The Public Sector Accounting Handbook (PSAB Handbook) defines the government reporting entity as "the government reporting entity should comprise the organizations that are accountable for the administration of their financial affairs and resources either to a minister of the government or directly to the legislature or local government council and are owned or controlled by the government".
Three factors must be considered in the determination of the completeness of the Province as a reporting entity.
Objectives of Financial Statements
Objectives of Financial Statements Section 1400 and referenced at Section 1300.03 of the Public Sector Accounting Handbook states that "government financial statements should provide an accounting of the full nature and extent of the financial affairs and resources for which the government is responsible including those related to the activities of government agencies and enterprises". The PSAB Handbook goes on to state that "those financial statements are a principle means by which a government demonstrates its accountability for the financial affairs and resources entrusted to it and should provide information useful in evaluating a government's performance in the management of financial affairs and resources".
It is accepted, as pointed out in the CICA Public Sector Accounting Handbook, that governments carry out their policies and deliver services through various forms of organizations.
Types of Organizations
In general terms the CICA Public Sector Accounting Handbook recommends all government organizations be included in the reporting entity. Government organizations are defined as "organizations which are accountable for the administration of their financial affairs and resources either to a minister of the government or directly to the legislature".
The PSAB Handbook separates from other government organizations, the following:
Government not-for-profit organizations are those organizations which have counterparts outside the public sector and meet the definition of a not-for-profit organization in the CICA Handbook.
Accountability, Ownership or Control
The PSAB Handbook points out that many organizations are subject to direct ministerial or council authority and are obviously included in the financial reporting entity.
Other organizations such as boards, commissions and Crown corporations have much broader financial powers and operational authority delegated to them and their inclusion as part of the reporting entity is less clear.
Accountability
Government organizations become accountable through their incorporating or enabling legislation. Accountability is either directly to the legislature or indirectly through a minister or senior official. Accountability is with respect to management's overall actions, operations and administration. Accountability can also be obvious from legislative provisions that require government organizations to be accountable.
It should also be kept in mind and as the PSAB Handbook points out, in order to be included in the reporting entity, organizations must be accountable for the overall administration of their financial affairs and resources. To be simply financially dependant on, or regulated by government or to have responsibility limited to the way the government funding is used, is not sufficient to define accountability.
Ownership is more easily defined. The CICA Public Sector Accounting Handbook defines ownership to exist where:
"Governments control other organizations when, without requiring the consent of others or changing existing legislative provisions, it has the authority to determine the financial and operating policies of that organization."
Control may also be evidenced in legislative provisions including regulations and by-laws where government is provided authority to:
In our review there are two areas which must be considered in reviewing the Province of New Brunswick as a reporting entity in comparison to other jurisdictions.
The first is adherence to the Public Sector Accounting Handbook. This is a decision each individual jurisdiction must make, with respect to various organizations identified for possible inclusion.
Therefore in analyzing differences in comparability of jurisdictions, decisions to adhere to the Public Sector Accounting Handbook must be considered.
The other area which must be addressed in assessing comparability is the interpretation of terms used in the PSAB Handbook.
Our report will specifically note, those organizations we considered for inclusion.
Ownership in our opinion is not difficult to establish, generally.
In fulfilling the terms of reference for this project, the one issue which required the greatest amount of attention was the review of the interpretation of accountability and control.
As noted in the background information, these definitions are vital to the determination of which organizations will be included in the reporting entity.
When comparing New Brunswick to other provincial and territorial jurisdictions we considered the fact that differences of inclusion in the reporting entity may not only be due to interpretation variances. The decision on whether to include certain organizations will always depend on the wording of its legislation. This legislation will vary between jurisdictions with some having a clear situation of accountability and control, or lack thereof, while others will leave more room for interpretation.
We understand some degree of uncertainty exists as to the application of the rules as an example where control exists.
We have reviewed correspondence from Provincial and Territorial jurisdictions wherein concern is expressed about certain types of entities not being included in the financial statements; such as health corporations, post-secondary education institutions and schools. Many jurisdictions are potentially making decisions based upon their interpretation of the spirit and intent of the PSAB recommendations.
Concern is also raised in many instances where including certain organizations in the reporting entity may change the relationship between the entity and government. This concern has been raised by some Provincial and Territorial jurisdictions in that, by including certain entities in the reporting unit, with the entities' results affecting overall government results, more input would be required into budgets, ongoing operations and all aspects of the entity.
The Public Sector Accounting Handbook states that government financial statements should provide an accounting of the full nature and extent of the financial affairs and resources for which the government is responsible, including those related to the activities of government agencies and enterprises. Including these board-governed organizations as part of the consolidated financial statements does not reduce their autonomy. The fact that one controls an organization does not mean that one must interfere in the day-to-day management of that organization.
In our view, choosing to interpret recommendations found in the PSAB Handbook in light of whether more influence or control must be exercised, due to the entity being included in the government reporting entity, is not the correct approach. Governments should make decisions as to whether or not they wish control or ownership relationships with organizations, knowing the reporting and funding responsibilities which result, and structure organizations in the appropriate manner. Therefore in comparing the New Brunswick reporting entity to other Provincial and Territorial jurisdictions all of the above must be considered.
In assessing entities for inclusion, we considered certain organizations because the Province might be ultimately responsible for their debt. We have not pursued this possible criteria as we believe the appropriate criteria for inclusion for these organizations is accountability, control and ownership.
After our review of the audited financial statements of certain Provincial and Territorial jurisdictions we believe New Brunswick has one of the most complete financial reporting packages.
Our review has identified only one limited circumstance where a Provincial or Territorial jurisdiction included an organization which New Brunswick has not or does not intend to include for the year ended March 31, 1999. This was the limited inclusion of certain universities by one jurisdiction.
The two areas which appear to be currently hot topics across the country are the education and health sectors. These sectors were the focus of a study commissioned by the Province of British Columbia in comparing the provincial legislation to the Public Sector Accounting Board (PSAB) reporting criteria.
Schools
For the education sector, the study looked at three aspects being public schools, colleges and universities. In relation to public schools and colleges, New Brunswick was one of the few which included the organizations as part of the financial reporting entity. These are being included through the consolidation method. With respect to both schools and colleges, ten of the applicable legislations were interpreted as meeting the PSAB criteria for inclusion in the financial reporting entity. In both instances there were two jurisdictions where the applicability was uncertain.
Universities
According to the study, five jurisdictions, including New Brunswick, met the PSAB criteria for inclusion as part of the financial reporting entity. Yet universities are currently only included by one jurisdiction. It is obvious that including universities has not yet gained wide acceptance nationally, however we suggest the Province stay abreast of any further developments in this area.
Hospitals
The health sector appears to be the one with the largest variance between actual practice and the PSAB recommendations. The study reported that eleven of the twelve jurisdictions met the PSAB criteria for including hospitals as part of the financial reporting entity, however only two were fully compliant for the fiscal year 1997-98. For the year ended March 31, 1998, New Brunswick did not include hospitals as part of the financial reporting entity however it is our understanding that such inclusion is appropriate. We have concluded that the Province of New Brunswick should include the hospitals in its reporting entity using the consolidation method.
The topic of accounting for hospital corporations in New Brunswick is dealt with, in a separate project elsewhere in our report.
Other organizations considered for inclusion.
Nursing Homes
Another organization which falls under the health sector is nursing homes. On review of many other Provincial and Territorial jurisdictions in Canada, none appear to be including nursing homes as part of the financial reporting entity, other than reflecting them using the transaction method. This is the approach being followed by New Brunswick. After review of certain applicable documentation, we do not believe nursing homes are accountable to the Minister of Health for their overall financial affairs and resources, nor are they owned or controlled by the Minister. We therefore consider the current approach appropriate.
Municipalities
As part of our review, we did an overall assessment of what other organizations could be potentially included in the financial reporting entity due to their relationship with the Province. One of the organizations considered was municipalities. The two aspects of municipalities which tie them into the provincial government are revenue and financing. With regards to revenue, property tax revenues are theirs to have as a result of Provincial legislation which provides them with taxing authority. In the case of financing, all long term financing for capital projects including capital leases needs to be approved by the Municipal Capital Finance Board and once approved is funded by the New Brunswick Municipal Finance Corporation. Although these two areas are controlled by the Province, they are only part of total municipal operations.
From an accountability point of view, the municipal councilors are elected by the residents of the municipality and are therefore primarily accountable to them. Although the municipality needs to provide the government with specified reporting, including annual budgets, the government has no control over how the municipality spends its funds, nor does it assist with deficits or have any rights to surpluses.
The Public Sector Accounting Handbook appears to contemplate three levels of government. The PSAB Handbook states "for purposes of applying PSAB recommendations, public sector refers to federal, provincial, territorial and local governments."
The PSAB Handbook further notes that government organizations, "are organizations that are accountable for the administration of their financial affairs and resources either to a minister of government or directly to the legislative or local government council".
The PSAB Handbook also separates or implies separation for various levels of government. The PSAB Handbook Section 1400 deals with objectives of financial statements, federal, provincial and territorial governments. Section 1700 deals with objectives of financial statements local governments.
Accountability, which has been defined earlier in terms of including organizations in a reporting entity, is implied in section 1700.15, "local government financial statements serve the interests of the public and council and others such as regulators, investors and analysts". Section 1700.18 states "regulators eg. provincial governments and their commissions and boards, have legislative or regulatory authority over local government activities. Regulators seek assurance that those activities are carried out in a financially responsible manner and in accordance with the authority and power delegated by provincial authorities". As noted earlier, being regulated by government is not sufficient to define accountability and have inclusion in the reporting entity.
We are of the opinion that municipalities should not be included as part of the New Brunswick Provincial financial reporting entity due to a lack of accountability and control or ownership on the part of the government. This is consistent with the approach being followed by the other Provincial and Territorial jurisdictions in Canada, which we reviewed.
Public-Private Partnerships
The public-private partnerships (3P) are another area reviewed to ascertain if there were any situations in which the government had voting control of the board. Based on our review we determined that the Fredericton-Moncton Highway Project is the only 3P where such a situation potentially exists. The Province of New Brunswick has had a study done on whether the entity known as, "the Project Company", should be consolidated as part of the Province's financial reporting entity, and it was determined that it should not. For purposes of this review we accept that this assessment is correct, since it appears based upon the study that, the government does not control the board nor does the company report to a Minister.
Debt
In order for the financial statements to meet the objectives stated in Section 1400 of the PSAB Handbook, the total debt for which the Province is responsible needs to be disclosed. Any such debt on the books of government organizations would get included on the statement of financial position through the consolidation process.
With regards to government business enterprises, their debt does not appear on the statement of financial position due to the mechanics of the modified equity method of accounting. Condensed financial information regarding these government enterprises is presented in the notes to the Province of New Brunswick's financial statements however disclosure of the Province's debt guarantees is not noted. We suggest the Province should present separately, within the condensed financial information, the liabilities which are government guaranteed.
The accounting for entities to be included is also evolving.
As noted in our discussions, a great deal of uncertainty continues to exist with respect to definitions used in assessing inclusion in a reporting entity, and there appears to be a significant amount of continued uncertainty.
In the future, in assessing completeness, precedent and agreement as to definitions, will resolve many inclusion issues.
We would encourage the Province of New Brunswick to be attentive to changes and recommendations by the Public Sector Accounting Standards Board.
Section II(f)
Terms of Reference
"To determine the completeness of the Province's financial reporting entity, including a comparison with other jurisdictions".
In answering this term of reference we have, as directed by the Steering Committee, defined completeness as meaning which organizations are in or potentially should be included in the reporting entity; we have not addressed the accounting procedures chosen to include organizations in the entity.Background
The Canadian Institute of Chartered Accountants has authorized the Public Sector Accounting Board to issue recommendations and guidance with respect to matters of accounting for the public sector.
The CICA Public Sector Accounting Handbook provides guidance with respect to these three issues.
A government business enterprise is an organization with the following characteristics;
Government business type organizations also are separate legal entities with the power to contract in their own name, and can sue and be sued. As well, they have been delegated the financial and operational authority to carry on business and also sell goods and services to individuals and organizations as their principal activity. However, government business type organizations are those which may sell goods and services within the government reporting entity or they may rely on subsidies from the government or other organizations in the government reporting entity to maintain their operations or meet their liabilities.
Control is also defined within the PSAB Handbook.
Government "may choose not to exercise its authority or actively participate in the implementation of the policies; nevertheless, control exists by virtue of the government's ability to do so".Scope of Review Procedures
In completing the terms of reference, the following were completed:
Analysis and Conclusions
We did not consider the multitude of organizations such as charities, foundations and other not-for-profit organizations which receive funding from the Province as part of their ongoing activities. As noted earlier, to be accountable, organizations must be accountable for the overall administration of their financial affairs and resources. It is our view the majority of these organizations simply receive some form of funding. Also, it would be likely that any organizations which have a relationship with the Province which exceeds financial dependence, regulation, or responsibility for the way funding is used would be immaterial to the Province's financial statements either alone or as a group. Also, we saw no evidence that any other Provincial or Territorial jurisdiction was including organizations of this type in their reporting entity.Conclusion
It is our view, the financial statements of the Province of New Brunswick will represent a complete and appropriate reporting entity for year ended March 31, 1999 based upon our review of the draft financial statements for the year ended March 31, 1999.Observations
The definition of a provincial reporting entity is an evolving process.
