Transcript Phase 3 Presentation - Newfoundland and Labrador

Phase 3
PSAB Implementation
Newfoundland and Labrador Municipalities
Department of Municipal Affairs
September to November 2009
1
Objectives of the Presentation
1.
Help you understand the differences between the
old & new F/S.
2.
Help you understand the requirements of the new
F/S.
2
PSAB Reporting Model

PSAB – Public Sector Accounting Board

It regulates accounting principles and practices for the
public sector.

Prior to 2009, PSAB had separate standards for
municipalities using a modified cash basis of accounting.

Beginning January 1, 2009 all governments will use the
same financial reporting model which utilizes accrual
accounting.
3
PSAB Reporting Model

The move to PSAB by municipalities should be seen as
an evolving trend to:
 provide greater disclosure of financial information,
 meet the needs of a wider range of users, and
 facilitate better decision making by users.

PSAB Reporting provides a more comprehensive set of
financial statements that places equal emphasis
between the annual surplus/deficit and the overall
financial health of the municipality.
4
Urgency for PSAB compliance
The 2009 financial statements will require comparative
figures for 2008.
This means:

Municipalities should have started gathering
information that they needed for their 2009 financial
statements in 2008.
5
If Municipality is Non Compliant…

Municipal auditor must qualify his/her audit opinion.

Could affect financing costs with banks.

Could create public concern over Council’s management
practices.

Would affect a Municipality’s receipt and eligibility for
Federal and/or Provincial programs, such as the Gas Tax
Funding Agreement.
6
Three Phases of the Department’s Action Plan

Phase 1 - January to September 2008
• Established a Steering and Working Committee
• Created the TCA Reference Manual
• Conducted Training Sessions

Phase 2 - September to December 2008
• Launched the PSAB resource website
• Created the TCA Valuation Manual
• Created the Phase Two Reference Manual
-Municipal Reporting Entities, Consolidations
-Accruals, Environment Liabilities, etc.
• Conducted Training Sessions
7
Three Phases of the Department’s Action
Plan continued…

Phase Three - September to November 2009
• Created a Phase Three Reference Manual
-Financial Statement Presentation & Disclosures
-Financial Planning (Budgets) Reconciliation
• Modified and updated the PSAB resource website
• Currently offering Phase Three Training Sessions.
8
PSAB Reporting Model
Municipalities in many of the other provinces are
already complying with PSAB. This would include the
provinces of:

B.C.,

Alberta,

Saskatchewan,

Ontario, and

Nova Scotia.
9
PSAB Reporting Model
There are four statements required by PSAB:
1. Statement of Financial Position ( Balance Sheet)
2. Statement of Operations ( Income Statement)
3. Statement of Change in Net Debt
4. Statement of Cash Flow
10
There are five major changes in the new
PSAB financial statements:
1.
TCA/Amortization
2.
Accrual Accounting
3.
Debt Payments
4.
Reporting Entity
5.
Transfers
11
Major Changes in the Financial Statements
1. TCA/Amortization
Old F/S
PSAB F/S

Capital Expenditures are
directly expensed.

Capital payments are
recorded as TCAs.

100% of cost is
expenditure of
accounting period.

Cost of a TCA is
amortized over its useful
life.

Cost is spread over more
then one period.
12
Major Changes in the Financial Statements
1. TCA/Amortization - Example
Old F/S
PSAB F/S

New Computer Network
$40,000

New Computer Network
$40,000

Expense entire $40,000

Record as TCA

Determine Useful life - 4
yrs

Amortization -$10,000/yr
which is a Non–cash
expense
13
Major Changes in the Financial Statements
2. Accruals
Old F/S
PSAB F/S

Prepared on a modified
cash basis.

Prepared on a full accrual
basis.

Expenditures were
recorded when cash was
disbursed.

Expenses are recorded as
incurred.

Examples; accrued
salaries, accounts
payable, environmental
liabilities
14
Major Changes in the Financial Statements
2. Accruals - Example
Old F/S
PSAB F/S

Mr. X earns 2 wks
severance pay
($2,000)/year of service

Mr. X earns 2 wks
severance pay
($2,000)/year of service

He retires after 20 yrs

$2,000 is accrued each
year

$40,000 is expensed in
his year of retirement

$40,000 liability paid in year
of retirement
15
Major Changes in the Financial Statements
3. Debt Payments
Old F/S
 Debt service charges
included interest &
principal payments
PSAB F/S
 Debt service charges only
include interest


This total was expensed.
Principal payments reduce
the liability.
16
Major Changes in the Financial Statements
4. Reporting Entity
PSAB F/S
Old F/S

F/S only report on the activities
of the municipality.

Each fund is presented
separately in the F/S.
 General Operating Fund
 Reserves
 General Capital Fund

F/S include all organizations
that are controlled by the
municipality.

All controlled organizations
and government partnerships
are consolidated into one set
of summary F/S.

Consolidated statements are
only required for the year end
audited financial statements.
17
Major Changes in the Financial Statements
4. Reporting Entity continued…
A quick refresher…what do we mean by control…..
18
Major Changes in the Financial Statements
4. Reporting Entity continued….
What are the PRIMARY indicators of control…
1.
Having the power to govern
Power to unilaterally appoint or remove
majority of governing members.
2.
Have the authority to determine financial &
operating policies
Does not necessarily mean day-to-day management
3.
Expected benefits or risk of loss



Benefits may be financial or non-financial
Most benefits are service oriented
Does risk of loss accrue to the government?
19
Major Changes in the Financial Statements
4. Reporting Entity continued….
PRIMARY indicators of control…..
3.
Hold a majority of the voting shares
 Municipal governments don’t often have voting shares
4.
Unilateral power to dissolve the organization
 Access assets
 Become responsible for its obligations
If any one (1) of these indicators exists, the organization is likely
controlled and should be consolidated and included in the MRE!
20
Major Changes in the Financial Statements
4. Reporting Entity continued….
What about the SECONDARY indicators of control:
1)
Significant input into the appointment of a governing body.
2)
Can appoint or remove key personnel of the organization.
3)
Establish or amend an organization’s mandate or mission.
4)
Can establish borrowing or investment limits.
21
Major Changes in the Financial Statements
4. Reporting Entity continued….
SECONDARY indicators of control, cont’d:
5)
Are able to restrict revenue generating capacity.
6)
Can establish or amend organizational policies.
7)
Can approve and make changes to the
organization’s budget.
Remember to consider the indicators collectively.
The more indicators that exist, the more likely control
exists!
22
Major Changes in the Financial Statements
4. Reporting Entity continued….
Still not sure?
See the Municipal
(Consolidated)
Reporting Entity
Checklist in the Phase
2 Reference Manual
or online at the PSAB
website.
23
Major Changes in the Financial Statements
4. Reporting Entity continued…
Government
Partnerships
Core Government
•General Op Fund
•General Op Reserve
•Capital Fund
•Etc.
Controlled Entities
Everything within the red circle is part of the Municipal
Reporting Entity (MRE)!
24
Municipal Reporting Entity

Identify controlled entities & gov’t
partnerships (GP)

Ensure entity F/S will be available
on time.

Difficulties with entities will create problems for
June 30, 2010 deadline

Discuss with your auditor as to the level of
assurance required for each entity. Depends on
materiality.
25
Major Changes in the Financial Statements
5. Transfers
Old F/S

Inter-fund and interorganizational balances and
transactions were recorded.
PSAB F/S

Transfers to reserves are not
expenses and transfers from
reserves are not revenues.

Inter-fund and interorganizational balances and
transactions are eliminated.
26
Budgeting
“The landscape has
remained the same, but the
picture is being taken from
a different perspective”
Daryl Wilson
Chair of PSAB
February 10, 2003
27
Budgeting

The budget process will not change for municipalities.

Still budgeting on a “cash basis” as in previous years.

Municipalities are still required to prepare a balanced budget
in accordance with the Municipalities Act or applicable City’s
Act.

A reconciliation between the financial plan and the PSAB
budget will have to be disclosed in the notes and/or schedules
to the financial statements because of the “budget
disconnect”.
28
Budgeting

What is the “Budget Disconnect”?

A Budget Disconnect is the difference between what is
budgeted on a cash basis and the operating results
reported under PSAB.
Budgeted
Cash
Surplus/Deficit
=
Surplus/Deficit
Reported
Under PSAB
29
Budgeting
A Budget disconnect results from the fact:
1)
the financial plan is prepared on a cash basis while PSAB
is prepared using accrual accounting,
2)
under PSAB, transfers are neither revenues nor
expenses,
3)
PSAB only records the interest portion of debt
repayments as an expense. The current budget records
the entire debt repayment as an expenditure,
4)
the financial plan expenses the entire amount of a capital
transaction in an accounting period. PSAB capitalizes
and amortizes this same expense over a number of years.
30
Standards of Financial Statement Presentation

Financial Statement Objectives (4)

Qualitative Characteristics of Financial Statements(4)

General Reporting Principles (10)
31
Financial Statement Objectives
1)
Financial Statements should include all the
organizations the government controls; i.e. MRE
2)
Financial Statements should report the government’s
financial position.
3)
Financial Statements should report changes in the
government’s financial position.
4)
Financial Statements should demonstrate if resources
were administered in accordance with the budget.
32
Qualitative Characteristics of Financial Statements

Relevance

Reliability

Comparability

Understandability
33
Relevance
Financial Statements are relevant when they help users
make decisions and provide information that:
a)
has predictive & feedback value;

Predictive value of the Statement of Operations is
enhanced if abnormal items are disclosed separately.
Information that confirms or corrects previous predictions
has feedback value.

Example – A municipality realizes a very large gain from
the sale of a tangible capital asset. This would not be a
normal recurring source of revenue so predictive value
would be improved by disclosure of the abnormal item.
34
Relevance continued…
b)
provides accountability;
 Information that helps users assess a government's
stewardship of the resources entrusted to it has
accountability value.
 Enhanced when financial statements compare actual
results against financial objectives and targets.
 Example - budgets
c)
and is timely.
 In order for information to be useful, the decision
maker must receive the information before it loses the
capacity to influence decisions.
 Example – Financial statements issued long after the
fiscal period they are reporting on.
35
Reliability
Inaccurate, inappropriate or incomplete information, or
information that is biased or does not faithfully represent what it
purports to represent, will inhibit rather than enhance
understanding and decision making by users. Reliable
information has the following characteristics:
a)
Representation Faithfulness

Transactions s/b accounted for in a manner that conveys their
substance rather than necessarily their legal form.

Example: Capital leases – The legal title to a piece of equipment
may remain with the lessor but the lessee has taken on all the risks
and benefits of ownership. The lessee therefore accounts for the
transaction exactly as if he had borrowed funds and purchased the
equipment outright.

36
Reliability continued….
b)
c)
Completeness

Means providing sufficient information about transactions
& balances for a user to understand the government’s
finances.

Example: Notes to the F/S
Neutrality
 Information should be free from bias, it should be
neutral and report economic activity without
coloring the image in some particular direction.
37
Reliability continued….
d)
Conservatism


e)
Used when estimates must be made in conditions of
uncertainty.
When uncertainty exists ensure that assets & revenues are
not overstated, or liabilities & expenses are not
understated.
Verifiability


A transaction is veridical if a knowledgeable and
independent observer would concur that it is in agreement
with the actual underlying transition with a reasonable
degree of precision.
Deals with the measurement of a transaction rather than its
appropriateness
38
Qualitative Characteristic trade-off

In practice there is often trade-offs between the
qualitative characteristics.

The aim is to achieve an appropriate balance between
the characteristics but there is often a trade-off
between relevance and reliability.
Example:
Land is for sale but has to be valued at the lower of
historical or net realizable value. Valuing the land at fair
market value would be more relevant but historical cost
would be more reliable.
39
Comparability

Comparability between governments is enhanced
when they follow the same accounting standards.

Consistent application of accounting policies between
accounting periods enhances comparability.
40
Understandability
For information to be useful it must be understood by
others. Understandability can be enhanced in financial
Information by ensuring:

Information is presented clearly and simply.

Avoid excessive detail & complex presentation formats which
often result in confusion & errors.
41
Chart of Qualitative Characteristics
Understandability
Conservatism
Decision Usefulness
Predictive
value
Timelines
Verifiability
Relevance
Reliability
Neutrality
Completeness
Accountability
Representational
Faithfulness
Comparability
Consistency
42
General Reporting Principles
1)
Financial Statements should be clearly identified and are the
responsibility of the government.
2)
Notes and Schedules that are integral to the Financial Statements should
be clearly identified.
3)
Notes and supporting schedules should not be used as a substitute for
proper accounting.
4)
Financial Statements should present the government’s:
i.
ii.
iii.
iv.
5)
Financial position
Results of operations
Change in net debt
Cash flows
Financial Statements should use common terminology & classification of
items so the information is understandable.
43
General Reporting Principles continued….
6)
Financial Statements should include comparatives.
7)
Financial Statements should be issued on a timely basis.
8)
The valuation of assets & liabilities should be applied
consistently, and where it is not self evident, it should be
disclosed.
9)
Where Financial Statements are subject to audit, the auditor’s
report should be appended to the statements. Unaudited
statements should be clearly identified.
10)
Financial Statements should present the substance of
transactions & events.
44
Statement of Financial Position ( Balance Sheet)
Presents a year end snapshot and highlights the following key
figures that describe the financial position of the government;
1)
2)
3)
4)
5)
Financial assets (FA)
Liabilities
Net Debt or Net FA Position
Non-Financial Assets (NFA)
Accumulated Surplus
45
Key Figures in the Statement of Financial Position
1. Financial Assets (FA)
Financial Assets are assets that can be used to pay existing
liabilities or finance future operations and are not for
consumption in the normal course of business. They represent
the resources available to pay existing liabilities or finance future
operations. Some examples:




Cash & cash equivalents
Temporary or short-term investments
Amounts Receivable (within 1 year of F/S date)
Inventories for sale
46
Key Figures in the Statement of Financial Position
2. Liabilities
Represent present obligations of a government to
others arising from past transactions or events. Some
examples:

Accounts payable & accrued liabilities:
Trade payables
 Accrued salaries & wages
 Accrued audit fees
 Accrued interest payable


Deferred revenue
Deposits for services & goods which have not been delivered
 Prepaid taxes
 Tax levies in advance

47
Key Figures in the Statement of Financial Position
2. Liabilities continued…
More examples which maybe of a more long-term
nature:




Liability for the remediation & mitigation of contaminated sites
Obligations under capital leases
Loans from other governments
Borrowings:
 Debentures
 Bank loans
48
Key Figures in the Statement of Financial Position
2. Liabilities continued…
Environmental Liabilities
There are three criteria that must be met for an Environmental
Liability to be reported, namely;
1)
the contamination must exceed an environmental standard,
2)
the government must be directly responsible or accept
responsibility for the site, and
3)
a reasonable estimate of the amount must be able to be
made.
49
Environmental Liability Decision Tree
50
In general for Environmental Liabilities….


Identify your existing & potential
contaminated sites.
Value and record as of Jan 1/09
and/or Dec 31/09.

Record liability if:
1.
2.
3.

Contamination exceeds an
environmental standard;
Muni is directly responsible or
accepts responsibility; and
Reasonable estimate of the cost
can be made.
Otherwise disclose
51
Key Figures in the Statement of Financial Position
3. Net Debt/Net FA

A Government’s Net Debt position is a key indicator of it’s overall
financial health.

Net Debt is simply a government’s financial assets less it’s liabilities.

If a government’s financial assets are greater then it’s liabilities then it
is called Net Financial Assets. If a government’s financial assets are
less then it’s liabilities then it is called Net Debt.

A Net Debt balance represents a lien against future operations while a
Net Financial Assets balance means the government has resources
available for future.
In general:
If financial assets are greater then liabilities = Net Financial Assets
If financial assets less then liabilities = Net Debt
52
If a Municipality is in a net debt position does
that mean that it’s bankrupt?
The answer is…NO!!

Not all the
liabilities are
due at the
Financial
Statement
date.
It simply means:
 Net debt balance represents a
lien against future operations.

Net FA balance means the
government has resources
available for future operations.
53
Key Figures in the Statement of Financial Position
4. Non – Financial Assets
Non-financial assets are assets that:

unlike financial assets do not normally provide resources to pay
existing liabilities.

are normally employed to deliver government services and

unlike financial assets maybe consumed in the normal course of
operations.
Examples of Non-financial assets:

Prepaid expenses

Inventories for
consumption:
Culverts
Chemicals
Fuel

TCAs!
54
Remember Tangible Capital Assets?
Have useful lives
extending beyond
an accounting
period
Are held for use:
•In production of goods
and services
•For rental to others
Are to be used
on a continuing
basis
TCA
Are not for sale in the
ordinary course of
operations
•For administrative
purposes
•For the development,
construction,
maintenance & repair of
other TCA
55
55
Tangible Capital Asset (TCA) cont…

Tangible – can be touched…substance

Capital – lasts over time…sustainable

Asset – has measurable value…to the public
or the municipality
56
56
Tangible Capital Asset (TCA) cont…
What info do you need to collect or look for?






Description of each asset
Asset category, or class
Year of acquisition
Expected useful life
Significant improvements made since acquisition
Estimated residual value, if any
In theory, any asset that meets the definition of a TCA
should be capitalized however you need to keep in mind
capitalization thresholds!
57
57
Tangible Capital Asset (TCA) cont…
The capitalization threshold defines the minimum dollar level a
municipality will use to determine which expenditures will be
capitalized and which will be expensed.
•Items whose original
cost or value is above
the threshold are
capitalized as assets.
•Items whose value is
below the threshold
are expensed.
Above
threshold=
CAPITALIZED
threshold
Below
threshold =
EXPENSED
58
58
Tangible Capital Asset (TCA) cont…
SO, what’s the bottom line?
The proper capitalization threshold is a balance between
the:
 accurate presentation of results, and

the cost of acquiring & maintaining the accounting
records.
59
59
Tangible Capital Assets

Should be completed as of Jan 1/09

Most municipalities have
completed their TCA

Time is running out!

Refer to the Tangible
Capital Asset Valuation
Manual and the Tangible
Capital Assets
Reference Manual.

Critical that you
complete ASAP
60
Key Figures in the Statement of Financial Position
5. Accumulated Surplus
 The accumulated surplus is another key indicator of a municipality’s
overall financial health.

The accumulated surplus does not represent a pool of surplus cash.
It represents:
1)
a municipality’s net worth,
2)
the amount by which all assets exceed liabilities,
3)
the Net financial assets (or net debt) + Non-Financial Assets,
4)
the net resources available to provide future services, and
5)
the sum of all annual surpluses and deficits since the municipality
existed
61
TOWN OF ANYWHERE
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
As at December 31, 2009
2009
2008
FINANCIAL ASSETS
Cash and temporary investments
$
1,497,300
$
1,547,100
Amounts receivable
410,600
307,950
Portfolio investments
81,500
75,000
147,300
137,000
Real estate properties held for sale
A
$
2,136,700
$
2,067,050
LIABILITIES
Accounts payable and accrued liabilities
$
1,111,300
$
1,136,100
Deferred revenue
15,000
30,000
Landfill closure and post closure liabilities
26,000
20,650
152,500
140,220
B
1,304,800
1,326,970
A-B $
831,900
Long-term debt
NET FINANCIAL ASSETS
$
740,080
NON-FINANCIAL ASSETS
Tangible capital assets
$
742,500
$ 516,000
Inventories
10,000
20,000
Prepaid expenses
37,200
31,200
789,700
567,200
1,621,600
$ 1,307,280
C
ACCUMULATED SURPLUS
A – B + C$
62
Statement of Operations (Income Statement)
The Statement of Operations displays the cost of
government services provided in the accounting period, the
revenues recognized in the accounting period and the
difference between them. It highlights:
1)
2)
3)
4)
the sources of revenues,
the types of expenses,
the annual surplus/deficit (difference between 1 & 2) and
the change in the accumulated surplus at the beginning
and end of the period.
63
Statement of Operations
Revenues
Revenues, including gains, are increases in economic
resources. Some examples:

Taxation
 All municipal taxes including penalties & interest
i.e. Property taxes, business taxes, water and sewer
taxes, etc.

User Fees
 Parking meters, rentals, park fees
64
Statement of Operations
Revenues continued…

Grants





Gas Tax Agreement Revenue
Municipal Operating Grants
Multi Year Capital Works Programs
Other provincial grants
Permits, Licenses & Fines




Building permits
Business licenses
Animal control fines and fees
Occupancy Permits
65
Statement of Operations
Revenues continued

Investment Income


Interest earned
Other Revenue

Miscellaneous
 Rule of thumb - Should not exceed 10% of total revenue
or more detailed disclosure required.

Water & Sewer

All revenues from water and sewer operations
66
Statement of Operations ( Income
Statement)
Expenses
Expenses, including losses, are decreases in economic
resources. Some examples:

General Government Services Expenses
 Expenses relating to the operation of Council and the
Municipality.
 Includes any expenses that cannot be attributed to a
particular program.
 Includes employee pensions and benefits and other
general government expenses.
67
Statement of Operations
Expenses continued…

Transportation Services Expenses
 Maintenance

Protective Expenses
 Provision

of roads, streets, sidewalks and bridges.
of fire protection, traffic enforcement
Recreation and Cultural Services
 Maintenance
and operation of community centers,
swimming pools, arenas, libraries, etc.
68
Statement of Operations
Expenses continued…
Expenses are reported by function on the Statement of Operations.
Expenses by object are normally disclosed in a schedule. Examples
of expenses by object would be:
 Utilities
 Lighting & heating, phone, cable/internet
 Amortization
 Interest on Long term Debt
 Interest expense on loan and debentures
69
Statement of Operations
Expenses continued…
 Bad debt Expense
 Expenses relating to doubtful amounts receivable.

Maintenance Materials and Supplies
cleaning supplies
 office supplies
 small tools
 automotive and equipment parts


Other Operating Expenses
Miscellaneous
 Rule of thumb - Should not exceed 10% of total expenses or
more detailed disclosure is required.

70
Accounting For HST Rebates

HST Rebates are not Federal transfers!!! They are refunds
of HST paid.

HST rebates & HST paid should not affect the Statement of
Operations.

Example:
Purchase new stationary on Jan 1/09:
Dr. Expense - GG
Dr. AR- HST Refund (B/S)
Cr. Bank
$1,000
$ 50
$1,050
71
Accounting For HST Rebates
Assume this is the only transaction for 1st quarter of 2009. In
the 2nd quarter you receive your HST refund and make the entry:
Dr. Bank
Cr. AR- HST Refund
$
50
$
50

For fiscal 2008 & 2009 there should be:
 No HST refunds in your revenues
 No HST paid in your expenses

Correct past errors as best you can with reversing entries.
Dr. HST Revenue
Cr. HST Paid - Expenses
72
TOWN OF ANYWHERE
CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31, 2009
REVENUE
Taxation
$
2009
2009
2008
Budget
Actual
Actual
540,000
$
543,000
595,000
Grants in lieu of taxation
40,000
40,000
39,500
User fees
40,000
37,800
34,400
240,000
241,700
215,000
Permits, licenses and fines
20,000
17,700
15,000
Investment income
20,000
21,800
26,000
Other income
8,000
7,820
8,100
Total revenue
908,000
909,820
933,000
170,000
170,500
165,000
20,000
20,000
19,000
220,000
215,000
232,500
Environmental health services
23,000
20,000
25,000
Public health and welfare services
12,000
10,000
12,000
Regional planning and development
36,000
36,700
38,300
Resource conservation
28,000
27,300
22,700
Recreation and cultural services
95,000
96,000
100,800
Total expenses
604,000
595,500
615,300
ANNUAL SURPLUS
304,000
314,320
317,700
1,307,280
1,307,280
989,580
Government Transfers
EXPENSES
General government services
Protective services
Transportation services
ACCUMULATED SURPLUS, beg of year
ACCUMULATED SURPLUS, end of year
$
1,611,280
$
1,621,600
$
1,307,280
73
Statement of Change in Net Financial Assets ( Net Debt)
Reports the extent to which revenues were sufficient
to cover cash expenditures. It:

reconciles opening net debt balance to closing net debt
balance, and

highlights changes in TCA balance caused by;
 Acquisitions,
 amortization
expense and/or
 disposals & write downs.
74
Statement of Change in Net Debt cont…
The Statement of Change in Net Debt & the
Statement of Cash Flows are “derivative statements”.
MEANING?
They can’t be completed until you have first completed
your Statement of Financial Position and your
Statement of Operations!
WHY?
75
Statement of Change in Net Debt cont…
The reason the Statement of Change in Net Debt is
considered a derivative statement is because before you can
prepare it you need:
1)
Annual surplus/deficit for the year – Statement of Operations
(Income Statement)
2)
Changes in your non-financial assets – Statement of Financial
Position (Balance
Sheet)
76
Statement of Change in Net Debt
Annual Surplus (Deficit)
Changes in Non Financial Assets:
•(Acquisition of TCA)
•Proceeds on disposals
•(Gains) & losses on disposal of TCA
•Write-down of TCA
•Amortization
•Decrease (increases) in inventories
•Decreases (increases) in prepaids
Changes in Net Debt
Net Debt, Beginning of Year
Net Debt, End of Year
77
Statement of Cash Flow
The Statement of Cash Flow reconciles your opening cash
balance to your cash balance at the end of the year! It
reports the sources and uses of cash by:
1)
Operations
2)
Capital transactions (acquisitions & disposals)
3)
Investments (purchases & disposals)
4)
Financing (debt proceeds & payments)
78
Statement of Cash Flow continued…
The first step in preparing a Statement of Cash Flows is to
distinguish between sources and uses of cash.

Decreases in non-cash assets are sources of cash, while
increases are uses of cash.

Liabilities are completely the opposite so increases in liabilities
are sources of cash while decreases in liabilities are uses of
cash.

Some examples:
79
Statement of Cash Flow continued…








Annual Surplus - Source of Cash
Annual Deficit - Use of Cash
Acquisition of TCA - Use of Cash
Disposal of TCA - Source of Cash (proceeds)
Issue Loan - Use of Cash
Sale of Property - Source of Cash
Repay Bank Loan - Use of Cash
Issue Debenture - Source of Cash
80
Statement of Cash Flow continued…
Cash Provided by Operating Transactions:
Surplus (Deficit)
Changes in Non-Cash Items
Cash Provided by Capital Transactions
Proceeds
on sale of TCAs or cash used to acquire TCAs.
Cash Provided by Investing Transactions
Portfolio
investments or real estate held for resale
Cash Provided by Financing Transactions
Proceeds
of long-term debt and debt repayments
Increase (Decrease) in Cash
Cash, Beginning of Year
Cash, End of Year
81
Financial Statement Note Disclosures

Needed to provide users with sufficient information about
transactions & balances.

PSAB Statements will require enhanced note disclosure.

However, a Municipality is not required to include notes
that are not applicable or immaterial.
82
Financial Statement Notes
Note 1 - Status of the organization
 A short description of the Municipality and its relevant
legislation.
Sample:
1. Status of the Town of Anywhere
The incorporated Town of Anywhere is a municipal government
that was incorporated in 1986 pursuant to the Province of
Newfoundland and Labrador’s Municipalities Act. The Town
provides or funds municipal services such as fire, public works,
parks and recreation, tourism, and other general government
operations.
83
Financial Statement Notes continued…
Note 2 – Significant Accounting Policies
 Disclosure of significant accounting policies should be
included every year.
Sample:
2. Significant Accounting Policies
The consolidated financial statements have been prepared in
accordance with Canadian generally accepted accounting
principles as recommended by the Public Sector Accounting
Board (PSAB) of the Canadian Institute of Chartered
Accountants and reflect the following significant accounting
policies:
84
Financial Statement Notes continued…
Note 2 Continued….
2 a. Basis of Consolidation
 Discloses the entitles included in the Municipal
Reporting Entity.
Sample:
a) Basis of Consolidation
The consolidated financial statements include the assets,
liabilities, revenues and expenses of the reporting entity.
The reporting entity is comprised of all organizations, local
boards and committees of the council which are controlled
by the Municipality which include the following:
Community Development Corporation
Anywhere Public Library
Anywhere Memorial Stadium
85
Financial Statement Notes Continued…
Note 2 Continued….
2 b. Significant accounting policies on assets and liabilities

Details on the accounting policies for only those with
balances in the Statements.
Sample:
b) Cash and Temporary Investments
Cash and temporary investments include cash and short
term investments with maturities of three months or less
from the date of acquisition.
86
Financial Statement Notes continued….
Note 2 Continued….
c) Investments
Sample:
Temporary investments are accounted for at the lower of
cost and market. Other investments are recorded at
cost.
d) Inventories
Sample:
Inventories are valued at the lower of cost and replacement
cost.
87
Financial Statement Notes continued….
Note 2 Continued….
e) Tangible Capital Assets
Sample:
Tangible capital assets are recorded at cost which includes all
amounts that are directly attributable to the acquisition, construction,
development or betterment of the asset. Assets under construction
are not amortized until the asset is put into use and one-half of the
annual amortization is charged in the year of acquisition and in the
year of disposal. The cost, less residual value, of the tangible capital
assets are amortized on a straight line basis over their estimated
useful lives as follows:
Buildings
Computer hardware and software
Equipment
Roads
Vehicles
Water and Sewer
25 years
5 years
5 years
20 years
10 years
60 years
88
Financial Statement Notes continued….
Note 2 Continued….
f) Revenue Recognition
Sample:
Revenues are recognized as earned and when collection is reasonably
assured. Tax rates are approved annually by Council.
g) Use of estimates
Sample:
The preparation of financial statements in conformity with Canadian
generally accepted accounting principles for the public sector requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting period.
Actual results could differ from these estimates.
89
Financial Statement Notes continued….
Note 3 - Cash & Temporary Investments:

Disclose the nature and terms of temporary investments
together with any valuation allowances. Sample:
3. Cash and Temporary Investments
Cash and temporary investments are comprised of the following:
2009
2008
Cash
$ XXX
$
XXX
Temporary investments
XXX
XXX
$ XXXX
$ XXXX
Temporary investments are comprised mainly of guaranteed investment
certificates and term deposits and have a market value approximating
cost. The Municipality has designated $XXX (2008 $XXX) to reserves for
debt principal repayments and tangible capital asset acquisitions.
90
Financial Statement Notes continued….
Note 4 – Amounts Receivable
 Disclose the nature and terms of a government's
financial assets net of any doubtful allowance amounts.
Sample:
4. Amounts Receivable
Poll tax
Business tax
Water and sewer
HST Rebate
Other
Less allowances for
doubtful amounts
2009
$ XXX
XX
XX
XX
XX
XXX
2008
$ XXX
XX
XX
XX
XX
XXX
( XX)
$ XXX
( XX)
$ XXX
91
Financial Statement Notes continued….
Note 5 – Portfolio Investments
 Disclose amount that is designated for reserves, the
market values if available and the amount of investment
income.
Sample:
5. Portfolio Investments
Marketable securities:
Government of Canada
Province of Newfoundland & Labrador
Other investments
2009
$ XXX
XX
X
$ X
2008
$ XXX
XX
X
$
X
92
Financial Statement Notes continued….
Note 6 – Inventories
 Disclose inventories for sale (FA) & inventories of
supply separately (NFA). Sample:
6. Inventories
Inventories for use:
Chemicals
Culverts
Gravel
2009
$ XXX
XX
XX
$ XXX
2008
$ XXX
XX
$ XXX
93
Financial Statement Notes continued….
Note 7 – Accounts Payable & Accrued Liabilities
 Disclose between types; accounts payable, accrued
liabilities, etc. but don’t include excessive detail.
Sample:
7. Accounts Payable and Accrued Liabilities
Accounts payable
Accrued expenses
Other governments
$
2009
XXX
XX
XX
XXX
2008
$ XXX
XX
XX
XXX
94
Financial Statement Notes continued….
Note 8 - Long Term Debt
 Should disclose:
• Interest rates
• Payments
• Maturity dates
• Principal payments over the next 5 years
Sample:
8. Long Term Debt
2009
Newfoundland Municipal Financing Corporation
loan with interest at 12%, payable in monthly
installments and maturing December 2012.
$ XXX
Royal Bank term loan with interest at 8%,
repayable in monthly installments and maturing
October 2016.
XX
2008
$ XXX
XX
95
Financial Statement Notes continued….
Sample continued….
8. Long Term Debt
2009
2008
XX
XXX
XX
$ XXX
Royal Bank term loan with interest at 7%,
repayable in monthly installments and maturing
October 2015.
$
Principal payments required in each of the next five years are as follows:
2010
2011
2012
2013
2014
$ XXXX
XXXX
XXXX
XXXX
XXXX
96
Financial Statement Notes continued….
Note 9 – Commitments
 Disclose obligations that will become liabilities in the
future.
Note 10 – Contingencies
 Disclose existing conditions that may become a liability in
the future or those that are not accrued because a
reasonable estimate of costs could not be made.
Examples would be lawsuits or remediation for a
contaminated sites.
97
Financial Statement Notes continued….
Note 11 – Financial Instruments
 A financial instrument is any contract that gives rise to a
financial asset for one party and a financial liability for
another party; i.e. a loan. An example of a generic note
adequate for most situations:
11. Financial Instruments
The Town as part of its operations carries a number of financial
instruments. It is management’s opinion the Town is not exposed
to significant interest, currency or credit risk arising from these
financial instruments, except as otherwise disclosed. Unless
otherwise noted, the fair value of these financial instruments
approximates their carrying values.
98
Financial Statement Notes continued….
Note 12– Subsequent Event

Is an event that occurs sometime between the financial
statement date and the date the financial statements are
completed. There are basically two types:
1)
Conditions existed at the year end date but only became
evident before the completion of the financial statements should adjust Statements for!
Examples:
o
Bad debt
o
Loan guarantee in default
99
Financial Statement Notes continued….
Note 12 – Subsequent Events continued…
2)
Conditions which arose after the year end date - Disclose in
notes! Examples:
 Damage by fire or flood
 Decline in market value of investments
 Issuance of new debt
Sample of each type…
100
Financial Statement Notes continued….
Note 12 – Subsequent Events continued…
12. Subsequent Events
(This is an example of the first type of subsequent event. Since it has
already been accrued in the financial statements it would be unnecessary
to disclose the subsequent event in the notes.)
Subsequent to the year end a major local business in the Town filed for
bankruptcy. At the financial statement date the business owned $10,000 in
taxes and $5,000 for water and sewer to the Town. Council believes that the
collection of these amounts is doubtful and has therefore included these
balances in the allowance for doubtful accounts at December 31, 2009.
(This is an example of the second type of subsequent event. These types
of subsequent events should be disclosed in the notes to the financial
statements)
Subsequent to the year end council has approved and entered into an
agreement to purchase a new fire truck in the amount of $75,000. The purchase
of the fire truck is to be financed through the general reserve.
101
Financial Statement Notes continued….
Note 13 – Budget
Remember:





Your Budget is not PSAB compliant
Difference will result due to the Budget Disconnect
Your budget is prepared on a non-consolidated
basis (controlled organizations and government
partnerships are not included).
Municipalities will have to “PSAB” their budgets
Reconciliation b/t budget & the PSAB budget will be
disclosed in a Schedule.
102
Financial Statement Notes continued….
Note 13 – Budget sample:
13. Budget
In accordance with the Municipalities Act (1999) every
council must adopt a financial plan for each fiscal period
in a form approved by the minister. The financial plan is
prepared on a revenue and expenditure basis that does
not meet the recommendations of PSAB. For
comparative purposes, the Town has modified its
financial plan to prepare a budget that is consistent with
the scope and accounting principles used to report the
actual results. The budget figures used in these financial
statements have been approved by Council. The
reconciliation between the financial plan and the budget
figures used in these statements is disclosed in Schedule
8 – Reconciliation of the Financial Plan to the Budget.
103
Financial Statement Notes continued
The final note relates to Accounting Changes!
Basically four types of accounting changes:
1)
A change in presentation
A change in how accounts have been grouped for financial statement
purposes. These changes impair comparability between years if both
years are not changed.
2)
A change in Accounting Policy,
Can occur for two reasons:
i.
To conform to new PSAB recommendations (or adopt PSAB)
ii.
Change from one appropriate accounting policy to another
Examples would include the adoption of full accrual accounting, the
consolidation of controlled entities and capitalization and amortization
of TCAs.
104
Financial Statement Notes continued
3)
A change in accounting estimate, or




4)
Changes in accounting estimates are different
Estimates are often updated for new information
Changes in estimates are not errors!
You do not restate prior periods for changes in accounting
estimates
A correction of an error in prior periods.
An unintentional error, such as miscalculations, in the statements. If
material to the point that prior period statements are no longer fairly
presented then it should be corrected retroactively.
105
In summary….
You should never adjust your
accumulated surplus except
for a:
1.
Change in accounting policy; or
2.
A material error
“To adjust for an error, the error has to
be so material as to make the
comparative numbers misleading!”
106
Some Examples of Changes in Accounting
Policies:
Indicate whether the example is:
1.
2.
3.
Change in accounting policy
Change in accounting estimate
An error
1.
Municipality forgot to accrue severance payable of $200 for a
new employee in it’s 2008 F/S?

Error, not material
Do not adjust the accumulated surplus

2.
Municipality is recording severance expense for the first time
in 2009?

Change in accounting policy
Adjust the accumulated surplus

107
Some Examples of Changes in Accounting
Policies continued…
3.
Study showed that an environmental liability for a
contaminated site should be increased from $1M to $2M?

Change in estimate
Do not adjust the accumulated surplus

4.
Municipality is capitalizing and amortizing TCAs for the first
time in 2009?

Change in accounting policy
Adjust the accumulated surplus

108
Some Examples of Changes in Accounting
Policies continued….
5.
Municipality forgot to accrue for a delivery of $500,000
of culverts in their 2008 F/S?

Error, likely material as it affects the net debt
Adjust the accumulated surplus

6.
The allowance on a tax account in arrears is
decreased?

Change in accounting estimate
Do not adjust the accumulated surplus

109
Some Examples of Changes in Accounting
Policies continued….
7.
Municipality is preparing consolidated F/S for the
first time?

Change in accounting policy
Adjust the accumulated surplus

110
Example of the note for Changes in Accounting
2009
2008
Policies
Opening Fund Balances:
General Operating
Utility Operating
Capital Funds
Reserves
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
(XXX)
(XXX)
XXX
(XXX)
(XXX)
Opening Non Cons Accm Surplus, Restated
Consolidation of Controlled Entities & GP
XXX
XXX
XXX
XXX
Opening Cons Accm Surplus, Restated
Consolidated Annual Surplus
XXX
XXX
XXX
XXX
Cons Accm Surplus, End of Year
XXX
XXX
Opening Accm Surplus, Previously Rep
Adjustments:
TCA
Fixed Assets
Landfill liability
You will only have to do this for your 2009 F/S unless there
are new standards issued by PSAB.
111
Schedules

For some disclosure requirements the information can be
more clearly presented in a schedule as opposed to a
note.

All schedules should be properly identified and the
presentation should be clear and understandable.

Schedules are part of the financial statements and should
be audited with the statements and the notes.
112
Schedules continued….
A listing of the Schedules are:








Schedule 1 – Consolidated Schedule of Tangible Capital Assets
Schedule 2 – Consolidated Schedule of Revenues
Schedule 3 – Consolidated Schedule of Expenses
Schedule 4 – Consolidated Schedule of Operations by Program
Schedule 5 – Consolidated Schedule of Core Government Results
Schedule 6 – Change in Reserve Fund Balances
Schedule 7 – Trust Funds
Schedule 8 – Reconciliation of the Financial Plan to the Budget
113
Schedule 1
Consolidated Schedule of Tangible Capital Assets

Disclose for each major category of TCA & in total:
a)
b)
c)
d)
e)
f)
g)

cost at the beginning and end of the year,
additions in the year,
disposals in the year,
the amount of any write-downs in the year,
the amount of amortization for the year,
accumulated amortization at the beginning and end
of the year, and
the Net Book Value (NBV) at the beginning and end
of the year.
Total NBV at the end of the year should tie into the
balances in the Statement of Financial Position.
114
Schedule 1
Consolidated Schedule of Tangible Capital Assets cont...
The financial statements should also disclose:
a)
b)
c)
d)
e)

the amortization method and rate for each major
category,
the Net Book Value of TCAs not being amortized; i.e.
assets under construction,
the nature and amount of donated TCAs received
during the year,
the nature of any TCAs recognized at a nominal value,
and
the amount of interest capitalized during the year.
Some of the above was disclosed in Note 2 – Significant
Accounting Policies.
115
Schedule 2
Consolidated Schedule of Revenues

The Consolidated Schedule of Revenues has the purpose of
providing more details on revenues without cluttering up the
Statement of Operations. Examples would be:
Taxation
Municipal taxes levied
Penalties and interest
Grants
Federal government
Provincial government
Other local governments
Non-government organizations

Total Revenue amount on this schedule should agree to the total
revenue on your Consolidated Statement of Operations!
116
Schedule 3
Consolidated Schedule of Expenses

Consolidated Schedule of Expenses has the purpose of
providing more details on the expenses without cluttering up
the Statement of Operations. Some examples would be:
Protective services
Fire
Emergency
Recreational and cultural
Community center and hall
Skating and curling rinks
Parks and playgrounds
Museums
Libraries
Transportation services
Road and street maintenance
Sidewalk maintenance
Street lighting

The total expenses on this schedule should agree to the total
expenses on the Statement of Operations.
117
Schedule 4
Consolidated Statement of Operations by Program
There are two purposes for this Schedule:
1) To disclose the expenses by object or type, and
2) To report on the segments.
What are segments?
They are distinguishable activities or a group of activities of a
government for which it is appropriate to separately report financial
information on. Some examples:
•
General Government
•
Protective Services
•
Transportation Services

For each of these segments you would show the various types of
revenues and expenses. The total of the Revenues and Expenses for
all segments along with the ending surplus/deficit which would again tie
into the Consolidated Statement of Operations.
118
Schedule 5
Consolidated Schedule of Core Government Results
The purposes of this Schedule are:
1)
to disclose the expenses by object or type ( this means
breaking them down by such things as utilities,
amortization, interest, etc.) and
2)
to report on the segments.
The segments are broken down into the:
1)
2)
3)
core municipality, ( What was reported in the old financial
statements)
the controlled entities, and
any government partnerships.
119
Schedule 6
Schedule of Change in Reserve Fund Balances

Reserves are funds that have been put aside, the use of
which can be restricted for a general or specific purpose.

Users of the financial statements need to understand the
extent of restricted funds because they limit the
municipalities financial flexibility.

Discloses activity by each reserve and in total:







Revenues (i.e. investment income)
Expenses (i.e. investment charges)
Net operating results
Transfers into & out of reserve
Change in reserve fund balance
Opening fund balance
Ending fund balance
120
Schedule 7
Trust Funds

Trusts are assets that have been assigned to the municipality to act
as a trustee.

The Municipality has no authority to change the terms and conditions
of the trust agreement.

Disclose by fund & in total:






Assets
Liabilities & Fund Balance
Revenues & Expenditures
Net revenues over expenditures
Fund balance, beginning of year
Fund balance, end of year
121
Schedule 8
Reconciliation of the Financial Plan to the Budget

Note 13 – tells users that the financial plan is not GAAP.

The Municipality’s budget must be presented on the same
basis (PSAB) & scope (consolidated)

Schedule 8 discloses the reconciliation of the financial plan
and a PSAB budget.

It discloses those items causing the budget disconnect.

There are two working examples in the Phase 3 Manual on
how to convert your financial plan (budget) into a PSAB
budget.
122
What are the steps for Preparing Consolidated
Financial Statements?
Close Off Municipality’s GL
• Prepare Trial Balance
Consolidate Municipality's Funds
• Eliminate inter-co
balances & transactions
Consolidate Controlled Entities & GP
Prepare Consolidated
Statement of
Financial Position
Prepare Consolidated
Statement of
Operations
Prepare Consolidated
Statements of Change
In Net Debt
& Cash Flows
Prepare Schedule 1 –
Consolidated
Schedule of TCA
Prepare
Notes & Schedules
123
Contact Information
General
Inquiries
1-877-729-4393
Paul Tucker
Director, Municipal
Finance
729-5381
Rayanne
Hibbs
PSAB Project
Manager
729-3247
Sheila Tulk
PSAB Coordinator
[email protected]
[email protected]
[email protected]
729-4393
[email protected]
124