Government Transfers - Deloitte

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Public Sector
Accounting (PSA)
Standards Update
November 1, 2011

Agenda
• New Public Sector Accounting (PSA) Standards
• Public Sector Accounting Board (PSAB) Projects
• Related Party Transactions
• Conceptual Framework
• Financial Instruments
• Government Transfers
• Transition to PSA Standards

Polling Question 1
What is your current use of PSA Standards
1. I currently prepare PSAB financial statements
2. I will be preparing PSAB financial statements
(with NPO standards)
3. I will be preparing PSAB financial statements
(without NPO standards)
4. I am an auditor of PSAB financial statements
5. None of the above apply to me (or I don’t
know)

New Public Sector
Accounting (PSA)
Standards

New PSA Standards
Topic
Financial Statement Presentation,
Amendments to Section PS 1201
Foreign Currency Translation,
Section PS 2601
Financial Instruments,
Section PS 3450
Government Transfers, revised
Section PS 3410
Government-
Effective Date
GNFPOs / OGOs
Effective Date
April 1, 2015 April 1, 2012
April 1, 2015 April 1, 2012
April 1, 2015 April 1, 2012
April, 1, 2012 April 1, 2012
(N/A for GNFPOs
applying 4200 series)
Tax Revenue,
Section PS 3510
Liability for Contaminated Sites,
Section PS 3260
April 1, 2012
April 1, 2014
N/A

Public Sector
Accounting Board
(PSAB) Projects

PSAB projects
Amalgamations and Restructurings
Amendments arising from Financial Instruments
Appropriations
Assets
Completeness of GAAP for Government Organizations
Concepts Underlying Financial Performance
PSA Handbook Terminology
Related Party Transactions
Revenue
AcSB/PSAB Joint Not-for-Profit Task Force

Related party
transactions

Related Party Transactions (RPTs)–
definitions and disclosure
Invitation to
comment
• No current guidance on accounting for RPTs
• Scope – disclosure of RPTs in general
purpose f/s
• Comments due November 14, 2011
Preliminary
views -
definitions
Preliminary
views -
disclosure
• Controlled entities
• Entities under common control
• Shared control
• Key management personnel and close family
• Nature of relationship
• Description of transaction
• Amounts recognized in f/s and outstanding
balances
• Basis of measurement

Related party transactions –
recognition and measurement
• Issues Paper released October 5, 2011
Should a
standard on
related party
transactions
include guidance
on recognition
and
measurement
Transactions reported at value
determined by government
policy or related parties
(unless guidance exists in a
current standard)
OR
Measurement standards
similar to RELATED PARTY
TRANSACTIONS, Section
3840 of the CICA Handbook –
Accounting
Comments
due
November
14, 2011

Conceptual framework

What is a conceptual framework
• coherent set of interrelated objectives and fundamentals
• leads to consistent standards
• prescribes the nature, function and limits of financial
accounting and reporting
• The conceptual framework in the PSA Handbook
sets out the concepts that underlie the
preparation and presentation of financial
statements for governments and
government organizations that
apply the PSA Handbook.

Conceptual Framework
Why Revising
Focus of Project
•Primarily a response to
concerns raised by senior
government on the impact of
recently issued standards on
measurement of financial
performance:
•Financial instruments
•Government transfers
•Review concepts underlying
financial performance
including:
•Characteristics of public
sector entities
•Users and user needs
•Elements of financial
statements
•Recognition and
measurement

Conceptual Framework – preliminary views
Will not revisit need for accrual accounting
Will maintain current historical cost-based mixed measurement
model
Financial capital maintenance in financial terms
Maintain crucial actual to budget comparison
Framework will continue to focus only on financial statements

Key characteristics of public sector
entities
Public
accountability
Multiple
objectives
Rights, powers
and
responsibilities
Lack of equity
ownership
Operating and
financial
frameworks set by
legislation
Importance of the
budget
Governance
structures
Nature of
resources
Non-exchange
transactions

Conceptual Framework Project –
anticipated timeline
PSAB
approved a
project
proposal
Consultation
Paper #1
issued
Statement
of
Principles
approved
Final
Handbook
Section
expected
to be
approved
December
2010
August 2011
December
2012
December
2014
June 2011
April 2012
December
2013
PSAB
received an
update on
the
progress,
proposed
approach
and
timeline of
the project
Consultation
Paper #2
expected to
be issued
Exposure
Draft
expected
to be
approved

Financial instruments

What is a financial instrument
Definition
• contractual arrangement between two or more parties
• gives rise to financial assets of one entity and financial liabilities or
equity instruments of another entity
Excluded
• does not apply to transactions that are not contractual in their
nature, such as taxes, grants and transfers
Examples
• accounts receivable and payable
• loans receivable and payable
• debt instruments
• equity instruments
• derivatives

Derivatives and Embedded Derivatives
Derivatives
•Characteristics:
•Value changes with
underlying variable
•Requires little or no initial
net investment
•Settled at a future date
•Examples:
•Interest rate swaps
•Forward contracts
•Cross currency swaps
•Written options
•Purchased options
Embedded
Derivatives
• Component within contract
• Accounted for separately if:
•Not closely related to host
contract
•Would meet the definition of
a derivative
•Host contract is not
accounted for at fair value
•Possible examples:
•Contract denominated in
foreign currency
•Contract pricing linked to
index

Changes to PSA Standards
Recognition and Measurement
“Old” PSA Standards
Temporary investments,
portfolio investments,
accounts receivable–
carrying value = cost, unless
market value is below
carrying value
Limited guidance on
derivatives (foreign currency
guidance)
“New” PSA Standard
Equity instruments (portfolio investments)
quoted in an active market – fair value
Most derivatives (and certain embedded
derivatives) – fair value
All other non-derivative financial instruments –
cost or amortized cost (effective interest
method)
Option to record financial instruments at fair
value in certain circumstances
New statement of remeasurment gains and
losses

Foreign currency translation
Unrealized gains and losses
“Old” PSA Standards
Gains and losses on translation are
deferred and amortized to
revenue/expense over the remaining
term of the monetary item
“New” PSA Standards
All monetary assets, liabilities and
non-monetary assets accounted for
at fair value are adjusted to the
period end exchange rate.
Prior to settlement, exchange gains
and losses will be recognized in a
statement of re-measurement gains
and losses (outside the statement of
operations).

Foreign currency translation
Hedging Relationships
“Old” PSA Standards
“New” PSA Standards
Focus = hedging foreign currency risk
No guidance on hedging anticipated
transactions.
There is no provision for hedge
accounting.
Limited guidance on documentation,
evaluating effectiveness, and accounting
for hedging relationships.

Effective interest method
• The effective interest method discounts the estimated future
cash payments or receipts throughout the life of a financial
instrument.
• Illustrative example: A public sector entity invests in a strip
bond that pays $5,000,000 upon maturity in five years. Its
purchase price is $3,917,500, which provides an effective
yield to maturity of 5 percent. An investor in this type of
security receives the $5,000,000 face value of the bond on
maturity.

Effective interest method
Year
Strip
bond
0 3,917,500
Interest
Income
Straight-line
Yield
Interest Income
Effective
interest method
Yield
Interest
Income
(Decrease)
increase
1 4,113,512 216,500 5.53% 196,012 5.00% (20,488)
2 4,319,188 216,500 5.26% 205,676 5.00% (10,824)
3 4,535,147 216,500 5.01% 215,959 5.00% (541)
4 4,761,905 216,500 4.77% 226,758 5.00% 10,258
5 5,000,000 216,500 4.55% 238,095 5.00% 21,595
Total – interest
income
$1,082,500 $1,082,500

Statement of Remeasurement Gains and Losses
• New statement of measurement gains and losses, reports:
– unrealized gains and losses associated with financial instruments
measured at fair value;
– foreign exchange gains and losses on foreign denominated items
carried at amortized cost;
– amounts reclassified to the statement of operations upon
derecognition or settlement; and
– other comprehensive income reported when a government includes
the results of government business enterprises and government
business partnerships in the government’s summary financial
statements.
– Impairment losses: recorded directly in Statement of
Operations

Financial instruments – fair value hierarchy
1
2
3
• Quoted prices in an active market for
identical assets or liabilities
• Inputs (other than quoted prices) that are
observable, either directly or indirectly
• Inputs that are not based on observable
market data

Financial instruments – risk
disclosures
Market
risk
• Currency risk
• Interest rate risk
• Other price risk
Risk
Disclosures
Credit
risk
Liquidity
risk
For each risk, an entity
should discuss its exposure
to risk, how they arise, and
its objectives, policies and
processes for managing the
risks and the methods used
to measure the risk.

Polling Question 2
What is your level of experience with respect to
financial instruments
1. I have in-depth experience with the accounting
standards related to financial instruments
2. I have limited experience with the accounting
standards related to financial instruments
3. I have no experience with the accounting
standards related to financial instruments
4. What is a financial instrument

Government transfers

Government Transfers
• Complexity and accountability of government transfer
programs have significantly increased
• Increased requirements over financial management of
transfer payments
• PSAB issued the initial standard on government transfers in
1990 when governments followed a modified accrual
accounting basis.
• PSAB undertook extensive activities to establish a new
standard for government transfers to reflect the current
reality.

Government Transfers, PS 3410 - New
standard
Standard sought to clarify:
The
recognition of
multi-year
funding to
outside
organizations
Nature and
level of
authorization
required for
recognition of
transfer
Whether
transfer terms
& conditions
affect timing
of recognition
by recipients
& transferring
government
Whether the
nature of the
transfer
affects the
accounting
(e.g. capital
or operating)

Government Transfers, PS 3410 - New
standard
PS 3410,
Government
Transfers
PS 3410
applies to:
• Applicable for fiscal years beginning on or after
April 1, 2012
• Early adoption encouraged
• May be applied retroactively or prospectively
• All levels of government
• Government organizations who apply PSA
standards
• Government not-for-profit organizations who elect
apply PSA standards without section 4200

What is a government transfer
Transferring government
does not :
receive any goods or services
directly in return, as would
occur in a purchase / sale or
other exchange transaction
Transferring
Government
Recipient
expect to be repaid in
the future, as would be
expected in a loan
expect a direct financial
return, as would be
expected in an
investment
monetary
assets or
tangible
capital
assets
Individual,
organization
or another
government

Government transfers – exclusions
Transfers made through the tax system that are authorized under tax legislation
Grants in lieu of taxes
Settlements of lawsuits or other types of legal compensation provided by public
sector entities
CPP/QPP payments
Transfers of non-monetary assets other than tangible capital assets
(e.g. natural resources rights, equity investments, works or art, historical treasures)
Taxes or other money collected by one government on behalf of another
government or organization
Flow-through arrangements where a government agrees to act merely as an
intermediary to administer funds on behalf of another party

Government transfers- transferring
government
• A government transfer should be recognized by a
transferring government as an expense in the period the
transfer is authorized and all eligibility criteria have been
met by the recipient.
• No pre-payments or financial assets are recognized by the
transferring government.
• Government transfers now include transfers of tangible
capital assets

Government transfers- transferring
government
• Eligibility criteria considerations:
– Some transfer programs may require recipients to apply
and meet eligibility criteria only once.
– Other programs may require periodic application as well
as evidence of ongoing eligibility over the periods
funded.
– The nature and extent of eligibility criteria may have an
impact on the extent of a transferring government's liability
under a transfer program at the financial statement date.

Authorization
Expanded guidance and clarification provided
Generally the exercise of authority (final approval) by the financial statement date
required
New standard allows for an earlier point of recognition based the concept of
“demonstrable commitment” at the financial statement date with final approval in the
stub period
Reference to constructive obligation in the PS3200
Government has “loss of discretion” to avoid proceeding with the transfer
Earlier point of recognition only applicable to transferring government

Government transfers - recipients
Eligibility
criteria
• describe who
a recipient
must be or
what it must
do in order to
be able to
get a
government
transfer
• must be met
before the
transfer
occurs
Stipulations
• describe how
a recipient
must use
transferred
resources or
the actions it
must perform
in order to
keep the
transfer
• met after the
transfer is
provided
Recognition
• Stipulations
do not affect
the timing of
an expense
of a
transferring
government
• Stipulations
can affect
revenue
recognition
timing by the
recipient

Government transfers - recipients
Situation
Transfer without eligibility criteria or
stipulations
Transfer with eligibility criteria but
without stipulations
With or without eligibility criteria but
with stipulations
Accounting requirements
Recognized as revenue when the
transfer is authorized
Recognize as revenue when
authorized and eligibility criteria
met
Recognize as revenue when
authorized and eligibility criteria met,
except when and to extent the
transfer gives rise to an obligation
that meets the definition of a liability
for the recipient in accordance with
liabilities (PS 3200)

Government transfers- disclosure
Financial statements should
disclose
major kinds of transfers recognized
in the accounting period
information about the nature and
terms of liabilities, if any, arising
from government transfers received

Conclusions
New standard
clarifies …
• Impact of
stipulations on
revenue
recognition
• Recognition of
assets and
liabilities
• Authorization
(transferor and
recipient)
Considerations
• Granting
processes &
related
documentation
• Internal control
implications
• Detailed analysis
required on a case
by case basis
• Quarterly reporting
impacts

Polling Question 3
What stage are you at with respect to
transitioning to PSA Standards
1. My government organization has completed its
PSAB transition planning
2. My government organization is in the process of
completing its PSAB transition planning
3. My government organization has not started its
PSAB transition planning
4. My organization is a government or a government
organization already following PSAB
5. Not applicable

Transition to PSA
standards

Not-for-profit and Public Sector - changes in Accounting Frameworks
Type of Organization Accounting Framework First reporting period – year
beginning on or after:
Government PSA Standards N/A
P
S
A
B
Government Business
Enterprise (GBE)
Government Not-for-Profit
Organization (GNFPO)
IFRSs
Choice of:
i. Existing NPO standards
(4400 series with minor
modifications) + PSA
Standards as underlying
framework, or
ii. PSA Standards (without
NPO standards)
January 1, 2011 (unless
organization qualifies for 1 year
deferral)
January 1, 2012
Other Government
Organization (OGO)
PSA Standards or IFRSs based
on assessment of users’ needs
January 1, 2011
A
c
S
B
Not-for-Profit Organization
(not controlled by
government) (NPO)
Choice of:
i. Existing NPO standards
(4400 series with minor
modifications) + Accounting
Standards for Private
Enterprises (ASPE) as
underlying framework, or
ii. IFRSs
January 1, 2012

Timeline – first time adoption by
GNFPOs with a March year end
April 1, 2011:
Date of transition to new Accounting
Framework
Opening statement of financial position date.
Beginning of first year of full comparative
financial statements in accordance with new
Accounting Framework.
April 1, 2012:
Date of conversion
External reporting commences
under to new Accounting
Framework with restated
comparative financial statements.
April 1, 2011 March 31, 2012 April 1, 2012 March 31, 2013
March 31, 2012:
Last audited financial
statements prepared in
accordance with Canadian
GAAP.
March 31, 2013:
First audited financial statements under
new Accounting Framework with
restated comparative financial
statements.

What are the impacts on the date of transition
Retroactive
application with
restatement of
prior periods,
subject to the
elective
exemptions
provided.
Recognize and
measure
assets and
liabilities in
accordance with
the new
accounting
framework as of
the date of
transition
Understand
exceptions &
determine
which
elective
exemptions
to apply
Disclosure
requirements

Financial Instruments – transition
considerations
PS 3450 -
transition
guidance
Government
organizations
– early
adoption
Comparative
figures

Financial instruments – PS 3450
transition guidance
Government
organizations
Governments
Government
organizations - apply
PS 3450 in the
same period PSA
Standards adopted
for the first time
[PS 3450.100]
Applies to fiscal
years beginning
on or after
April 1, 2012.
Retroactive
application
is
prohibited.
Earlier
adoption is
permitted.
Applies to fiscal
years beginning
on or after
April 1, 2015.
Retroactive
application
is
prohibited.
Earlier
adoption is
permitted.
Comparative
amounts
presented
are not
adjusted.
Retroactive
application
is
prohibited.

Frequently asked questions –
financial instruments transition
What happens to
accumulated
other
comprehensive
income for
entities
transitioning to
PSA Standards
Should a
government
organization
consider early
adoption of PS
3450 and PS
2601
Should government
organizations
transitioning to PSA
Standards for the
first time restate
their comparative
figures for PS 3450
and PS 2601

Government organizations – early
adoption of PS3 450 & PS 2601
• The effective date of PS 3450 and PS 2601 is after the
date of transition to the PSA Handbook for government
organizations and for some GNFPOs.
• Government organizations and GNFPOs may wish to early
adopt these new standards on transition to the PSA
Handbook
– This avoids having to change accounting policies in these
areas twice within a few years.

Restatement of comparative figures
• Context: Government organizations that adopt Section PS
3450 and Section 2601 in their first PSA compliant financial
statements
• Applicable timeline:
– government organizations - beginning of the fiscal year
that begins on or after January 1, 2011
– government not-for-profit organizations - beginning of
the fiscal year that begins on or after January 1, 2012
• The balances in the opening statement of financial position
and the comparative figures in their first PSA financial
statements will be based on the accounting policies they
follow for Financial Instruments and Foreign Currency
Translation prior to their transition to the PSA Handbook.

Accumulated other comprehensive
income on PSAB transition
• Context: An entity that previously had financial instruments
carried at fair value
– Examples:
• investments classified as available for sale
• derivatives measured at fair value
• Any adjustment of the previous carrying amount is
recognized as an adjustment to the accumulated
remeasurement gains and losses at the beginning of the
fiscal year in which PS 3450 is applied.

First time adoption – PS 2125 optional
exemptions
retirement
and postemployment
benefits
business
combinations
government
business
partnerships
tangible
capital asset
impairment
investments
in
government
business
enterprises

Lessons learned
Understand your organization’s control
assessment & classification
Start early - identify the differences between
existing Canadian GAAP and PSA standards
Expect change - nothing is straightforward

Lessons learned (continued)
Obtain expert advice
Develop position papers –assessment of complex accounting
issues
Prepare a PSA compliant opening statement of financial position,
including PSA disclosures.
Keep your Audit Committee, Board and other stakeholders up to
date

Polling Question 4
How comfortable are you with your level of
knowledge with PSA Standards
1. I have been using PSA standards for a number
of years and I am comfortable with applying PSA
standards.
2. I have been using PSA standards for a number
of years but find it difficult to keep up to date.
3. I know something about PSA standards, but
require more training.
4. PSA Standards are completely new to me.

Questions
Paula Jesty
Partner
pjesty@deloitte.ca
Cindy Veinot
Partner
cveinot@deloitte.ca
Pina Colavecchia
Senior Manager
pcolavecchia@deloitte.ca