Annex 6
Implementation of Full Accrual Accounting in the Federal Government’s Financial Statements

Introduction

• As recommended by the Auditor General of Canada and beginning with this budget, the Government will adopt full accrual accounting as its accounting standard, replacing the modified accrual standard it has been using since the mid-1980s. Under full accrual accounting, the Government’s financial statements will provide a more comprehensive and up-to-date picture of the Government’s financial situation.

• National and international accounting standards bodies and the Auditor General strongly support full accrual accounting.

• The Public Sector Accounting Board of the Canadian Institute of Chartered Accountants, which recommends accounting standards for senior levels of government, urges governments in Canada to adopt full accrual accounting.

• The Auditor General has strongly recommended full accrual accounting as "…superior to the Government’s current accounting policies." The Government announced its commitment to full accrual accounting in the 1995 budget.

• Over the past several years, as part of the Financial Information Strategy, the Receiver General for Canada and departments have worked to put in place new financial information systems and to acquire the accounting expertise required to implement full accrual accounting. Overseeing this initiative, the Treasury Board Secretariat also developed the necessary accounting policies and training programs to implement full accrual accounting government-wide.

• In her Observations on the Government’s 2002 financial statements, the Auditor General encouraged the Government to resolve the concerns that were causing delays in the introduction of full accrual accounting and to implement it for the 2002–03 financial statements. After extensive consultations with the Office of the Auditor General, the Government is confident that it has sufficient assurance as to the reliability of the accrual accounting amounts that it can now proceed.

• Implementing full accrual accounting will improve transparency and accountability because:

• the Government’s balance sheet will provide a more comprehensive picture of the Government’s assets and liabilities; and

• the annual budgetary balance will better reflect the impact of economic events and government decisions during the fiscal year.

• Implementing full accrual accounting will provide new information that can be used to improve government decision making in the following ways:

• As full accrual accounting recognizes the value of the Government’s physical assets in its financial statements, it will encourage better stewardship of these assets and better decisions about whether to buy, lease or sell buildings and equipment. Under full accrual accounting, there is more focus on the consumption or use of such resources.

• Full accrual accounting will show more accurately the cost of owning and operating capital equipment, providing a better picture of the cost of providing some programs and services. This provides a much better means to relate the costs of programs to the performance results being achieved.

• More complete recording of the Government’s liabilities will encourage departments to develop better plans for managing those liabilities.

• The shift to full accrual accounting, which affects tax revenues and the valuation of liabilities and non-financial assets, leads to some changes in the annual budgetary balance and the value of the federal debt (that is, the accumulated deficit).

• For example, under full accrual accounting, tax revenues are accounted for in the period to which they relate, not when they are received, as was the case under modified accrual. Under full accrual, the budgetary balance will now be more reflective of economic developments occurring within the year. Largely due to the accrual of tax revenues, the budgetary surplus for 2001–02 has been reduced by $0.7 billion to $8.2 billion.

• Full accrual is more comprehensive as additional liabilities are recognized and non-financial assets, such as government buildings, are now included. The estimated value of the federal debt (accumulated deficit) at March 31, 2002, declines from $536.5 billion to $507.7 billion.

Implementing Full Accrual Accounting

In this budget the Government has moved to full accrual accounting as its accounting standard. Full accrual accounting replaces the previous accounting standard, modified accrual. The Auditor General recommended the shift to full accrual accounting as soon as the outstanding issues causing delays were resolved. Following extensive consultations with the Office of the Auditor General, the Government believes that there is now sufficient quality assurance as to the reliability of the accrual accounting numbers. The Government noted that it intended to take this step in last October’s Economic and Fiscal Update.

What Is Full Accrual Accounting?

The Government’s previous accounting standard—modified accrual—used a mix of accrual and cash accounting, depending on the type of transaction. With this budget the Government is extending the use of accrual accounting to all items that were previously recorded on a cash basis. Accordingly, the new accounting standard is called full accrual accounting.

Moving to full accrual accounting extends the accrual approach to three new areas.

Under modified accrual accounting, the value of the Government’s stock of capital assets, such as buildings, vehicles and equipment, was not shown on the Government’s balance sheet. Under full accrual, the cost of these non-financial assets will now be recorded. Under modified accrual accounting, the full purchase price of a capital asset was shown as an expenditure item in the year of purchase and therefore had an immediate impact on the annual budgetary balance. Under full accrual, the annual cost of owning a capital asset will be the estimated depreciation (or amortization) in the value of the asset according to Generally Accepted Accounting Principles. Full accrual accounting therefore spreads the cost over the useful life of the asset. Similarly, under modified accrual, the cost of an item held in inventory is recognized in the year in which the item is purchased while, under full accrual, it is recognized as an expense in the year in which the item is used.

Tax Revenues

Under modified accrual accounting, tax revenues were recorded on a cash basis in the year they were received. Refunds were charged against revenues in the year in which the refunds were paid. Under full accrual accounting, tax receipts and refunds will generally be recorded in the year in which the taxable activity took place, not when cash payments occurred. Accordingly, a receivable will be established for taxes still owing to the Government and a payable will be established for tax refunds owing to taxpayers.

Under full accrual accounting, a more comprehensive list of liabilities will be recorded on the balance sheet. As a result of the shift to full accrual accounting, the Government will now include the estimated cost of environmental clean-ups in areas of federal jurisdiction; the value of liabilities related to Aboriginal claims to the extent payment is likely and estimable; and increased liabilities for post-employment benefits for federal employees, including workers’ compensation, veterans’ disability costs, and federal employee retirement benefits such as health and dental care.

What Are the Benefits of Full Accrual Accounting?

Full accrual accounting improves transparency and accountability by providing more comprehensive and up-to-date financial statements and greater accountability by the Government to Parliament and the Canadian public.

• The Government’s balance sheet will provide a more comprehensive picture of the Government’s assets and liabilities. For example, the cost of the buildings that the Government owns will appear on its balance sheet for the first time, as will its liabilities for cleaning up contamination on its properties.

• The annual budgetary balance will better reflect the impact of economic events during the fiscal year. In particular, year-to-year changes in recorded tax revenues will more accurately reflect the year-to-year changes in the tax base and tax rates, as these changes will not be affected by lags in tax collections and the payment of refunds.

• The annual budgetary balance will better reflect the impact of government decisions during the fiscal year. In particular, government decisions that cause an increase (or decrease) in the Government’s liabilities for post-employment or retirement benefits will be recorded in the year in which the decision was made. Under modified accrual accounting, the full costs of some of these decisions would not be shown in the Government’s financial statements until all of the resulting cash payments were made many years later.

Full accrual accounting enables more effective decision making about government operations, spending and longer-term risks and obligations.

• As full accrual accounting recognizes the value of the Government’s physical assets in its financial statements, it requires the Government to recognize the amortization of those assets as a cost. This will lead to better recording of assets, and encourage better stewardship of those assets and better decisions about whether to buy, lease or sell buildings and equipment.

• Full accrual accounting will show more accurately the cost of owning and operating capital equipment, providing a better picture of the cost of providing programs and services, and better relate decisions about whether to buy, lease or sell buildings and equipment.

• More complete recording of the Government’s liabilities (i.e. environmental liabilities, liabilities to Aboriginal peoples and liabilities for retirement and post-employment benefits) will encourage departments to develop better plans for managing those liabilities.

The Public Sector Accounting Board of the Canadian Institute of Chartered Accountants (CICA) recommends that senior levels of government adopt full accrual accounting in the presentation of their financial statements.^[1] In their "Observations" on the Government’s financial statements, Auditors General have strongly encouraged the Government to adopt full accrual accounting. It is the accounting practice already used by six provinces—including Quebec, Ontario and Alberta—and by foreign governments such as Australia and New Zealand. Among G7 countries, the United Kingdom has announced its intention to move to accrual accounting.

The Treasury Board Secretariat has established a working group on accrual budgeting to examine the potential application of accrual information to the budgetary process. The working group is examining how accrual concepts bear on many types of decisions, drawing on the experience of other governments that have implemented accrual accounting. For the present, appropriations by Parliament will remain unchanged.

Why Implement Full Accrual Accounting in This Budget?

The Government has been working towards full accrual accounting since the 1995 budget. The Treasury Board Secretariat has developed accrual accounting policies. The Receiver General for Canada and departments have put in place new financial information systems and acquired the accounting expertise needed to report on the greater range of financial activity that this approach requires. The phase-in by departments started in April 1999 and was completed in April 2001.

In the 2001 budget the Government announced that it had decided to delay the move to full accrual by at least one year given the timing of the budget and the fact that important components of the information required to implement accrual accounting had yet to be audited and verified. In her "Observations" on the 2002 Public Accounts last fall, the Auditor General encouraged the Government to resolve the issues which had caused delays in the introduction of full accrual accounting and to implement it for the 2002–03 financial statements. Given the progress that has been made since that time in finalizing the estimates, and working closely with the Office of the Auditor General, the Government is now confident it can introduce accrual accounting.

How Does Full Accrual Accounting Affect Fiscal Planning?

The Government’s fiscal anchor remains the annual budgetary balance. With the implementation of full accrual accounting, there will be changes to how the annual budgetary balance is calculated. Details on these changes and how they affect the reported results are provided below.

Prior to the shift to full accrual accounting there was no distinction between net debt and the accumulated deficit, so these terms were used interchangeably. With the implementation of full accrual accounting that is no longer the case. Net debt is the Government’s liabilities excluding the value of its non-financial assets. The accumulated deficit, however, takes into account the value of the non-financial assets. With the shift to full accrual accounting and the resulting inclusion of non-financial assets, the two indicators will represent different measures of the Government’s financial position.

What Is the Impact of Implementing Full Accrual Accounting on the Government’s Financial Statements?

The implementation of full accrual accounting affects the financial position (the statement of assets and liabilities) of the Government of Canada and therefore the annual change in assets and liabilities, or the budgetary balance.

The most comprehensive measure of the Government’s overall financial position is the accumulated deficit or the federal debt. This is the difference between the Government’s total liabilities and its total assets. Accordingly, it is also equal to the accumulation of annual deficits and surpluses since Confederation.

• Under full accrual accounting, the Government’s liabilities will include a number of liabilities not previously recognized. These include liabilities for: environmental clean-ups on federally owed lands; Aboriginal claims; post-employment benefits such as veterans’ disability costs, workers’ compensation and retirement benefits for dental and health costs of federal public servants; and tax refunds payable by the federal government. As shown in Table A6.1, the net impact of these accrual adjustments is to increase total liabilities by $71.0 billion at March 31, 2002.

• Under full accrual accounting, the Government’s assets also include financial assets that were not taken into account before, namely tax receivables (taxes owed by taxpayers) and the value of the Government’s holdings in its enterprise Crown corporations. The value of these assets amount to $45.9 billion at March 31, 2002. The Government’s assets also include non-financial assets, such as tangible capital assets, inventories and prepayments. The value of these non-financial assets is estimated at $53.8 billion at March 31, 2002. Thus total recorded assets increase by $99.7 billion at March 31, 2002.

• As the increase in the value of the assets more than offsets the additional liabilities, the federal debt (i.e. total liabilities net of all financial and non-financial assets) is $507.7 billion at March 31, 2002, under full accrual accounting, $28.7 billion lower than the corresponding figure calculated using modified accrual accounting.

• Net debt, which excludes non-financial assets, is now estimated at $563 billion at March 31, 2002, compared to $536 billion under modified accrual. This occurs because the value of the financial liabilities that are added to the balance sheet in shifting to full accrual is greater than the value of the additional financial assets (as shown in Table A6.1).

Table A6.1
Statement of Assets and Liabilities: March 31, 2002¹

Moving to full accrual accounting leads to the reclassification of some assets and liabilities. Some additional reclassifications have been made to ensure conformity with current accounting standards. As shown in Table A6.1, these reclassifications do not change the estimated value of the federal debt.

The Government’s fiscal anchor—the budgetary balance—is being presented on a full accrual basis of accounting rather than on the previous modified accrual accounting basis. As such, it better reflects current economic events and government decisions.

Table A6.2 reconciles the financial results for 2001–02 on a full accrual basis of accounting with that previously published under modified accrual. The budgetary surplus is now estimated at $8.2 billion, $0.7 billion lower than the $8.9 billion under the modified accrual basis of accounting, largely reflecting lower personal income tax revenues.

The table shows separately the impact of moving to full accrual and the impact of the classification changes. Although the classification changes affect the individual components, they have no effect on the overall budgetary balance. Among the major components:

Personal income taxes are $3.3 billion lower. Collections in 2001–02 were affected by the extraordinary stock market gains in 2000, which resulted in record final tax settlement payments in April and May 2001. Under accrual accounting, these payments have been allocated to the year in which they were earned. As a result, personal income tax revenues in 2001–02 have been lowered, while those in 2000–01 have increased. There are also a number of classification changes. Interest and penalties, which were previously included in personal income tax revenues, are now part of other non-tax revenues. Largely offsetting this impact is a reclassification of non-resident taxes from other income tax to personal income tax revenues. Finally, repayments of Old Age Security benefits, which were previously included in personal income taxes, are now netted against elderly benefits.

Corporate income taxes have been revised up by $0.6 billion. Half of this is attributable to the reversal of the impact of the Budget 2001 measure which allowed small businesses to defer their monthly instalments for January to March 2002 for a period of six months.

Other income tax revenues are down $1.2 billion, primarily reflecting reclassification of revenues between other income taxes and personal income taxes.

Other non-tax revenues are up $2.0 billion, primarily reflecting the inclusion of interest and penalties on income tax owing. Previously, only penalties and interest on goods and services tax revenues were included in this component.

Changes in the other major revenue components are primarily attributable to the timing of receipts.

The decrease in elderly benefits is due to the reclassification of repayments of Old Age Security benefits.

The recognition of post-employment and retirement benefits (primarily veterans’ disability costs) as a liability results in a reduction in direct program spending with a roughly corresponding increase in public debt charges. As these liabilities have been recognized in previous years, current benefit payments no longer affect direct program spending. However, public debt charges are now higher. This reflects the notional interest costs that ensure that the liabilities established for future payments such as veterans’ disability benefits are always equal to the present value of those expected future payments. This change does not cause higher cash payments to debt holders. This is how the Government currently accounts for its unfunded public service pension liabilities. Direct program spending is also affected by the capitalization of assets, as the amortization adjustment is somewhat lower than capital acquisitions.

Table A6.2
Impact of Full Accrual Accounting: 2001-02¹

The chart below shows the budgetary balance using both the full accrual standard of accounting and the modified accrual standard back to 1993–94. Under full accrual accounting, deficits over the 1993–94 to 1996–97 period are somewhat lower than previously reported. The surplus for 1997–98 is slightly lower; the surplus for 1998–99 is virtually unchanged while those for both 1999–2000 and 2000–01 are somewhat higher.

Tables A6.3 to A6.6 present the summary statement of transactions, budgetary revenues, total expenditures and the statement of assets and liabilities on a full accrual basis of accounting for the years 1993–94 to 2001–02. The impact of moving to full accrual accounting has no effect on the financial requirements/source. The reconciling entry is in non-budgetary transactions.

Table A6.3
Summary Statement of Transactions: Full Accrual¹

Table A6.4
Budgetary Revenues: Full Accrual¹

Table A6.5
Total Expenditures: Full Accrual¹

Table A6.6
Statement of Assets and Liabilities: Full Accrual (as of March 31)¹

^[1] See the CICA Web site at www.cica.ca. [Return]

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