Statement of Principles

Use of Appropriations
Prepared by: Public Sector Accounting Board February 2012

Comments are requested by April 20, 2012

PSAB

Commenting on this Statement of Principles

This Statement of Principles is issued by the Public Sector Accounting Board. The members 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 PDF response form has been posted with this document that can be downloaded here. You can save the form both during and after completion for future reference. 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: ed.psector@cica.ca To be considered, comments must be received by April 20, 2012, addressed to: Tim Beauchamp, Director Public Sector Accounting The Canadian Institute of Chartered Accountants 277 Wellington Street West Toronto, Ontario M5V 3H2

Highlights
The Public Sector Accounting Board (PSAB) proposes, subject to comments received on this 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 position and the statement of operations. Appropriations would be recognized in the period in which the related authority is in effect, 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 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.

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 the response. 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 and indicate a suggestion, supported by specific reasoning, for alternative wording. Supporting reasons for your comments are most valuable when they demonstrate how the Statement of Principles proposals, or your alternatives: produce more relevant information for accountability and decision-making by external users; improve the representation of the substance of the underlying transaction or event;
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contribute to improved measures and understanding of financial position and annual results; facilitate enhanced comparability; and provide sufficient information for external users to understand the financial statements.

Please respond to the following question(s): 1. Do you support the need for a separate standard on accounting for the use of appropriations? 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 that directly 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 limited to separate legal entities? 4. Do you agree that the funding accessed directly under the authority of an appropriation would be recognized in financial statements? 5. If you answered yes to Question 4, do you agree that the use of appropriations would be 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?

ii | STATEMENT OF PRINCIPLES FEBRUARY 2012

USE OF APPROPRIATIONS TABLE OF CONTENTS

PARAGRAPH

Purpose and scope .......................................................................... Special purpose reports ...................................................................... Nature of appropriations ................................................................. Need for a standard ......................................................................... Entity ................................................................................................. Other standard setters .................................................................... Recognition ...................................................................................... Reporting appropriations in financial statements .............................. Alternatives considered ..................................................................... Capital and income approach....................................................... Netting ......................................................................................... Statement of financial position liability.................................... Statement of financial position equity/contribution from owners ................................................................................. Statement of financial position direct credit to accumulated surplus/deficit .............................................................................. Statement of changes in accumulated surplus/deficit .................. Statement of cash provided by government authorities ............... Statement of operations ............................................................... Optional reporting........................................................................ Recognition criteria ........................................................................... Deferral .............................................................................................. Future use of appropriations .............................................................. Presentation ..................................................................................... Disclosures ...................................................................................... Determining what constitutes a reporting entity ..........................

.001 - .010 .007 - .010 .011 - .015 .016 - .022 .023 - .035 .036 - .040 .041 - .106 .042 - .044 .045 - .097 .047 - .050 .051 - .059 .060 - .065 .066 - .073 .074 - .082 .083 - .086 .087 - .090 .091 - .095 .096 - .097 .098 - .100 .101 - .104 .105 - .106 .107 .108 - .110 Appendix

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PURPOSE AND SCOPE

.001 The purpose of this Statement of Principles is to propose standards on accounting 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 disclosure of the use of appropriations. For local governments, the equivalent of appropriations is approved annual budgets. Guidance on presentation is not intended to indicate preferred formats or to prescribe standardized presentation or note disclosure. Preparers must determine the appropriate format, ordering or terminology tailored to their users needs. An entity, unless required by law or other authority, is not required to prepare and present general purpose financial statements. Accountability and reporting requirements in each jurisdiction may specify which entities are required to prepare separate general purpose financial statements. The amount of an approved appropriation generally benefits an entity in one of two 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 the consolidated 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. The proposals in this Statement of Principles would apply to those entities that directly access funding under the authority of appropriations and do not receive the funds or other transfer as defined in GOVERNMENT TRANSFERS, Section PS 3410. The proposals do not apply to government business enterprises or other entities that are directed by the Introduction to Public Sector Accounting Standards, or that choose, to adhere to the standards applicable to publicly accountable enterprises in Part I of the CICA Handbook Accounting. Other entities may elect to prepare and present separate financial statements. For the purposes of their reporting, these entities must determine the most appropriate basis of accounting. The determination is based on an assessment of users' 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 proposals in this Statement of Principles would apply to those entities that determine the standards in the CICA Public Sector (PSA) Handbook generally meet the needs of users of their separate general purpose financial statements.

.002

.003

.004

.005

.006

2 | STATEMENT OF PRINCIPLES FEBRUARY 2012

Special purpose reports .007 This Statement of Principles does not deal with special purpose reports. Entities produce 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 specific users. For example, an entity may publish financial statements that provide a comparison 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 same scope 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. There may be circumstances where special purpose reports or other financial reports published are based on financial reporting concepts in the PSA Handbook, 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. The PSA Handbook does not discuss objectives of the applicable financial reporting 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 purpose financial statements of public sector entities. Nevertheless, an entity preparing a special purpose report would not be precluded from applying these proposals.

.008

.009

.010

NATURE OF APPROPRIATIONS
.011 In making the proposals in this Statement of Principles, PSAB considered the nature 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 the vehicles by which the legislature controls finances, and represent the linkage by which a legislature holds entities accountable for the management of financial affairs and the use of resources within authorized budget allocations. Spending authorities can be divided into two categories; namely, voted and statutory. Voted authorities are those for which the government must seek the legislatures 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. |3

.012

USE OF APPROPRIATIONS

.013

Once approved, the voted authority and approved amounts become the governing conditions under which operating and capital expenditures may be made. The voted authority does not create a commitment to spend the entire amount 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 other than that for which the appropriation was provided. The rules and practices related to the ability to draw on the appropriations of a previous 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 that fiscal 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. Some jurisdictions allow vote-netting. Under vote-netting, the legislature allows that entities can use certain of their revenues to finance their directly related expenditures. The mechanics of vote-netting vary among jurisdictions.

.014

.015

THE NEED FOR A STANDARD

.016 An argument has been made that a separate standard is not required because GOVERNMENT 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 tangible capital assets. All government transfer programs are ultimately discretionary and wholly under the direction of the transferring government. The transferring government also has the ability to impose transfer terms called eligibility criteria and stipulations. Contrary views hold that appropriations do not meet the definition of government transfers. Appropriations generally do not result in the actual transfer of assets and largely affect organizations that are within the same government 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. Use of appropriations requires additional disclosures to those required in Section PS 3410. Appropriations may be prepared on a different basis of accounting and 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 financial statements will differ from the amounts funded from appropriations and amounts

.017

.018

4 | STATEMENT OF PRINCIPLES FEBRUARY 2012

authorized. In addition, appropriations are commonly amended by legislatures and councils during the fiscal period to take into account unforeseen events and reallocations 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 be applied, an appropriation is different from government transfers in many respects resulting in unique recognition, presentation and disclosure issues. An appropriation is an annual and generally lapsing authorization by a legislative act of 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. Recognition issues may arise because appropriations are used by a legislature or other authority in a broader context than government transfers to control finances and hold entities accountable for the management of financial affairs and the use of resources within authorized budget allocations. For example, an entity may be allowed to retain revenue collected to be used to meet directly related 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 the transferor. The current practice related to the reporting of the use of appropriations varies across 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 inflow of 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 are simply cost centres that are authorized to spend within their appropriation limits. Appropriations are a source of financing and not revenue. PSAB is of the view that a separate standard is warranted. The reporting and accounting issues are sufficiently different from those of government transfers, due to the nature of appropriations, to justify a separate standard. The significant variations in opinions that exist on how the use of appropriations should be accounted for and the inconsistency of current reporting practices also justify a separate standard.

.020

.021

.022

ENTITY
.023 The Introduction to Public Sector Accounting Standards defines public sector as including federal, provincial, territorial and local governments as well as government organizations controlled by the government. GOVERNMENT |5

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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 manage public 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 own name and that can sue and be sued. .024 Arguments have been made that the issue of accounting for appropriations should be put in the context of ministries and departments and whether they constitute 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 deconsolidation of the government reporting entitys financial statements. They look 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. Others have questioned whether ministries, departments and other government organizations that are not separate legal entities or that do not operate under a legislative 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 in accordance 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 and take into account their unique nature. For financial reporting purposes, an assumption is made that an economic entity exists. 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, controls economic 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

.025

.026

6 | STATEMENT OF PRINCIPLES FEBRUARY 2012

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 be determined 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 any other 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 this determination. For financial reporting purposes, a reporting entity is generally defined as any economic 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-making purposes. Determining what constitutes a reporting entity is a preparer decision. PSABs publication, 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 such as a department or ministry. It may be an economic entity comprised of a number of individual entities under common control such as the government reporting entity. 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. Whether the reporting entity has a separate legal status or not does not affect how transactions or events are recorded if the entity is issuing general purpose financial statements. Some argue that an activity that is not a separate legal entity, such as a department, should issue special purpose reports and not be regarded as a reporting 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

.028

.029

.030

.031

.032

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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 a separate 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 based on legal constraints rather than economic phenomena. Regardless of whether an entity 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.
UNINCORPORATED BUSINESSES, paragraph 1800.01 in Part II of the CICA

.034

Handbook 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 to International Public Sector Accounting Standards (IPSASs), paragraph 12, notes that IPSASs are designed to apply to all public entities, which include departments. Since 1986, the PSA Handbook has made no such distinction that a government organization needs to be a separate legal entity. GOVERNMENT REPORTING ENTITY, paragraph PS 1300.04, notes that governments carry out their 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 PSA Handbook, 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, PSAB consulted other authoritative sources of GAAP. Other standard setters 1 surveyed have not specifically addressed the issue of accounting and reporting appropriations in the separate financial statements of public sector entities. The Government Accounting Standards Board in its Basis of Conclusions to Statement 33, Accounting and Financial Reporting for Non-exchange Transactions, states that a qualified recipient should recognize a receivable and revenue when an appropriation for that program exists and the period to which the appropriation applies has begun and all other applicable eligibility requirements have been met. It also states that in those cases, the provider government should report a liability and expense.

.037

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

8 | STATEMENT OF PRINCIPLES FEBRUARY 2012

.038

The International Public Sector Accounting Standards Board (IPSASB), in IPSAS 1, Presentation of Financial Statements, recognizes that public sector entities are typically subject to budgetary limits in the form of appropriations 2 or budget 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 actual amounts 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 flow should 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, states that segment revenue includes revenue from budget appropriations or similar authority. 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 the definition of a contribution by owners; or (c) a liability of the government department where the appropriation satisfies the definition of liabilities. Although the "rule" is that appropriations are accounted for as income, the standards do provide that there may be circumstances when appropriations could be 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 the entity. 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 of entities that occur as a consequence of a government decision to restructure the activities or functions of its controlled entities or for other purposes.

.039

.040

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 use of appropriations in their separate financial statements may include: (a) Should the use of appropriations be reported in separate financial statements? (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 sector entity 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 and extent 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 in a public sector entitys financial position in the accounting period; and (d) financial statements should demonstrate the accountability of a public sector entity for the resources, obligations and financial affairs for which it is responsible. PSAB is of the view that a public sector entity controls the economic resources necessary 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. PSAB has based this view on the fact that an appropriation is authorization for departments and agencies to make expenditures or incur obligations of either an operating, 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 entity controls the economic resources associated with the approved authority under the appropriation. If it incurs expenditures in accordance with the governing conditions, it can draw upon the consolidated revenue fund to settle the liability.

.043

.044

Principle 1 The funding accessed directly under the authority of appropriations should be recognized in a financial statement.

10 | STATEMENT OF PRINCIPLES FEBRUARY 2012

Alternatives considered .045 In accordance with FINANCIAL STATEMENT OBJECTIVES, Section PS 1100, if separate 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 between revenues 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. Obligations incurred and expenditures made under the authority of appropriations should be recognized in financial statements according to their nature 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 the accounting 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.

.046

Capital and income approach

.047

Two broad approaches, the capital approach and the income approach, have been suggested 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. The income approach requires that the economic resources accessed under the authority of appropriations be reported as a credit in the statement of operations. 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 the operations, transactions and events of the accounting period that should be reported as revenues.

.048

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(d)

A department is a cost centre and not a reporting entity. The primary objective of public sector entities issuing separate financial statements is reporting 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 resources received. (c) The statement of operations should reflect the annual operating results taking 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 or future periods. (e) The statement of operations reports the net change in assets and liabilities in the accounting period in order to explain and articulate the change in the accumulated 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 its economic 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. The IASB and AcSB take an income approach to reporting government assistance whereby government assistance is recognized in profit or loss on a systematic basis over the periods in which the entity recognizes as expenses the related 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.

.050

12 | STATEMENT OF PRINCIPLES FEBRUARY 2012

Netting

.051

This alternative would report the credit for economic resources accessed under the 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 appropriations would be netted against the cost of the asset and the net amount amortized to operations over its useful life. Supporting this approach is the argument that an entity is acting as an agent of the government and, therefore, the expenditures incurred under the authority of appropriations 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 the appropriation. 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 assume the risks and rewards as a principal in providing goods and services. Therefore, the reporting entity should not report gross revenues and expenses. Additionally, netting a capital appropriation against the cost of a tangible capital asset would reduce volatility in financial statements. Under a full accrual model, tangible capital assets are capitalized and amortized to expense over their useful lives 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 is effectively recognized as the related asset is used to provide services. PSAB is of the view that netting would not meet the objectives of financial reporting 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 and administered through government departments, special funds, agencies and enterprises. Expenses represent the cost of resources consumed in delivering government goods and services in the period. Disclosure of gross expenses reflects the total magnitude of an entitys consumption of, or reduction in, economic resources in the 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 information for evaluating goods and services. Similarly, the financial statements should report the extent to which revenues of the 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.
USE OF APPROPRIATIONS

.052

.053

.054

.055

.056

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.057

The full cost of tangible capital assets would not be presented on the statement of financial position and the full cost of providing goods and services would be understated by the amount of the economic resources accessed under a capital appropriation. 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 for assessing performance and for making resource allocations decisions. 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 tangible capital asset. The function of financial statements is the communication of information to users. To fulfil this function effectively, the information must be relevant and reliable. Netting would result in relevant information for decision making and for assessing accountability being omitted. Netting would also result in incomplete 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 assists users 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.

.058

.059

Statement of financial position liability

.060

Those favouring reporting the use of appropriations as a liability make many of the same arguments as cited in paragraph .048 above that support the capital approach. 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. A contrary argument is that the use of appropriations would not meet the definition 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 an obligation 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. Initially, a public sector entity will record a liability for all obligations incurred for 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

.061

.062

14 | STATEMENT OF PRINCIPLES FEBRUARY 2012

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 and expenditures made by a public sector entity are a liability of the general revenue fund 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 the future sacrifice of economic benefits by the reporting entity to the government. Even if the argument that a public sector entity has a liability to the government is 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 the borrower, loans with forgivable conditions and loans with significant concessionary 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 an appropriation to settle its obligations would not have a loan payable to the government. PSAB is of the view that the credit part of the transaction cannot be recognized as a liability. PSAB next considered whether, as many have argued, the credit could be treated as equity/contribution from owner.

.064

.065

Statement of financial position equity/contribution from owner

.066

Under this approach, an entity would report the economic resources accessed under 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 Board Accounting 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. Those favouring reporting the use of appropriations as an equity/contribution from owners cite many of the same arguments that support the capital approach (see paragraph .048 above). Some supporters of this approach draw a parallel to branch accounting where the balance in the head office account is flowed through equity in branch financial statements.

.067

USE OF APPROPRIATIONS

| 15

.068

Equity is generally defined as the residual interest in the assets of the entity after deducting all its liabilities. Investors put up capital in expectation of a return. The financial interest of investors is represented by equity. Private sector standard 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 total amount of income and expense. Similarly, IPSASB requires that gross inflows of economic benefits or service potential 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 owners establish a financial interest 3 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 the owners or their representatives, and (ii) to distributions of any excess of assets over liabilities in the event of the 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. 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, the government funding would not be considered a contribution from owners. Economic resources accessed under the authority of appropriations are normally depleted 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 not generally establish a financial interest in the net assets/equity of an entity.
Further, introducing equity/contributions from owners into public sector general

.069

.070

.071

.072

purpose financial statements would require revision to the conceptual framework. FINANCIAL STATEMENT CONCEPTS, Section PS 1000, states that

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

16 | STATEMENT OF PRINCIPLES FEBRUARY 2012

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 economic resources, 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 difference between 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 must flow 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 credit side as a transaction directly to equity in general purpose financial statements prepared in accordance with the standards in the PSA Handbook. Governments and government organizations generally do not have equity. In addition, PSAB is currently reviewing the conceptual framework in conjunction with its Concepts Underlying Financial Performance project. Pending the outcome of this project, there did not appear to be a compelling argument for an exception to the 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-source revenues in the statement of operations with the net difference (net cost of operations) going to accumulated surplus or deficit. The offsetting entry in accumulated surplus or deficit would be the financing provided by the government under the authority of appropriations. This reporting model is currently followed by the Government of Alberta in the audited consolidated financial statements included in annual departmental performance reports. Those favouring reporting the use of appropriations as a direct credit to accumulated surplus/deficit cite many of the same arguments that support a capital approach (see paragraph .048 above). Supporters of this approach contend 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 entities within 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. 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

.075

.076

USE OF APPROPRIATIONS

| 17

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 of liabilities could be treated as contributed surplus. .077 Section PS 3800 only applied to government organizations that sold goods and services 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 the owner 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 make it self-sufficient. It is difficult to analogize the standards in Section PS 3800 to situations involving 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 net assets/equity of an entity. Section PS 3800 also addressed accounting when amounts received from the owner were not in the nature of contributed surplus as defined. The Section required that the amounts received that did not meet the definition of contributed surplus be recorded as income. These amounts were required to be separately identified and reported at gross in arriving at net income or loss for the period. Other standard setters also generally require that economic resource inflows be reported 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 the extent 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 of resources 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. Reporting the use of appropriations as a direct credit to accumulated surplus/deficit would require that PSAB make an exception to existing financial statement concepts and standards. Currently, operating results (the difference

.078

.079

.080

.081

18 | STATEMENT OF PRINCIPLES FEBRUARY 2012

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 accumulated surplus/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 its Concepts Underlying Financial Performance project. Pending the results of the review, 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. Under GOVERNMENT 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 that the 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 would ultimately recognize the transfer as the obligation is settled. The public sector entity that has direct access to the consolidated revenue fund or equivalent would not 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 the opening 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 used by federal government organizations complying with the Federal Government Treasury Board Accounting Standard. Alternatively, for presentation purposes, the reconciliation could be done on the face 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 the exercise 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. It could be argued that FINANCIAL STATEMENT PRESENTATION, Section PS 1200, accommodates both presentation options. Paragraph PS 1200.74 requires that 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 same paragraph requires that, for the statement of operations to aid understanding and assessments of operations for accountability and decision-making purposes, it

.084

.085

USE OF APPROPRIATIONS

| 19

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 for a period and, except in specific circumstances, articulates that change. .086 The same arguments, pro and con, would apply to this alternative as discussed under 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. The statement 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 under appropriations. 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 are a 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 its activities in the accounting period and met its cash requirements. The difficulty with this approach is that the bottom line number reporting the resources 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 of operations, 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 on the face of the statement of operations. This statement would not be the equivalent of a cash flow statement in that it would not report cash flows during the period classified by operating, capital, investing and financing activities. The information in this statement would provide users with information about only one aspect of how the entity financed its activities and met its cash requirements.

.088

.089

.090

20 | STATEMENT OF PRINCIPLES FEBRUARY 2012

Statement of operations

.091

Those favouring reporting the use of appropriations as an equity/contribution from 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 of economic 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 of operations. 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. The arguments that support this approach are based on the objectives of general purpose 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. 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 the allocation and consumption of resources; (c) the net difference between revenues and expenses as the measure of the extent to which the net economic resources of the entity have been maintained after the activities of the period have been taken into account. Information about the cost of goods and services and how that cost was financed allows users to make resource allocation and other decisions, as well as for assessing an entitys accountability. PSAB also considered the argument that the use of an appropriation is not revenue 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 to the entity. An entity that has incurred an obligation under the authority of an approved appropriation 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 the economic resources of the government should be accounted for as a credit in the statement of operations.

.092

.093

.094

.095

USE OF APPROPRIATIONS

| 21

Optional reporting

.096

PSAB considered whether reporting entities should be given the option of reporting a credit directly to accumulated surplus/deficit or on the statement of operations. 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 similar transactions across public sector entities and between jurisdictions.

.097

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 an appropriation 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. An appropriation is considered authorized for an entity when the legislation has received 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. In order for a public sector entity to be eligible to receive or recognize an appropriation, the entity must have incurred eligible expenditures under the authority provided to it by the authorizing entity.

.099

.100

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 the use 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 of economic resources accessed under the authority of capital appropriations and the impact that timing could have on annual surplus/deficit. Some entities that currently report the offsetting credit in the statement of operations generally defer the portion of a parliamentary appropriation used to finance the acquisition

22 | STATEMENT OF PRINCIPLES FEBRUARY 2012

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 defer recognition. .102 Deferral of revenue recognition is a similar issue that arose in developing a standard 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 the nature 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. Still others 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. In the case of government transfers, PSAB concluded that the most appropriate approach was to link the revenue recognition for the recipient government to whether 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 of revenue 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. PSAB considered whether the exercise of authority under an appropriation may similarly 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 and is in effect and expenditures have been incurred that comply with the governing conditions of the appropriation, a credit would be recognized in the statement of operations 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.

.103

.104

Future use of appropriations .105 In cases when the legislation or practice of the jurisdiction is such that the authority for the appropriation lapses at the fiscal period end, a receivable would not be recognized. It may be appropriate to provide information about items that do not meet the recognition criteria in notes to the financial statements. In some cases where authority lapses, a government may approve an appropriation 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.

.106

USE OF APPROPRIATIONS

| 23

PRESENTATION
.107 If an entity prepares general purpose financial statements in accordance with the standards applicable to public sector entities in the PSA Handbook, the use of appropriations would be reported as credit in the financial statements. The financial statements would separately disclose the amount.

DISCLOSURES
.108 Appropriations may be prepared on a different basis of accounting and 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 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 end of the fiscal year. In the notes or supplementary schedules, financial statements would provide a reconciliation 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 accordance with legislative authorities. Appropriations and budgets are commonly amended by legislatures and councils during the fiscal period to take into account unforeseen events and amounts are reallocated between programs. Disclosure should also include an explanation of the reasons for differences between the original and final authorized amounts in appropriations, including whether those differences arise from reallocations or other factors such as policy shifts, natural disasters, or other unforeseen events.

.109

.110

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.

24 | STATEMENT OF PRINCIPLES FEBRUARY 2012

APPENDIX DETERMINING WHAT CONSTITUTES A REPORTING ENTITY

Preparer Decisions

No

Economic Entity?

No

Yes Reporting Entity?

Preparer considers whether: activities of the entity can be kept separate from the activities other entities; separate accounting records can be maintained; transactions can be associated with the entity; and assets and liabilities of the entity are not intermixed with those of other entities. Preparer considers: existence of external users; legislative requirement; or policy requirement.

Yes General Purpose Financial Statements Yes Basis of Accounting? Preparer considers: legislation; needs of users; and audit.

Preparer considers special purpose reporting, i.e.: accountability reports (actual spending against budgetary authorities; operations compliant with the authorities and powers granted); and other special purpose reports.

USE OF APPROPRIATIONS

| 25