Extract from the Notes to the Province of New Brunswick Draft Financial Statements for the Year Ended March 31, 1999
"Loans that earn a low rate of return are recorded as assets at the original loan amount less any principal payments made to 31 March 1999".
If a government lends money at rates less than what it pays to borrow money, it does so at a net cost. If concessionary loans are shown at face value in the financial statements, the net cost of the concessionary component is buried in the cost of debt servicing. Even though the government of the day made the commitment to give that concessionary rate, future governments and taxpayers will bear the net cost of those loans issued at concessionary terms. As well, if these loans are recorded at face value, a $100,000 loan at 0% interest appears the same as a $100,000 loan with market terms. In fact, a concessionary loan is different. Similar to a bond issued at a discount or premium, the financial markets put a different "price" on a loan which is issued at terms different than market - in this case, at an amount which is less than face value.
To address these issues and improve the accountability for government lending, the Public Sector Accounting Board (PSAB) issued a Statement of Recommendations in April 1993, which applies to all levels of government. The applicable recommendations in Section 3050 of the CICA Public Sector Accounting Handbook follow:
"When the terms of a loan are so concessionary that the substance of the transaction is that all or a significant part of the loan is more in the nature of a grant, the grant portion of the transaction should be recognized as an expenditure when the loan is made".
"The recorded value of the loan at the date of issue should be its face value discounted by the amount of the grant portion. The amount of the loan discount should be amortized to revenue in a rational and systematic manner over the term of the loan".
For loans with concessionary terms, the recommendations accomplish two things. They require the impact of issuing such loans be reflected up front, in the year the loans are issued, so that the effects are not hidden. They also ensure that the amount recorded on the statement of financial position reflects the fact that special terms or repayment assistance have been granted by the government to the borrower.
Recognizing the impact up front raises another issue, how to recognize repayments on the loan. The PSAB Handbook recommendations require the discount be amortized to revenue over the term of the loan, so that the loan is written up each year by the amount of the amortization and repayments are applied against that loan balance. The preferred method of amortization is the effective interest rate method, a method used to amortize bond discounts and premiums, but other appropriate methods are also allowed. This essentially results in the full use of present value techniques in accounting for concessionary loans.
We obtained the necessary loan information from the respective contact people in each department. Generally we obtained the following information:
We did not calculate the concessionary value of low interest loans that have already been expensed by the Province through an allowance for doubtful accounts or those loans that we have recommended the Province add to the allowance for doubtful accounts in another section of this report.
Economic Development, Tourism and Culture
We discussed the extent of low interest loans in this department with a number of representatives from both this department and the Office of the Comptroller. Mr. John Watt provided an initial overview of the department's activities with respect to these types of loans and Ms. Joanne Walker and Ms. Dawn Sullivan provided us with detailed loan data. The outstanding balances of individual loans range from $17,000 to $14,000,000 and carry a diverse array of interest and repayment features. We identified the loans with a concessionary component through a process of discussion and review of selected files. Based on the information provided to us by the department and the Office of the Comptroller, we estimate the value of the concessionary component of the low interest loans in this department to be approximately $10.5 million.
Fisheries and Aquaculture
We discussed the extent of low interest loans in this department with Mr. Maurice Bernier, Executive Director of Finance and Administration. A significant portion of the outstanding loans in this department were not included in our calculations as they are provided for in the allowance for doubtful accounts or we have recommended they be added to the allowance. A number of zero interest loans in the groundfish sector are an example of the loans we think should be added to the allowance. They have been addressed in another section of our report.
Of the remaining loans, we reviewed a number that carried a zero interest rate for the first five years of a twenty-five year term. Based on the information provided to us by the department, we estimate the value of the concessionary component of the low interest loans in this department to be approximately $740,000.
Municipalities and Housing
We met with Mr. Charles Boulay, Director of Housing and Ms. Joan Baldwin, Housing Finance Manager to discuss the extent of low interest loans in this department. They identified five programs that together contained approximately 97% of the outstanding loan portfolio. Upon discussion, we eliminated one of the five programs for review, the Federal / Provincial Repair Program, as the loans within this program bear market rates. The other four programs: the Home Completion Loan Program, the Homeowner Assistance Program, the Down-Payment Assistance Program and the New Construction Program were reviewed with Ms. Baldwin to determine the average payout period, the average interest rate and the average renewal period of the loans in each program. Based on the information provided to us by the department, we estimate the value of the concessionary component of the low interest loans in this department to be approximately $3.9 million.
Agriculture and Rural Development
We discussed the extent of low interest loans in this department with Mr. Paul Cooper, Secretary/Manager of the Agricultural Development Board. Based on this discussion, the department does not have any loans outstanding with concessionary rates of interest that are not fully provided for in the allowance for doubtful accounts. The department has not been involved in any significant low interest loan programs in recent years. Based on the information provided to us, there appears to be no concessionary component of low interest loans in this department.
Regional Development Corporation
The Regional Development Corporation has one loan outstanding for $5 million. This loan is receivable from the Fundy Trail Trust and is non-interest bearing. Based on the information provided to us by the Office of the Comptroller, we estimate the value of the concessionary component of this low interest loan to be approximately $2.2 million.
Executive Council
The Executive Council has one loan outstanding for $4 million. This loan is receivable from La Fondation du Quotidien Francophone. The loan is non-interest bearing and there are no provisions for repayment unless the French language daily newspaper it benefits ceases publication and is not replaced by another acceptable French language newspaper. Based on the information provided to us by the Office of the Comptroller, we recommend the continued recognition of this amount as a financial asset be reviewed and consideration be given to recognizing the entire amount as an expenditure.
Solicitor General
The Solicitor General has one loan outstanding for $3.7 million. This loan is receivable from the City of Moncton, is non-interest bearing and is due in seven equal annual installments from 1999 to 2005. Based on the information provided to us by the Office of the Comptroller, we estimate the value of the concessionary component of this low interest loan to be approximately $650,000.
Other
We did not review the remaining miscellaneous loans receivable in the March 31, 1999 draft financial statements as only $3.6 million of the $13.9 million total is not included in the allowance for doubtful accounts.
Based on the information provided to us by the various departments and the Office of the Comptroller and the recommendations in section 3050, Loans Receivable, of the CICA Public Sector Accounting Handbook, we estimate the value of the concessionary component of low interest loans on the draft financial statements of the Province of New Brunswick to be approximately $18 million as of March 31, 1999.
Section II(d)
Terms of Reference
"To value the concessionary component of all low interest loans reported as financial assets. This should be done by applying the recommendations in section 3050, Loans Receivable, of the CICA Public Sector Handbook".Background
The Province of New Brunswick has outstanding loans receivable from various individuals and corporations of approximately $275 million as at March 31, 1999. A number of these loans were issued at interest rates below market. Currently, provincial loans are all recorded on the statement of financial position in the same manner - at face value. Scope of Review Procedures
We initially met with the Steering Committee as well as Mr. Ed Mehan, Mr. Michael Ferguson, and Ms. Janet Gallagher of the Office of the Comptroller to obtain their input and direction. We discussed the magnitude of low interest loans in each department with them and obtained the names of contact people within each of the departments with significant loan portfolios.
Using the preceding information we estimated the future expected cash flow for each significant loan or group of loans. We then compared the present value of the future cash flow to the face amount of loans receivable recorded in the March 31, 1999 draft financial statements to determine the concessionary component of low interest loans. In the calculation of the present value we used the Province's suggested borrowing rate at the time of loan issuance or at the renewal date if the original loan was altered subsequent to issuance.Analysis and Conclusion
Our observations by department follow:Conclusion
We have summarized our analysis in the following table which shows the concessionary component of low interest loans by department. 
