues and expenses in the period

as a measure of the surplus or deficit for the period. The surplus or deficit for

the period is a measure of the change in net economic resources for an entity fora period and, except in specific circumstances, articulates that change.

.086 The same arguments, pro and con, would apply to this alternative as discussedunder the previous heading (see paragraphs .074-.082 above). Given that

operating results (the annual operating surplus or deficit) is a measure of the

change in net economic resources for the period and must articulate that change,the proposed reporting may require an exception to existing financial statement

concepts and standards.

Statement of cash provided by government authorities

.087 This statement would provide a reconciliation between the net cost of operations(operating expenses less own-source revenues) reported in the statement of

operations and the resources provided under authority of appropriations. Thestatement would be similar to a cash flow statement in that the net cost of

operations would be adjusted for non-cash operating expenses (for example,

amortization) to arrive at the net resources provided by authority underappropriations.

.088 Arguments are made that this statement is consistent with the fact that ministries,departments and other organizations that access resources directly do not

generally have their own bank accounts. It is argued that since appropriations area financing resource, this statement would be reflective of use of the line of

credit established under the authority of appropriations. This statement would

better report the effects of an entitys activities by showing how it financed itsactivities in the accounting period and met its cash requirements.

.089 The difficulty with this approach is that the bottom line number reporting theresources provided under the authority of appropriations would not tie directly to

any other number in the financial statements. In order that this statement

articulates with other financial statements, it would have to report the net cost ofoperations, the resources provided under the authority of appropriations and the

accumulated surplus/deficit at the beginning and end of period. Alternatively,

these figures could be reconciled either on the face of the statement of financial

position, in a separate statement of changes in accumulated surplus/deficit or onthe face of the statement of operations.

.090 This statement would not be the equivalent of a cash flow statement in that itwould not report cash flows during the period classified by operating, capital,

investing and financing activities. The information in this statement wouldprovide users with information about only one aspect of how the entity financed

its activities and met its cash requirements.

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Statement of operations

.091 Those favouring reporting the use of appropriations as an equity/contributionfrom owners cite many of the same arguments that support the income approach

(see paragraph .049 above). This approach is based on the fact that the use of

authority under appropriations to meet obligations results in an increase ofeconomic resources of an entity. The increase, either as an increase in assets or a

decrease in liabilities, should be reported as a credit in the statement ofoperations. The statement of operations reports the surplus or deficit in the

accounting period. The annual surplus or deficit measures, in monetary terms,

the extent to which an entity has maintained its net assets in the period.

.092 The arguments that support this approach are based on the objectives of generalpurpose financial statements that are generally acceptable to users and preparers.These objectives define the nature of the information needed to meet the

requirements of users and are requisite to setting appropriate accounting and

reporting standards.

.093 Financial statements should report:(a) an entitys sources of revenues and their relative contributions to provide

information that is useful in gaining an understanding of an entitys

finances;

(b) the nature and purpose of an entitys expenses in the period to show theallocation and consumption of resources;

(c) the net difference between revenues and expenses as the measure of theextent to which the net economic resources of the entity have beenmaintained after the activities of the period have been taken into account.

Information about the cost of goods and services and how that cost was financedallows users to make resource allocation and other decisions, as well as for

assessing an entitys accountability.

.094 PSAB also considered the argument that the use of an appropriation is notrevenue because, in most cases, funding does not actually flow to the entity.

However, PSAB is of the view that the accounting and reporting of the use of

appropriations would be consistent whether or not the funding actually flows tothe entity.

.095 An entity that has incurred an obligation under the authority of an approvedappropriation will draw upon the consolidated revenue fund of the government

to extinguish that liability. Applying the definitions in FINANCIAL STATEMENT

CONCEPTS, Section PS 1000, extinguishing the liability by drawing on theeconomic resources of the government should be accounted for as a credit in the

statement of operations.

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Optional reporting

.096 PSAB considered whether reporting entities should be given the option ofreporting a credit directly to accumulated surplus/deficit or on the statement ofoperations.

.097 PSAB is of the view that the standard should not provide optional reporting.Arguments in favour of the income approach are more persuasive. Optional

reporting would result in inconsistencies in accounting and reporting for similartransactions across public sector entities and between jurisdictions.

Principle 2

The use of appropriations should be recognized in the statement of operations in general

purpose financial statements.

Recognition criteria

.098 An entity recognizes the use of appropriations when it has been authorized by anappropriation or supply act or other legislation and the entity has made operating

and capital expenditures for the purpose and amount set out in the governing

conditions under the legislation.

.099 An appropriation is considered authorized for an entity when the legislation hasreceived final approval by the governments legislature or by-law of council.

The authority under the appropriation must be in effect at the financial statement

date.

.100 In order for a public sector entity to be eligible to receive or recognize anappropriation, the entity must have incurred eligible expenditures under theauthority provided to it by the authorizing entity.

Principle 3

The use of appropriations should be recognized in the period that:

(a) the legislation or equivalent authority (for example, an approved budget) for theuse of appropriations for the fiscal period has been enacted and is in effect; and

(b) an eligible expenditure/expense has been incurred that complies with the

governing conditions under the legislation or equivalent authority.

Deferral

.101 PSAB considered the issues related to timing of revenue recognition ofeconomic resources accessed under the authority of capital appropriations and

the impact that timing could have on annual surplus/deficit. Some entities thatcurrently report the offsetting credit in the statement of operations generally

defer the portion of a parliamentary appropriation used to finance the acquisition

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of tangible capital assets. These entities recognize the credit in the statement of

operations on the same basis as the asset is amortized. On the other hand, entities

that report a credit directly to accumulated surplus/deficit generally do not deferrecognition.

.102 Deferral of revenue recognition is a similar issue that arose in developing astandard on government transfers. In the case of capital government transfers,

some argued that immediate revenue recognition was appropriate once a transfer

was authorized and eligibility criteria had been met because a transfer is in thenature of a gift. Others argued that revenue recognition over the period(s) the

related asset was acquired or developed was appropriate because capital transfers

are financing for the purchase or construction of a tangible capital asset. Stillothers felt that recognizing the transfer in revenue as the related asset is used to

provide services was more reflective of the role of government in providing

services to constituents.

.103 In the case of government transfers, PSAB concluded that the most appropriateapproach was to link the revenue recognition for the recipient government towhether a liability that meets the definition of a liability in accordance with

LIABILITIES, Section PS 3200, is created as a result of a transfer received. If a

liability is created, the terms of the liability would determine the timing ofrevenue recognition. For a capital transfer, revenue recognition may occur over

the related asset's useful life or over a lesser period depending on the terms of

the liability.

.104 PSAB considered whether the exercise of authority under an appropriation maysimilarly create an obligation that meets the definition of a liability. It is the view

of PSAB that when the legislative or equivalent authority has been enacted andis in effect and expenditures have been incurred that comply with the governing

conditions of the appropriation, a credit would be recognized in the statement ofoperations in that period. It could not come up with an example of a situation

when a parliamentary appropriation would result in a liability once an eligible

expenditure has been made.

Future use of appropriations

.105 In cases when the legislation or practice of the jurisdiction is such that theauthority for the appropriation lapses at the fiscal period end, a receivable would

not be recognized. It may be appropriate to provide information about items thatdo not meet the recognition criteria in notes to the financial statements.

.106 In some cases where authority lapses, a government may approve anappropriation in a subsequent period to settle liabilities related to expenditures

incurred prior to the fiscal period end. The passing of legislation subsequent to

the fiscal period end would not create an existing condition or situation at the

financial statement date that would allow the recognition of an asset.

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PRESENTATION

.107 If an entity prepares general purpose financial statements in accordance with thestandards applicable to public sector entities in the PSA Handbook, the use of

appropriations would be reported as credit in the financial statements. Thefinancial statements would separately disclose the amount.

DISCLOSURES

.108 Appropriations may be prepared on a different basis of accounting and for adifferent scope of activities than that adopted for the financial statements. For

example, appropriations may be prepared on a cash requirements basis.Accordingly, the amount reported in financial statements will differ from the

amounts reported for comparison with approved appropriations. Unutilized

authorized appropriations or approved budgets may or may not expire at the endof the fiscal year.

.109 In the notes or supplementary schedules, financial statements would provide areconciliation of amounts recognized in the financial statements to actual

amounts funded by appropriations, and between the actual amounts funded by

appropriations and the original and final authorized amounts in appropriations.This is important accountability information that helps users assess whether the

resources and financial affairs of the entity were administered in accordancewith legislative authorities.

.110 Appropriations and budgets are commonly amended by legislatures and councilsduring the fiscal period to take into account unforeseen events and amounts are

reallocated between programs. Disclosure should also include an explanation ofthe reasons for differences between the original and final authorized amounts in

appropriations, including whether those differences arise from reallocations orother factors such as policy shifts, natural disasters, or other unforeseen events.

Principle 4

The financial statements should include:

(a) the amounts receivable or payable at the fiscal period end; and(b) a reconciliation of amounts recognized in the financial statements to the authorized

appropriations in the notes or supplementary schedules to the financial statements.

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APPENDIX DETERMINING WHAT CONSTITUTES AREPORTING ENTITY

Preparer Decisions

Economic

Entity?

Preparer considers:

legislation;

needs of users; and

audit.

Preparer considers whether: activities of the entity can be kept

separate from the activities other

entities;

separate accounting records can bemaintained;

transactions can be associated with theentity; and

assets and liabilities of the entity arenot intermixed with those of other

entities.

Preparer considers special purpose reporting, i.e.:

accountability reports (actual spending against

budgetary authorities; operations compliant withthe authorities and powers granted); and

other special purpose reports.

Preparer considers:

existence of external users;

legislative requirement; or

policy requirement.

Yes

No

Reporting

Entity?

Basis of

Accounting?

Yes

General Purpose

Financial Statements

Yes

No
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