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Presentation byPresentation by

Wayne McDonald, CAWayne McDonald, CA

Financial Reporting Requirements February 2005

Financial Reporting Requirements February 2005

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Auditor requirementsAuditor requirements

Summary of First Nation reporting requirementsSummary of First Nation reporting requirements

INACINAC

Health CanadaHealth Canada

First Nation PreparationFirst Nation Preparation

Topics Topics

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Auditor Requirements Auditor Requirements

An audit must be conducted in accordance with GAASAn audit must be conducted in accordance with GAAS

PlannedPlanned

Performed to provide reasonable assurance that the financial Performed to provide reasonable assurance that the financial statements are free of material misstatementstatements are free of material misstatement

Includes examining on a test basis evidence to support the Includes examining on a test basis evidence to support the financial statement disclosuresfinancial statement disclosures

Assessment of accounting principles and estimates used in Assessment of accounting principles and estimates used in preparing the financial statementspreparing the financial statements

Evaluation of the overall financial statement presentationEvaluation of the overall financial statement presentation

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Financial statements must be prepared in Financial statements must be prepared in accordance with GAAPaccordance with GAAP

Generally GAAP refers to one the following Generally GAAP refers to one the following principlesprinciples

For profit accounting For profit accounting

Not-for-profit accounting Not-for-profit accounting

Public Sector Accounting (PSA)Public Sector Accounting (PSA)

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For financial statements prepared in accordance For financial statements prepared in accordance with GAAPwith GAAP

an opinion can be issued, either unqualified or an opinion can be issued, either unqualified or qualifiedqualified qualified if any of the following:qualified if any of the following:

Material departure from GAAP, but statements are still Material departure from GAAP, but statements are still deemed usefuldeemed usefulScope limitationScope limitation

deny an opinion if unable to gather sufficient deny an opinion if unable to gather sufficient evidence to form an opinionevidence to form an opinion

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Financial statements prepared on basis other than GAAP Financial statements prepared on basis other than GAAP permitted only when required bypermitted only when required by

legislation or regulationlegislation or regulation

written contractual agreementwritten contractual agreement

Audit report to include the following:Audit report to include the following:

indicate purpose of the financial statementsindicate purpose of the financial statements

financial statements are not prepared in accordance with financial statements are not prepared in accordance with GAAPGAAP

not intended for and should not be used by anyone other than not intended for and should not be used by anyone other than the specified usersthe specified users

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Audit report on financial informationAudit report on financial information

reference to the agreement or legislationreference to the agreement or legislation

disclose basis of accounting disclose basis of accounting

define nature of financial information auditeddefine nature of financial information audited

Audit report on control proceduresAudit report on control procedures

perform specified audit procedures perform specified audit procedures

procedures must be well definedprocedures must be well defined

issue an opinionissue an opinion

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SummarySummary

Audited financial statements Audited financial statements must adhere to GAAPmust adhere to GAAP

Non-GAAP financial statements Non-GAAP financial statements permitted only by legislation or agreementpermitted only by legislation or agreement

disclaimer issueddisclaimer issued

Audit report on financial informationAudit report on financial informationpursuant to agreementpursuant to agreement

Audit report on control procedures Audit report on control procedures perform specified audit proceduresperform specified audit procedures

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First Nation Reporting Requirements First Nation Reporting Requirements

INACINAC

Financial statement basis of reportingFinancial statement basis of reporting

Non-financial statement disclosure Non-financial statement disclosure

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First Nation Reporting RequirementsFirst Nation Reporting Requirements

INAC – Financial Statement StandardINAC – Financial Statement Standard

Use Generally Accepted Accounting Principles Use Generally Accepted Accounting Principles (GAAP)(GAAP)

First Nations to follow GAAP for local governments First Nations to follow GAAP for local governments as defined in the Public Sector Accounting as defined in the Public Sector Accounting Handbook (PSA)Handbook (PSA)

Tribal Councils and other organizations to follow Tribal Councils and other organizations to follow PSA or Not-For-ProfitPSA or Not-For-Profit

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INACINAC

Non - financial statement disclosureNon - financial statement disclosurePrepare separate schedules for each program/service Prepare separate schedules for each program/service identified in the funding agreementidentified in the funding agreement

Separate schedules for Contributions, Separate schedules for Contributions, shall not shall not combine combine Contribution with Flexible Transfer PaymentsContribution with Flexible Transfer Payments

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INACINAC

Non-financial statement disclosure (cont’d)Non-financial statement disclosure (cont’d)Account for revenue by sourceAccount for revenue by source

Disclose expenditures by objectDisclose expenditures by object

Present cumulative surpluses or deficitsPresent cumulative surpluses or deficits

Provide detail of opening and closing deferred revenueProvide detail of opening and closing deferred revenue

Separate reporting for Consolidated Revenue Fund Separate reporting for Consolidated Revenue Fund withdrawalswithdrawals

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INACINAC

Non-financial statement disclosureNon-financial statement disclosureSchedule of salaries, honoraria, travel expenses and other Schedule of salaries, honoraria, travel expenses and other remuneration for elected officials and senior officialsremuneration for elected officials and senior officials

INAC funding reconciliationINAC funding reconciliation

Schedule of Federal Government Funding or BCR Schedule of Federal Government Funding or BCR permitting disclosure of financial statements to general permitting disclosure of financial statements to general publicpublic

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Implications of INAC Reporting Implications of INAC Reporting

Public Sector AccountingPublic Sector Accounting

Recognized as GAAP Recognized as GAAP

Prescribed format for financial statement disclosurePrescribed format for financial statement disclosure

First Nation’s no longer have flexibility to “pick and First Nation’s no longer have flexibility to “pick and choose” accounting policychoose” accounting policy

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Financial statements to includeFinancial statements to include

All organizations that are controlled by the First All organizations that are controlled by the First NationNation

Control is a question of factControl is a question of fact

Method of including the organization dependent Method of including the organization dependent upon its type of activityupon its type of activity

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Method of inclusionMethod of inclusion

For-profit entities – modified equity methodFor-profit entities – modified equity methodNo consolidationNo consolidation

Do not eliminate balances between entitiesDo not eliminate balances between entities

For-profit type entities – full consolidationFor-profit type entities – full consolidation

Not-for-profit organizations – full consolidationNot-for-profit organizations – full consolidation

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Financial ReportingFinancial Reporting

Financial statements to include statements of:Financial statements to include statements of:Financial positionFinancial position

Financial activitiesFinancial activities

Changes in financial positionChanges in financial position

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Statement of Financial PositionStatement of Financial Position

To report To report financial financial assets and liabilitiesassets and liabilitiesCategories like restricted, current and long-term are not Categories like restricted, current and long-term are not usedused

Use financial and non-financialUse financial and non-financial

Financial assets include:Financial assets include:CashCash

ReceivablesReceivables

Inventory for resaleInventory for resale

InvestmentsInvestments


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Statement of Financial PositionStatement of Financial PositionFinancial liabilities include:Financial liabilities include:

Temporary loans payableTemporary loans payable

Accounts payable and accrued liabilitiesAccounts payable and accrued liabilities

Deferred revenueDeferred revenue

Long-term debtLong-term debt


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Statement of Financial PositionStatement of Financial PositionPhysical assetsPhysical assets

Standards provide flexibility to either record or notStandards provide flexibility to either record or not

CICA is studying this issue CICA is studying this issue


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Statement of Financial ActivitiesStatement of Financial ActivitiesAccount for difference between revenues and expendituresAccount for difference between revenues and expenditures

Account for the combined change in fund balancesAccount for the combined change in fund balances

Revenues include:Revenues include:GrantsGrants

Government fundingGovernment funding

User feesUser fees

Items not included as revenue:Items not included as revenue:Transfers from other fundsTransfers from other funds

Debt proceedsDebt proceeds


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Statement of Financial ActivitiesStatement of Financial ActivitiesExpenditures includeExpenditures include

Cost for goods and services used (regardless of payment)Cost for goods and services used (regardless of payment)

Salaries and wagesSalaries and wages

SuppliesSupplies

Interest on borrowingsInterest on borrowings

Items not included as expendituresItems not included as expendituresTransfers to other fundsTransfers to other funds

Debt repaymentsDebt repayments


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Statement of Financial ActivitiesStatement of Financial ActivitiesExpenditures should be reported by functionExpenditures should be reported by function

HealthHealthSocial servicesSocial servicesGeneral governmentGeneral government

Financial statements should also disclose expenditures by Financial statements should also disclose expenditures by objectobject

Recommend note or schedule disclosureRecommend note or schedule disclosureWould include disclosure for:Would include disclosure for:» SalariesSalaries» Materials and suppliesMaterials and supplies


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Statement of Changes in Financial PositionStatement of Changes in Financial PositionReport changes in cash and cash equivalentsReport changes in cash and cash equivalents

Classify cash flows as:Classify cash flows as:OperatingOperating

InvestingInvesting

FinancingFinancing


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Fund ReportingFund ReportingFinancial statements should report fund balances for the Financial statements should report fund balances for the following:following:

Current fundCurrent fund

Capital fundCapital fund

Reserve fundReserve fund

Changes in fund balances should be reportedChanges in fund balances should be reported


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Inconsistent with INAC required schedules of revenue and Inconsistent with INAC required schedules of revenue and expenditureexpenditure

Revenue disclosed by category not sourceRevenue disclosed by category not source

Expenditures disclosed by program not objectExpenditures disclosed by program not object

No disclosure of cumulative surpluses and deficits by programNo disclosure of cumulative surpluses and deficits by program

No disclosure of deferred revenue opening and closingNo disclosure of deferred revenue opening and closing

No deferred expenditure concept for timing differences on No deferred expenditure concept for timing differences on capital projects – included with fund balancecapital projects – included with fund balance

Impact of PSA to First NationsImpact of PSA to First Nations

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Debt is no longer a source of revenue Debt is no longer a source of revenue

Likely expenditures will exceed revenues prior to Likely expenditures will exceed revenues prior to debt – may be interpreted as deficitdebt – may be interpreted as deficit

Debt financing of physical assets Debt financing of physical assets

Ensure asset is recorded to avoid reduction of Ensure asset is recorded to avoid reduction of overall Members’ Equityoverall Members’ Equity


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Financial terms are not consistent with funding Financial terms are not consistent with funding agreementsagreements

Agreements consider default if cumulative deficit Agreements consider default if cumulative deficit equals 8% or more of total annual revenueequals 8% or more of total annual revenue

Financial statements do not disclose cumulative surplus or Financial statements do not disclose cumulative surplus or deficitdeficit

INAC does not define which cumulative surplus or deficit INAC does not define which cumulative surplus or deficit used in calculationused in calculation

Subjective interpretation by INACSubjective interpretation by INAC


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Separate entities under Chief and Council’s control Separate entities under Chief and Council’s control will have to be included in First Nation resultswill have to be included in First Nation results

Defining control can become a significant issueDefining control can become a significant issue

Chief and Council may interpret control differently Chief and Council may interpret control differently than PSAthan PSA

INAC has interpreted control subjectively INAC has interpreted control subjectively


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Health Canada Reporting RequirementsHealth Canada Reporting Requirements

Health Canada – Health Canada – Transfer AgreementsTransfer Agreements (Feb /04) (Feb /04)

Separate audited financial statements including Separate audited financial statements including balance sheet and revenue and expenditurebalance sheet and revenue and expenditure

Program revenue and expenditure activity by objectProgram revenue and expenditure activity by object

Disclosure of Moveable Capital Asset Reserve Disclosure of Moveable Capital Asset Reserve activityactivity

Specify financial statement disclosure that is not Specify financial statement disclosure that is not GAAPGAAP

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Health Canada – Health Canada – Transfer AgreementsTransfer Agreements (Feb /04) (Feb /04)

Require auditor to attest that “all resources were Require auditor to attest that “all resources were used in accordance with the terms and conditions of used in accordance with the terms and conditions of the agreement”the agreement”

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Health Canada – Audit ImplicationsHealth Canada – Audit Implications

Non-GAAP financial statements require disclaimer Non-GAAP financial statements require disclaimer

Cannot attest that Cannot attest that all resources were used in all resources were used in accordance with terms of the agreementaccordance with terms of the agreement unless unless

100% examination100% examination

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Health Canada – Implications to First NationsHealth Canada – Implications to First Nations

Balance sheet can be difficult to extract if Health Balance sheet can be difficult to extract if Health operations are consolidated with other operations operations are consolidated with other operations

Auditor’s inability to comply with terms of agreement Auditor’s inability to comply with terms of agreement may cause Health Canada concernsmay cause Health Canada concerns

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First Nation Reporting Requirements First Nation Reporting Requirements

Future items Future items

Expanded requirements with increased Expanded requirements with increased accountabilityaccountability

Audit opinion on internal controlAudit opinion on internal control

Audit opinion on effectiveness of proceduresAudit opinion on effectiveness of procedures

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First Nations PreparationFirst Nations Preparation

Financial information Financial information mustmust support operation support operation management management

timely timely

accurate accurate

relevantrelevant

understandableunderstandable

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Reporting flexibility is necessary and should meet Reporting flexibility is necessary and should meet

Internal needsInternal needs

External needsExternal needsGeneral audit requirementsGeneral audit requirements

Specific project or program objectivesSpecific project or program objectives

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General ledger design is fundamental General ledger design is fundamental

Flexible and adaptableFlexible and adaptable

Chart of accounts to includeChart of accounts to includeDepartments, programs or projectsDepartments, programs or projects

Identify specific objects – wages, supplies, revenue Identify specific objects – wages, supplies, revenue sources etc.sources etc.

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Understand funding arrangements Understand funding arrangements

Review terms and conditionsReview terms and conditions

Review reporting requirementsReview reporting requirements

Examine reporting formatExamine reporting format

Inform external auditors of any particularsInform external auditors of any particulars

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Ensure the accounting system captures Ensure the accounting system captures

Chief and Council honorariaChief and Council honoraria

Salaries and benefits for senior managementSalaries and benefits for senior management

Capital assets acquired Capital assets acquired

Debt repayments Debt repayments

Revenue transfersRevenue transfers

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Lobby INAC for standardized reporting frameworkLobby INAC for standardized reporting framework

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OUESTIONS?OUESTIONS?

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Documents

nonfinancial financial

use financial

financial information

basis of accounting

issue public sector

accounting policy

nation control

general public