Financial Information Strategy Accounting Manual

Note to reader

The Directive on Accounting Standards came into force in April 2017 as part of the Financial Management Policy suite reset. Currently, the following resources are available to departments regarding the financial coding of accounting transactions:

  • The Financial Information Strategy Accounting Manual (FIS), supplements to the FIS Manual and other guidance material
  • The Receiver General Manual Accounting Entries (accessible only on Government of Canada network), and certain Appendices from the Year-End timetable and procedures (accessible only on Government of Canada network)

These resources are being replaced by the Government of Canada (GC) Guide on Accounting Entries. The GC Guide on Accounting Entries will be a merger of the above noted resources. The Government Accounting Policy and Reporting team at TBS and the Receiver General are working closely on the development of this guide. Draft chapters of the guide are posted to GCpedia (accessible only on Government of Canada network) as they become available. A complete crosswalk is also posted there and will be updated as the guide evolves.

Acknowledgements

This manual reflects the collaborative efforts of over 45 people representing some 24 departments within the Federal Government. It is not practical to acknowledge individually all those people who gave so freely of their time to put this manual together. Invariably some would be missed. However, each of them is well aware of their contribution and can take great pride in seeing the results of their hard work. To each of them, we say well done and thank you.

Preface

This manual:

  1. Defines differences between accrual accounting, authorities accounting, and reporting by objects.
  2. Describes a variety of accounting transactions and indicates how to code them with supporting rationale in the three Scenario s indicated above.
  3. Outlines reporting and presentation requirements for departmental financial statements.

Amendment Record Sheet

Please note: Each new release may contain minor and/or major revisions. Grammatical corrections and clarifications can be considered minor, while major revisions include coding changes, additions and deletions that are significant or new in nature.

Release no. 11 - July 12, 2001

  1. Revision - the reference to FIS has been returned to the title of the manual.
  2. Revision - Prepayments - the description relating to transfer payments has been revised.
  3. Addition - Capital Assets - Scenario G provides an example of the write-down of a capital asset.
  4. Addition - Capital Assets - Scenario E provides an example of an optional entry for trade-ins to adjust the authority code related to the proceeds from disposal of surplus crown assets.
  5. Revision - Capital Leases - Scenario A, entry 3a, 3b and 5b, the economic object for the recognition of interest expense has been corrected to conform to an expenditure basis.
  6. Addition - Future Site Restoration Costs - section has been added.
  7. Revision - Compensation - Scenario A and C (entry 1 and 2a), Scenario F and G (entry 1), the economic object code has been corrected to record the economic object on an expenditure basis. Scenario F and G, entry 2a has been added to reverse the accrual in entry 1.

Release no. 10 - April 27, 2001

  1. Revision - the reference to FIS has been removed from the title of the manual.
  2. Revision - Unconditional Repayable Contributions - details of the example provided have changed. Entries 3 and 5 have been deleted. Amortization of entire amount of discount is done on a straight-line basis.
  3. Revision - Tangible Capital Assets - Scenario A, Entry 2, economic object 7099 has been added as an alternative for the recording of accumulated amortization.
  4. Revision - Capital Leases - Scenario A
    • Entry 1, the economic object used when capitalizing the asset has changed to 7099.
    • Entry 2 and 5a, the economic object for the reduction in the lease obligation has changed from 6299 to 1221.
    • Entry 4, economic object 7099 has been added as an alternative for the recording of accumulated amortization.
  5. Revision - Capital Leases - Scenario B
    • Entry 7, economic object 7099 has been added as an alternative for the recording of accumulated amortization.
    • The economic object used for informatics equipment has changed from 1226 to 1221.
  6. Revision - Loan Guarantees, Entry 2b, the FRA to record the loan receivable has changed to 13371. Entries 2c and 3 have been added to present the recording of an allowance for doubtful accounts and the write-off of the loan receivable.
  7. Revision - Unrestricted Gifts, Bequests, Donations -
  8. Scenario B1, Scenario B2 - Entry 2, Scenario C - Entry 3, Scenario D: FRA 42715- Donated assets to the Crown has been replaced by FRA 42712-Gifts to the Crown.Addition - SPAs Cost-Sharing/Joint Project Agreements - an example of a cost-sharing/joint project agreement to be accounted for under Scenario A has been added. More guidance has been provided in the introduction on choosing between accounting for these agreements under Scenario A or B.
  9. Revision - Foreign Currency Transactions - Scenario C
    • Entry 1, authority code for loss on foreign exchange has changed to A-126.
    • Entry 2, authority code for gain on foreign exchange has changed to D343.
  10. Revision - alternative entries have been added for the accounting of expenses incurred by the Spending Department. The year-end entries for both the Funding and Spending departments have changed.

Release no. 9 - February 28, 2001

  1. Revision - Prepayments
    • Scenario A, Journal Entry 2) - Authority Codes were changed from F999 to F119 on the debit side and F313 on the credit side.
    • Scenario B, Journal Entry 2) - Same as above.
    • Scenario C, Journal Entry 2) - Same as above.
    Using a more specific code will aid the departments with their reconciliation. Please note departments do have the discretion to use F999 or a more specific code, either way there is no impact on authorities.

  2. Addition - Prepaid Expenses - alternative entries to record a prepayment have been added.
  3. Addition - the GST component has been added to all applicable accounting entries throughout the Manual.
  4. Revision - Accounts Receivable - Scenario B, Entry 1, the economic object for bad debt expense has been changed from 3462 to 3215/3217.
  5. Revision - Unconditional Repayable Contributions - the definition of "significant" in the introduction has been revised.
  6. Addition - section 3.3 Inventories.
  7. Revision - Tangible Capital Assets - Scenario A entry 1, the entry to record freight has been revised. Scenario F, entry 1 - the FRA to record the loss has changed as well as the object code.
  8. Addition - Tangible Capital Assets - alternative entries to record the purchase of an asset have been added to Scenario A, C, D.
  9. Revision - Capital Leases - Scenario A, entry 1 and 2, the object code used for the obligation entry has been corrected. Entry 3a and 3b, the object code used to record the interest component has been corrected. Scenario B, entry 7, the object code used to record accumulated amortization has been corrected.
  10. Revision - Accounts Payable - Scenario A, entry 1,2 and 3, the amount recorded for accounts payable has been corrected.
  11. Revision - Deferred Revenue - all entries, the FRA used for deferred revenues has been changed from 21519 to 21510.
  12. Revision - Net Assets (Liabilities) - Introduction has been re-written. Accounting for donations and bequests accounts has been changed to reflect change in accounting treatment for SPAs. Adjustments have also been made to the amounts presented.
  13. Addition - section on Unrestricted Gifts, Bequests and Donations revenue has been added as section 6.2.
  14. Deletion - Grants and Contributions - Section on contingent recoveries and Scenario B has been deleted. Information on contingent gains can be found in section 9.4 on contingencies.
  15. Addition - Compensation - various examples of compensation related accruals have been added.
  16. Deletion - Opening Balances has been removed.
  17. Revision - section 9.1 Specified Purpose Accounts has been revised. The significant changes include:
    • for SPAs which earn interest, the two-sided IS entry is presented;
    • each SPA has its own authority code assigned to it - entries have been modified to reflect this;
    • cost-sharing and joint project agreements, two alternatives are presented on how to account for these; and
    • the entries related to donations and bequests of capital assets and donations and bequests of funds without restrictions have been moved to section 6.2.
  18. Revision - Foreign Exchange Gains and Losses - description of accounting for exchange gains and losses in introduction has changed to remove reference to the deferral and amortization of gains.
  19. Addition - Funds Administered by Departments on Behalf of OGD's has been added as section 9.9.

Release no. 8 - September 29, 2000

  1. Addition - Prepayments (including Prepaids and Deferred Charges)
  2. Addition - Loan Guarantees
  3. Addition - Pension Superannuation Liabilities (see Compensation section)
  4. Addition - Compensation
  5. Addition - Court Awards
  6. Addition - Pension Accounts (see Compensation section)
  7. Addition - Foreign Currency Transactions
  8. Addition - Sales Tax
  9. Addition - Contingencies
  10. Addition - List of Acronyms
  11. Revision - Respendable versus Non-Respendable Revenue, Scenario A1, Journal Entry 1, Object Coding Rationale.
  12. Revision - Loans Receivable-General Scenario A, Journal Entry 3, FRA code for Loans receivable was changed to 13341 from 13219.
  13. Revision - Assets under Construction- There were both minor and major revisions made to this section, they are as follows:
    • Scenario A - minor - added an assumption to the Scenario.
    • Scenario A, Journal Entry 1), FRA Coding Rationale and Authority Rationale - minor
    • Scenario A, Journal Entry 2a), FRA Coding Rationale and Authority Rationale - minor
    • Scenario A, Journal Entry 2b), FRA Coding Rationale - minor
    • Scenario A, Journal Entry 2b), Authority Coding was changed from F999 on both sides of the transaction to B14A on the debit side and B11A/B12A on the credit side. The corresponding rationale has been changed to reflect that the salaries and wages must be re-allocated from the program or operating vote to the capital vote.
    • Scenario A, Journal Entry 3), FRA Coding Rationale - minor
    • Scenario A, Journal Entry 4), FRA Coding was changed from 16622 to 16122
    • Scenario A, Journal Entry 4), Object Coding was changed from 1226 on both sides of the transaction to 3425 on the debit side and 3717 on the credit side. The object rationale was changed to reflect this.

Release no. 7 - August 31, 2000

  1. Addition - Loans Receivable - General
  2. Addition - Unconditional Repayable Contributions
  3. Addition - Assets Under Construction
  4. Addition - Commitments
  5. Addition - Financial Statements
  6. Revision - Net Assets (Liabilities) -Changes were made to reflect the notion that Endowments are not closed directly to equity but flow through a revenue account (FRA 42624-Donations and bequests to endowment accounts) and is subsequently closed to a separate equity account (FRA 31224- Endowment accounts). As a result, an additional journal entry (1e) was added to Scenario B, Journal Entry 1 and the FRA Coding Rationale was modified. As well, the Introduction section - "Accounting for Restricted Net Assets" was modified to reflect this.

    Other coding changes include:

    • "42624 Donations and bequests to other trust accounts" was changed to "42625 - Donations and bequests to other accounts" and 42624 will now be "Donations and bequests to endowment accounts"
    • "51624 Payments from other donations and bequest trust accounts" was changed to "51625 - Payments from other donations and bequest accounts" and 51624 will now be Payments from endowment accounts" (note that 51624 code is not used in the manual).

  7. Revision - Endowments - Changes were made to reflect the notion that Endowments are not closed directly to equity but flow through a revenue account (FRA 42624 - Donations and bequest to endowment accounts) and is subsequently closed to a separate equity account. As a result, Scenario A, Journal Entry 1 was modified as was the FRA Coding Rationale to reflect this change. As well, the Introduction section - "Accrual Accounting Perspective" was changed to explain these modifications.
  8. Revision - Transfers - Minor changes to Reference section
  9. Revision - Conditional Repayable Contributions - The concept of contingent recoveries is replacing contingent gains since the repayment of these contributions are considered recoveries of expenses. Therefore, modifications have been made to the Introduction section, Departmental Financial Statement and Disclosure Requirements Section, References section, and Scenario B, Journal Entry 1 to accommodate the change.

    As well, when portions of the transfer payment are to be repaid, the credit will be to Transfer Payment expense (FRA 511XX) instead of revenue (FRA 42719) and the Accounts receivable (FRA 11221) will be replaced by Accounts receivable for refunds of program expenses (FRA 11231) see Scenario C, Journal Entry 1).

  10. Revision - Grants and Contributions - The concept of contingent recoveries was expanded. Modifications were made to the Introduction section and the Departmental Financial Statement and Disclosure Requirements Section.

    As well, when portions of the transfer payment are to be repaid, the credit will be to Transfer Payment - Scholarship (FRA 51119) instead of revenue (FRA 42719) and the Accounts receivable (FRA 11221) will be replaced by Accounts receivable for refunds of program expenses (FRA 11231) see Scenario C, Journal Entry 1).

  11. Revision - Tangible Capital Assets - The term informatics equipment has been changed to informatics hardware. See Scenario C, Journal Entry 1a), 1b) , Scenario E, Journal Entry 1).

    Scenario D, Journal entry 1) - FRA coding change from 16122 to 16129

Release no. 6 - August 1, 2000

  1. Revision - The term DRAFT has been removed from the manual. This does not indicate that the manual is yet complete. The manual should be considered to be and "evergreen" document which will require constant updates to reflect new policies, changes in codes, additional Scenario s etc.
  2. Revision - Limitation of Manual: References made to indicate that the codes used in the Manual should only be used in 2001-02.
  3. Addition - Net Assets (Liabilities)
  4. Addition - Transfers
  5. Addition - Conditional Repayable Contributions
  6. Addition - Grants and Contributions
  7. Addition - Services Provided Without Charge
  8. Addition - Control Accounts
  9. Addition - Cost Sharing Arrangements
  10. Addition - Gifts, Bequests, and Donations
  11. Addition - Endowments
  12. Addition - Brief Introductions added to Assets, Receivables, Liabilities, Revenues, and Expenses
  13. Addition - Environmental Liabilities
  14. Revision - There have been recent revisions to the Object Codes in the Chart of Accounts 2001-2002. The following journal entries have been changed:

    Section

    Scenario

    Journal Entry

    Old OBJ

    New OBJ

    Accounts Receivable

    A

    1

    4218

    4200

    Accountable Advances

    B

    2a

    5037

    5032

    Accountable Advances

    B

    2b

    5037

    5032

    Tangible Capital Assets

    E

    1

    7091

    7099

    Capital Leases

    A

    1

    6091

    6099

    Capital Leases

    A

    2

    6092

    6099

    Capital Leases

    A

    5a

    6092

    6099

    Capital Leases

    A

    5b

    7091

    7099

    Capital Leases

    B

    7

    7091

    7061/7099

    Deferred Revenue

    B

    1b

    7091

    7099

    Respendable versus Non Respendable Revenue

    A1

    1

    4218

    4200

    Respendable versus Non Respendable Revenue

    B1

    1

    4218

    4200

    Respendable versus Non Respendable Revenue

    B1

    1

    3546

    4546

    Respendable versus Non Respendable Revenue

    B1

    2b

    7091

    7099



  15. Revision - Trust Accounts, Scenario A, Journal Entry 1
  16. Revision - Lexicon: Definition of "Net Assets and Liabilities" revised.
  17. Deletion - Federal/Provincial Arrangements. No examples were forthcoming from departments, therefore we have removed the section from the table of contents in this release.
  18. TBAS 1.3, Departmental and Agency Financial Statements, will be re-issued as TBAS 1.2, Departmental and Agency Financial Statements.

Release no. 5 - July 14, 2000

  1. Addition - Specified Purpose Accounts
  2. Addition - Prepayments
  3. Addition - Trust Accounts
  4. Addition - Deposit Accounts
  5. Addition - Lexicon
  6. Revision - Due to the recent streamlining of the Object Codes in the Chart of Accounts, there have been numerous changes to the Object Codes. All cash accounts are reflected as "5299-Net Increase or Decrease in Cash Accounts" As well, codes that were previously used for Payables (623x and 625x) have been changed to "6299-Net Increase or Decrease to Other Liability accounts". Also, object codes that were previously used for Accounts receivables (531x) have been changed to "5399-Net Change to Accounts Receivable". Since these changes are too numerous, it is not practical to list them individually on the amendment record sheet.
  7. Revision - Debt Deletions, Introduction and Reference Sections
  8. Revision - Accountable Advances Scenario B, Journal Entry 2b, CR Accountable Advances changed to $1 000.00.

Release no. 4 - June 20, 2000

  1. Addition - Accounts Receivable Section 3.2.1
  2. Addition - Debt Deletions Section 3.2.5
  3. Addition - Respendable versus Non Respendable Revenue Section 6.1
  4. Addition - Sales Tax Section 9.4 (only portion of section is completed)
  5. Addition - References Section added to Sections 2.0, 3.1, 3.3.2, 3.6, 3.6.1.1, 4.1, 4.2, 7.1 and 9.9
  6. Revision - Cash Section 3.1, Scenario A, Journal Entry 3, Object Coding Rationale
  7. Revision - Tangible Capital Asset Section 3.6.1, Introduction
  8. Revision - Capital Leases 3.6.1.1, Scenario A, Journal Entries 3a and 3b, FRA Coding Rationale
  9. Revision - Accounts Payable 4.1, Scenario A, Journal Entries 1and 3

Release no. 3 - May 19, 2000

  1. Addition - Capital Leases Section 3.6.1.1
  2. Addition - Non-Monetary Transactions Section 9.9
  3. Deletion - Working Capital Advances Section 3.3.2
  4. Addition - Accountable Advances Section 3.3.2
  5. Revision (major) - Deferred Revenue Section 4.2
  6. Revision (minor) - "ECON" heading (all journal entries) changed to "OBJ".
  7. Revision (minor) - "Economic object coding rationale" headings changed to "Object coding rationale" (all journal entries).
  8. Revision (minor) - Preface Paragraph a)
  9. Revision (minor) - Introduction Sections 1.0-1.8
  10. Revision (minor) - Accounting Principles Sections 2.0, 2.3, 2.4, 2.6
  11. Revision - Cash Section 3.1, Scenario A, Journal Entry 3
  12. Revision (minor) - Tangible Capital Assets Section 3.6.1
  13. Revision (minor) - Accounts Payable Section 4.1 (including coding change to Scenario A, Journal entry 3)
  14. Revision (minor) - Operating Expenses Section 7.1

Release no. 2 - April 14, 2000

  1. Addition - Capital Assets Section 3.6
  2. Addition - Tangible Capital Asset Section 3.6.1
  3. Addition - Cash Section 3.1 Scenario C, journal entries 2 and 3
  4. Addition - Operating Expenses section 7.1, Departmental Financial Statement Presentation and Disclosure Requirements
  5. Revision - Accounts Payable Section 4.1, Introduction, paragraph 1
  6. Revision - The title "Presentation and Disclosure Requirements" has been changed to "Departmental Financial Statement Presentation and Disclosure Requirements"

1.0 Introduction

1.1 Objectives of the Manual

The objectives of this Manual are to:

  • provide general information and guidance on accrual accounting;
  • assist departmental staff in understanding differences among accrual accounting, accounting for authorities and reporting by objects;
  • assist departmental staff in recording both routine and complex transactions particular to government, from the accrual, authorities and object of expenditure perspective. This is important since all accounting transactions must be recorded to indicate: a) accrual accounting basis; b) appropriations or other authorities basis; and, c) object of expenditure basis; and,
  • assist departments with respect to recognition and disclosure requirements for the production of their departmental financial statements on a full accrual basis.

1.2 Limitation of Manual

It should be noted that the Manual does not purport to cover all possible accounting transactions and Scenario s. This is considered to be neither desirable nor possible because of the number of permutations and combinations that can exist. This is especially so for the use of authority codes because they depend to a great extent on specific departmental legislation and other authorities including Estimates. As a result, the Manual cannot be considered authoritative.

The transactions presented must be considered in light of this and may not be the only possible way of handling a specific transaction. Thus, the Manual only provides general direction on the majority of transactions that Departments will encounter. However, the transactions covered together with the explanations should provide departmental personnel with the necessary guidance to handle most transactions. In circumstances where this is not possible, the advice of TBS should be sought.

To use this Manual effectively, departmental personnel should refer to:

Recommendations for the inclusion of other types of transactions in the Manual should be made to the Government Accounting Policy Division of TBS, Telephone (613) 957-2527, Facsimile (613) 952-9613.

1.3 Applicability of the Manual

This Manual will be useful to all government departments as defined in Section 2 of the Financial Administration Act (FAA). "Department" means

  1. any of the departments named in Schedule I of the FAA.
  2. any of the divisions or branches of the public service of Canada set out in column I of Schedule I.1 of the FAA.
  3. a commission under the Inquiries Act that is designated by order of the Governor in Council as a department for the purposes of the FAA.
  4. any departmental corporation (Schedule II)

The contents of this manual do not override legislation, regulations or Treasury Board policy relating to financial administration. When there are any conflicts between this manual and legislation or regulations or policy, the latter will apply.

1.4 Description of Accrual Accounting, Accounting for Appropriations and Other Authorities and Reporting by Objects

With the full implementation of the Financial Information Strategy on 1 April 2001, departments will be required to account for economic events specific to their department on: a) an accrual accounting basis; b) an authority basis to identify the appropriations or other authorities; and, c) an objects of expenditure basis. Although there may be similarities amongst these three requirements, there are many differences. Consequently, they will be considered separately.

The underlying bases of accounting differ to some extent between accrual accounting and appropriation accounting. Currently appropriations are on a partial accrual basis. Consequently, reporting in financial statements will need to be on both a full accrual accounting and partial accrual accounting bases. Under the partial accrual basis now used for amounts reported in the Estimates, some expenses are accrued but not all; respendable revenues are on a pure cash basis; and, non-financial assets are expensed on acquisition. For example, Payables at Year End (PAYE) are accrued, as are salaries, while other items like employee benefits are not accrued. Transactions that get recorded on an accrual accounting basis may or may not affect appropriations and vice versa. In these cases, the appropriate coding and journal entries must be made to ensure that appropriations are not improperly affected. Departments will also be required to record transactions on an object of expenditure basis. It is best to consider these three elements i.e., accrual, authority and objects as separate and distinct since there are many circumstances where there is not a direct correlation amongst or between them.

1.4.1 Accrual Accounting

Accrual accounting recognizes transactions when the underlying economic event occurs, not just when cash is received or paid. In accrual accounting, transactions are classified as assets, liabilities, equity, revenues or expenses.

The objective of accrual accounting is to ensure that events that affect a department's financial statements are recorded in the periods in which they occur, rather than in the periods in which the department uses its appropriation. Accrual accounting means recognizing revenue when earned (rather than when cash is received) and recognizing expenses when incurred (rather than just when paid). Over the long run, trends in expenses and revenues, since they reflect the underlying economic consequences of operating decisions for a time period are generally more meaningful than trends in payments and cash receipts or charges to an appropriation.

The accrual basis provides users with information about such matters as the resources controlled by the department, the cost of its operations and other information useful in assessing its financial position and changes in it over a particular time period, and in assessing whether a particular organization is operating economically and/or efficiently.

It should be noted that Financial Reporting Accounts (FRAs) were developed as separate accounts in the Chart of Accounts to code transactions for accrual accounting purposes.

1.4.2 Accounting for Appropriations and other Authorities

An appropriation is an authority of Parliament to pay money out of the Consolidated Revenue Fund (CRF).

Therefore, an appropriation is required before moneys can be spent by the government. Some authorities are given in the form of annually approved limits through appropriation acts. Other authorities come from other legislation in the form of statutory spending authority for specific purposes (for example, employee benefits).

Appropriation authority is the means by which Parliament controls the outflows of money from the CRF. However, there are a number of transactions which are charged to a current year appropriation but which do not affect the CRF until a later date or not at all, such as:

  1. certain goods received or services rendered prior to or on March 31 of a fiscal year, but not paid for until after that date;
  2. charges made by one government department on another; and
  3. write-off, forgiveness, etc. of loans, investments or advances.

As a general rule, transactions are recorded against an appropriation on an "expenditure basis". However, there are certain expenditures which are not charged to an appropriation until a payment is required e.g. various allowance or provision accounts currently set up by Treasury Board Secretariat such as employee benefit costs for accrued vacation pay, severance pay, etc.

Currently, accounting for the use of appropriations provides parliamentarians with control over most expenditures of the Government, for both amount and purpose. However, it does not give a complete financial picture of the government since it lacks information on assets and some liabilities and skews information on program costs. For example, if a department purchases a building, the department will record the full expenditure against a particular appropriation in the year acquired notwithstanding that the building will provide benefits over a number of years.

1.4.3 Reporting by Objects

To measure the impact of government transactions on the economy, expenditures are classified according to the type of resources (goods and services) acquired, revenue earned or the transfer payments made. Identification of detailed economic objects, combined with information from other sectors of the economy, makes possible economic analysis, on a national basis, of the effects of government spending. The economic objects are the base code for the object classification and are required for government-wide statistical purposes. They may be used by departments as departmental line objects, but departments may need more detail for their own purposes.

To accommodate the need for differing degrees of detail, several levels of classification by object are used. In descending order of aggregation, they are: categories, sub-categories; reporting objects; economic, source and class objects; and departmental (line) objects. Standard objects, which are the highest level for Parliamentary reporting, can be related to specific categories or sub-categories.

1.5 Identifying Important Differences

In order to understand the primary differences between accrual accounting and accounting for the use of appropriations, terminology becomes increasingly important. It is necessary to distinguish between certain terms, to ensure that all users are consistent when describing a transaction, preparing a journal entry or providing rationale for various accounting treatments.

1.5.1 Expenditures versus Expenses versus Disbursements

As per the Canadian Institute of Chartered Accountants Public Sector Accounting Handbook (PS) 1500.88, expenditures are the cost of goods and services acquired in the accounting period whether or not payment has been made or invoices received and include transfer payments due where no value is received directly in return.

Examples would include the payment of grants, contributions, the acquisition or construction of capital assets, and the acquisition of operating supplies etc.

Expenses, as per PS1500.93 are the cost of resources consumed in and identifiable with the operations of the accounting period.

Expenses include the costs associated with:

  • the purchase of goods and services;
  • government transfers;
  • grants, contributions and donations (non-repayable); and
  • consumption of an asset e.g. amortization of a capital asset, consumption of inventory or prepaid expenses.

Expenses do not include:

  • the acquisition or construction of a capital asset;
  • the repayment of debt; and
  • investments in other entities (both loans and capital injections)

To further clarify the difference, an expenditure refers to the acquisition of a good or service whereas an expense refers to the use of the good or service acquired. For example, the acquisition cost of a tangible capital asset would be an expenditure and the amortization of the cost of that asset would be an expense in the Statement of Operations for the period. Conceptually, the cost of an asset is deferred and recognized as an amortization expense over the period when the assets are used in delivering government programs.

A disbursement is an outlay of cash. Such disbursements may be in the form of cheques, warrants or through the electronic transfer of funds.

1.5.2 Revenues versus Receipts

Revenues, from an accrual accounting perspective, are defined as increases in economic resources, either by way of inflows of or enhancements to assets or reductions of liabilities, resulting from the ordinary activities of a department. As per PS 1500.83-84, revenues should be accounted for in the period in which the transactions or events occurred that gave rise to the revenues. For example, user fees should be recorded in the period the goods or services are provided, sales and excise taxes should be recorded in the period when the sales are made, and transfer payments for shared cost agreements should be recorded in the period the costs are incurred. Items not practicably measured until cash is received would be accounted for at that time. Accounting for all of government's revenues ensures that related financial assets are accounted for in the period they are created.

Revenues include amounts earned from:

  • taxes;
  • the provision of goods and services; and
  • interest.

Revenues do not include

  • receivables inflows e.g. payments received for accounts receivables or loans;
  • refunds of expenditures; and
  • custodial receipts e.g. deposit and trust accounts, etc.

Revenue earned which is not yet collected in the year would be an accounts receivable.

Receipts refer to moneys received, whether through cash, cheque or by electronic transfer of funds.

1.6 Guidance on Accrual Accounting

The purpose of this section is to provide an overview of accrual accounting in the government environment.

Accounting standards

"Departments" will follow generally accepted accounting principles (GAAP) as defined in the Canadian Institute of Chartered Accountants Public Sector Accounting (PS) Handbook. Specifically, departments will use the "expense basis" of accounting as referred to in the handbook (PS1500.93). Subject to modifications or interpretations by the Treasury Board Accounting Standards (TBAS), the PS Handbook will be the authoritative reference manual. In situations where a specific item is not covered in the PS Handbook, then the Canadian Institute of Chartered Accountants (CICA) Handbook will be used.

This FIS Accounting Manual refers to accounting standards where they are relevant. These are part of GAAP. Where appropriate, the text contains a brief description of the requirements of the standards, together with details of any additional or alternative accounting treatments. The relevant accounting standards should be consulted for a full understanding of their requirements.

1.7 Other guidance

As mentioned in section 1.2, not every possible Scenario is covered in this Manual. Furthermore, the PS and CICA Handbooks may not be explicit enough in certain circumstances. Therefore, it may be necessary to consult alternative sources to determine the most appropriate treatment for a particular transaction. An intermediate or advanced accounting textbook would be a most valuable source of information, since a variety of Scenario s would be described in sufficient detail to aid departments. As well, the Canadian Institute of Public Real Estate Companies (CIPREC) Handbook can serve as a useful guide to help departments with real property issues.

In addition, there will be specific guidance, which will be the responsibility of, and be developed by, departments themselves. This means that each department should have an accounting guideline that is sufficiently detailed to deal with its own unique circumstances.

1.8 Departmental Reporting

Each department, as defined by Section 2 of the FAA, will produce annually a full set of financial statements as at March 31 that can withstand the test of audit. These statements will consist of a Statement of Financial Position, a Statement of Operations, and a Statement of Cash Requirements, together with required Notes and Schedules.

The financial statements, accompanied by a Statement of Management Responsibility and Auditor's Report, (if required by legislation or policy), must be available to the Receiver General for Canada by June 15th of each year. Departments will publish these financial statements in their Departmental Performance Report.

To the extent possible, department specific financial information now contained in the Public Accounts will be included in either the departmental financial statements or the supplementary financial information attached thereto. All financial information required on a government-wide basis would continue to be included in the Public Accounts.

2.0 Accounting Principles

To prepare financial statements, there are certain basic accounting principals that need to be generally recognized and understood before individual transactions can be analyzed.

2.1 Going Concern

The going concern principle is applied on the expectation that a department will continue to operate for the foreseeable future and there is no intention to curtail its operation.

The implications of this going concern principle are critical. The historical cost principle (described below) would be of limited usefulness if it were not for the going concern principle. For example, amortization policies are only justifiable and appropriate if we assume continuity of the department.

2.2 Historical Cost

The determination of the measurement base on which an item is to be recognized in financial statements has been one of the most difficult problems in accounting. A number of bases exist on which an amount for a single item can be measured e.g. replacement cost, net realizable value (net amount that would be received from selling an asset), present value of future cash flows, market value, original cost (less amortization, where appropriate) etc.

Generally, under existing GAAP, transactions and events are recognized in financial statements at the amount of cash or cash equivalents paid or received or the fair value ascribed to them when they took place; i.e., historical cost. By using historical cost as the basis for record-keeping, financial statements will contain objective and verifiable information. Historical cost provides financial statement users with a stable and consistent benchmark that they can rely on to establish historical trends.

This concept is especially critical since there is a great deal of controversy about valuation of real property and other tangible assets carried by departments for many years. The historical cost is not always available or relevant to the users of the financial statements and must be supplemented by other financial information relevant to the decision making.

2.3 Matching Principle

The matching principle requires that revenue and expenses be accrued; that is, they are recognized as they are earned or incurred, not just when they are received or paid or when they affect an appropriation.

Under the matching principle, inclusion or exclusion of an item of revenue or expenses will depend on the period to which it relates, the period in which it was received or performed, or the period in which it was consumed, used or lost, subject in all cases to materiality considerations.

In general accounting literature, the matching principle normally refers to the matching of revenue and expenses. However, with minor exceptions, departments do not generate major amounts of non-tax revenue but are funded through appropriations. As such, the matching principle must take on a slightly different interpretation. Consequently, revenues should be recognized when the goods and/or services have been rendered and expenses should be matched to program delivery outputs of services to the public.

For example, in the case of tangible capital assets, a systematic and rational allocation policy is used to approximate the matching principle. This type of expense recognition involves making assumptions about the benefits that are being received as well as the cost associated with those benefits. The cost of a long-lived asset is allocated over the accounting periods during which the asset is used because it is assumed that the asset contributes to the generation of program outputs throughout its useful life.

2.4 Consistency

There should be consistency of accounting treatment of like items within each accounting period and from one period to the next. This is particularly important if users are to compare successive years' accounts, for example, to identify trends in revenue and expenses. Changes in accounting policies and practices should generally only be made when those changes will result in fairer presentations of financial results. Any changes that have a significant impact on departmental and or consolidated results should only be made after prior discussion with TBS.

Consistency does not mean that different organizations must apply the same accounting methods. This may be thought to improve comparability between departments. However, requiring such uniformity may result in dissimilar circumstances between departments being reported as being similar. For example, amortization policies should be developed on the basis of what best reflects the consumption of the asset in its particular operating environment. There may be different operating environments in each department.

2.5 Materiality

Materiality is a term used to describe the significance of financial statement information to users. It is a matter of judgement in the particular circumstances. An item, or an aggregate of items, is material if it is probable that its omission or misstatement would influence or change a decision. In short, it must make a difference or it need not be disclosed. It is difficult to provide firm guidelines to help judge when an item is or is not material because materiality depends on the relative size of the item compared to the size of other items and the nature of the item itself.

In determining whether an item or an aggregation of items is material, the following factors should be considered:

  • the size of the item;
  • nature of the item - for example, irregularities or illegal acts by departmental personnel would be material even if the amounts were small; and,
  • cumulative effects - the total effect of individual amounts on the financial statements taken as a whole.

It should be noted that specific disclosures in annual financial statements required by legislation must be complied with regardless of the amounts involved.

Care should be taken in reporting immaterial items since reporting them could otherwise impair the clarity and understandability of the financial statements and notes.

2.6 Substance over Form

Financial statements should present the economic substance of transactions and events even though their legal form may suggest a different treatment. As such, departments must ensure that transactions and events affecting their entity are presented in the financial statements in a manner that is in agreement with the actual underlying transactions and events. Thus, transactions and events are accounted for and presented in a manner that conveys their substance rather than necessarily their legal or other form. For example, a) capital leases should be accounted for by the lessee as an acquisition of an asset and an assumption of an obligation, since the lease transfers substantially all of the benefits and risks of ownership related to the leased property from the lessor to the lessee. b) repayable contributions may appear to be an expense for the period but some of them are in fact loans. Therefore those, which meet the definition of a loan according to the PS Handbook, should be accounted for as a loan receivable. Depending on the terms of the agreement, some of them may need to be treated as concessionary loans.

3.0 Assets

Assets are economic resources controlled by a government as a result of past transactions or events and from which future economic benefits may be obtained.

Assets have three essential characteristics:

  • they embody a future benefit that involves a capacity, singly, or in combination with other assets to provide future net cash flows, or to provide goods and services;
  • the government can control access to the benefit; and
  • the transaction or event giving rise to the government's right to, or control of, the benefit has already occurred. PS 3150.04

Assets appear on a Department's Statement of Financial Position, and they are divided into either of two categories, Financial Assets and Non-Financial Assets.

Financial Assets

Financial assets are those assets on hand at the end of an accounting period, which are expected to be turned into cash. They are not intended for consumption in the normal course of operations. Examples of these assets include cash, accounts receivables, loans and advances, inventories held for resale, etc.

Non-Financial Assets

Non-financial Assets are assets that have economic lives that may extend beyond the accounting period and are intended for consumption in the normal course of operations. They generally are converted into expenses in future periods. Examples of these assets include capital assets, inventories of supplies, and prepayments, including transfer prepayments.

3.1 Cash

Introduction

From a departmental perspective, "cash" includes cash on hand, cash in transit, and cash on deposit.

It should be noted that the main focus of the "cash" component would be that of a typical department's day-to-day handling of public money to the credit of the Receiver General for Canada. Cash related entries specific to the Receiver General for Canada and foreign currency cash will not be addressed in this manual.

References

  • PS 1500.49-.51
  • TBAS 1.1, 1.2
  • Receiver General Manual-Chapter 5 "Bank Facilities System (BFS) and Departments", Chapter 10 "Departmental and Central Accounting Entries under Full FIS"

Scenario A - Department receives money for services rendered

The Department receives a $25,000 cheque in the mail from a customer for services rendered by the Department.

Journal Entries

1) Department receives cash in from customer ***

AMT($)

FRA

AUTH

OBJ

DR Cash in Hands of Depts awaiting deposit to RG

25,000

11125

R300

5299

CR Revenue or Accounts Receivable etc.

25,000

*

*

*

* See Accounts Receivable section for coding

FRA coding rationale: (PS 1500.49-51) - The Department records the cash as being in hand awaiting deposit to a Chartered Bank. The credit entry offset is to either a revenue item or against accounts receivable.

Authority coding rationale: The authority code is "R300-All other assets and liabilities". Although there is no impact on the authority side for "cash", the system requires that a code be used.

Object coding rationale: To record the net impact on Cash Accounts, 5299 would be used.

2) Cash Deposited by the Department in a Chartered Bank ***

 

AMT($)

FRA

AUTH

OBJ

DR Deposits in Transit to RG

25,000

11123

R300

5299

CR Cash in Hands of Depts awaiting deposit to RG

25,000

11125

R300

5299

FRA coding rationale: (TBAS 1.1, PS 1500.49-51) - The Department deposits the cash in a Chartered Bank and records the cash as being in transit to RG. The credit entry offset is to reflect the transfer from "in hands" to that of being "in transit" to the RG.

Authority coding rationale: The authority code is "R300-All other assets and liabilities". Although there is no impact on the authority side for "cash", the system requires that a code be used.

Object coding rationale: To record the net impact on Cash Accounts, 5299 would be used.

3) Department receives notification from the RG confirming that cash has been sent from the Chartered Bank to the Bank of Canada.

   

AMT($)

FRA

AUTH

OBJ

DR Cash Deposit Control Account

25,000

62DDD**

0000

0000

CR Deposits in Transit to RG

25,000

11123

R300

5299

** DDD: Department number

FRA coding rationale: (PS 1500.49-51) - The Department records the cash as being received by the RG resulting in the offset debit entry being reflected in the Cash Deposit Control Account.

Authority coding rationale: The authority code is 0000 for the "Cash Deposit Control Account" and "R300-All other assets and liabilities" for Deposits in Transit to RG. There is no impact on the authority side for "cash" but the system requires that a code be used.

Object coding rationale: All RG interface Control Accounts are zero filled (0000), with the exception of I/S Control Accounts, at the object level. To record the net impact on Cash Accounts, 5299 would be used.

Scenario B - Department books cash at time of Deposit to Chartered Bank

*** Note: If the Department books cash at time of deposit to a Chartered Bank then the entry would be a combination of the Scenario A 2) DR entry and the Scenario A 1) CR entry identified above.

Journal Entries

1) Department books cash at time of deposit ***

   

AMT($)

FRA

AUTH

OBJ

DR Deposits in Transit to RG

25,000

11123

R300

5299

CR Revenue or Accounts Receivable etc.

25,000

*

*

*

* See Accounts Receivable section for coding

2) Department receives notification from the RG confirming that cash has been sent from the Chartered Bank to the Bank of Canada.

See journal entry in Scenario A 3)

Scenario C - Department receives overpayment by supplier

The Department receives a $500 cheque in the mail from a supplier with a note indicating it had been overpaid by this amount.

Journal Entries

1) Department receives $500 from a supplier, it is discovered this is an overpayment.

  

AMT($)

FRA

AUTH

OBJ

 DR Cash in Hands of Depts awaiting deposit to RG

500

11125

R300

5299

 CR GST - refundable advance account

32.70

13392

G111

8171

 CR Operating expenses

467.30

513XX

¥

¤

FRA coding rationale: (PS 1500.49-51) - The Department records the cash as being in hand awaiting deposit to a Chartered Bank. The credit entry offset is to Operating expenses since this amount had been originally charged as an expense. The GST - refundable account is charged for portion of GST which was overpaid.

Authority coding rationale: The authority code is "R300-All other assets and liabilities". There is no impact on the authority side for "cash" but the system requires that a code be used. Since GST does not affect a departmental appropriation, it is recorded to a special authority, G111.

¥ If the money is received in the same year as the overpayment was made, it would be necessary to credit the correct appropriation, e.g. B11A - operating vote or B12A - program vote. However, if the money is received in a year after it was charged to the appropriation then the credit entry should be made to "D311-Other statutory non-tax revenue - refund of a prior years expenditures".

Object coding rationale: To record the net impact on Cash Accounts, 5299 would be used. The GST must be reflected by using "8171-Payment of GST on purchases".

For the credit side, the appropriate economic object would be used depending on the nature of the good or service in question. Note: if the authority code used is D311 and your system cannot handle the use of an expense object code with a revenue authority code, object "4711 - Refunds of expenditures pertaining to purchased operating goods" may be used.

2) See journal entry (2) in Scenario A above.

3) See journal entry (3) in Scenario A above.

Departmental Financial Statement Presentation and Disclosure Requirements

The expectation is that all cash would be cleared and deposited at year-end. Therefore, with possible minor exceptions, there should be no cash shown in the Department's Statement of Financial Position as at 31 March (TBAS 1.2).

3.2 Receivables

Receivables are financial assets in the form of claims held against customers and others for money, goods, or services. Receivables include accounts receivables, loans receivables and accountable advances.

Receivables should be valued at net realizable value, which is the net amount expected to be received in cash, which is not necessarily the amount legally receivable. Determining net realizable value requires an estimation of uncollectible receivables. When it is deemed that receivables are not collectible, they are to be written off. Readers should refer to Section 3.2.4 on Debt Deletions.

Receivables are classified as a financial asset on the Statement of Financial Position.

3.2.1 Accounts Receivable

Introduction

Accounts receivable are classified as short-term receivables that are normally, but not necessarily, expected to be collected within a year. This section does not include receivables for tax revenue, as tax revenue transactions are not covered in the Accounting Manual.

Accounts receivable may include trade and non-trade receivables. The former represents amounts owed by customers for goods sold and services rendered as part of normal business operations. The latter arises from a variety of transactions including return on investments (dividends), interest income, and refund of overpayments and recoveries.

Accrued receivables should be set up for estimated amounts for goods or services rendered but not recorded at the end of each month, for any material amounts. These should be subsequently reversed when definitive amounts are known, at which time an accounts receivable would be set up, or at the beginning of the next month depending on a department's system.

Allowance for Doubtful Accounts

Accounts receivable should be valued at net realizable value, which is the net amount expected to be received in cash, which is not necessarily the amount legally receivable. Determining net realizable value requires an estimation of uncollectible receivables

An allowance for bad debts can either be established as a percentage of accounts receivable or by setting up an aging schedule.

References

  • CICA 3020
  • Debt Write-off Regulations, 1994 (pursuant to section 25(1) for the FAA)

Scenario A - Sale of Goods

The department sells information products to an outside party for $500. (Assume the Department does not have respendable revenue or vote netting authority). Examples for vote netting are shown in Scenario B of the section on Revenues.

Journal Entries

1) Department sell information products to an outside party for $500. They have not paid for the goods at this point.

(Assumption: Sale takes place in Ontario. See section on Sales Tax for rules on sales tax with respect to sales in other provinces.)

  

AMT($)

FRA

AUTH

OBJ

DR Accounts receivable

575

11221

R300

5399

CR PST payable

40

21151

R300

6299

CR GST payable

35

21134

R300

6299

CR Sales of goods and information products

500

42315

(*)

4546

See Scenario A Journal entry 1 for FRA, Authority and Object Rationales in the Revenue Section of the manual.

The entries for the settlement for GST payable can be found in the section related to Sales Tax.

The entries related to the settlement of PST payable (which is treated like any trade payable) can be found in the Accounts Payable Section of the manual.

2) Invoice paid in full

 

AMT($)

FRA

AUTH

OBJ

DR Cash in Hands of Depts awaiting deposit to RG

575

11125

R300

5299

CR Accounts receivable

575

11221

R300

5399

Further entries related to cash can be found in the Cash Section of the manual.

FRA coding rationale: At this point the outside party has paid the department thereby reversing the accounts receivable and increasing the Department's "Cash in hands of Depts. (awaiting deposit to RG)" holdings.

Authority coding rationale: There is no effect on appropriations with respect to the settlement of the accounts receivable therefore R300 is used.

Object coding rationale: To record the net impact on Cash Accounts, 5299 would be used. To indicate the net impact on accounts receivable"5399-Net Change to Accounts Receivable" is used.

Scenario B - Establish an Allowance for Doubtful Accounts

Using past experience, a Department can estimate the percentage of its outstanding receivables that will likely become uncollectible, without identifying specific accounts. The percentage of receivables may be applied using one composite rate that reflects an estimate of the uncollectible receivables or by setting up an aging schedule and applying a different percentage based on past experience to the various age categories.

Based on an aging schedule the Department sets up an Allowance for Doubtful accounts for $10,000.

Journal Entries

1) Set up of Allowance for Doubtful Accounts

 

AMT($)

FRA

AUTH

OBJ

DR Bad debt expense

10,000

51732

F122

3462

CR Allowance for doubtful accounts

10,000

11229

F412

7021

FRA coding rationale: When allowances for doubtful accounts are recorded, a bad debt expense is recorded at the same time. The allowance for doubtful accounts is a valuation account (i.e. contra asset) and is subtracted from the gross amount of the accounts receivable on the "Statement of Financial Position".

Authority code rationale: Since the establishment of an allowance for doubtful accounts does not impact appropriations, F codes are used. "F122-Allowances set up for bad debt expenses" is used for the Bad debt expense and "F412-Changes to allowances for doubtful accounts" is used for Allowance for doubtful accounts.

Object rationale: There is no effect on objects when the allowance for doubtful accounts is set up. Bad debt expense is a non-cash expense, therefore it falls under standard object 12 and sub-category 34. The economic object used for bad expense is 3462. For non-cash items related to assets and liabilities, sub-category 70 is used. 7021 is used for Allowance for doubtful accounts.

Scenario C1 - Write-off of Trade Accounts Receivable

An accounts receivable for $300 is deemed as uncollectible and is written off.

Journal Entries

1) Record the write-off of $300 accounts receivable

  

AMT($)

FRA

AUTH

OBJ

DR Allowance for doubtful accounts

300

11229

F412

7021

CR Accounts receivable - non-tax revenue

300

11221

R300

5399

FRA coding rationale: An account receivable should be written off as soon as it is known to be uncollectible. The balance is removed from the books by debiting Allowance for Doubtful Accounts and crediting Accounts receivable - non-tax revenue

Authority code rationale: There is no effect on appropriations. Since the expenditures related to the products that were sold were originally charged to a budgetary vote (operating, program, capital vote etc), there is no requirement to get it off the books via a budgetary appropriation since it has already been charged to a budgetary appropriation. Consequently, there is no effect on appropriations. R300 is used for accounts receivable and "F412-Changes to allowances for doubtful accounts" is used for Allowance for doubtful accounts. Notwithstanding that an appropriation is not required, Treasury Board approval may still be required. See section 25 of the FAA and sections 4 and 5 of the Debt Write-off Regulations.

Object rationale: Since there is a net change to accounts receivable, "5399-Net Change to Accounts Receivable" would be used. For non-cash items related to assets and liabilities, sub-category 70 is used. 7021 is used for Allowance for doubtful accounts.

Scenario C2 - Collection of a Trade Accounts Receivable written off

Six months later a collection is made on the receivable that is written off ($300).

Journal Entries

1) Record collection of receivable

1a) Re-establish receivable

  

AMT($)

FRA

AUTH

OBJ

DR Accounts receivable - non-tax revenue

300

11221

R300

5399

CR Allowance for doubtful accounts

300

11229

F412

7021

FRA coding rationale: The first step is to re-establish the accounts receivable. Debiting the account receivable and crediting the allowance for doubtful accounts accomplishes this.

Authority code rationale: There is no affect on appropriations. Therefore, R300 is used for accounts receivable and "F412-Changes to allowances for doubtful accounts" is used for Allowance for doubtful accounts.

Object rationale: Since there is an adjustment to accounts receivable, "5399-Net Change to Accounts Receivable" would be used. 7021 is used for Allowance for doubtful accounts.

1b) Record collection

  

AMT($)

FRA

AUTH

OBJ

DR Cash in Hands of Dept awaiting deposit to RG

300

11125

R300

5299

CR Allowance for doubtful accounts

300

11221

R300

5399

FRA coding rationale: The cash holdings of the department are increased due to the customer remittance. The accounts receivable is reduced by an equivalent amount.

Authority code rationale: There is no affect on appropriations. Therefore, R300 is used for accounts receivable and Cash in Hands of Department awaiting deposit to RG.

Object rationale: To record the net impact on Cash Accounts, 5299 would be used. The net change to account receivable due to a payment by a customer is coded to 5399-"Net Change to Accounts Receivable ".

Departmental Financial Statement Presentation and Disclosure Requirements

Accounts receivable are to be recorded in the Statement of Financial Position under the heading Financial Assets grouped into Receivables. Receivables are stated at amounts expected to be ultimately realized i.e. net of the allowance for doubtful accounts.

3.2.2 Loans Receivable - General

Introduction

Accrual Accounting Perspective

A loan receivable is a financial asset of a government (the lender) represented by a promise by a borrower to repay a specific amount, at a specified time or times, or on demand, usually with interest but not necessarily.

The terms of a loan agreement describe when a loan is due. The terms may specify a calendar date or dates for repayment, or may describe the particular time(s) or circumstance(s) which will determine repayment. For example, repayment may be contingent on future events, such as commodity prices or operating results. (PS 3050.07)

Recognition

A loan receivable should be recognized on a government's statement of financial position when:

  1. the government assumes the risks associated with, and acquires the right to receive, payment of principal and any related payments of interest; and
  2. the amount of the loan can be reliably measured.

This normally coincides with the disbursement of funds, exchange of other assets, or assumption of liabilities. (PS 3050.26)

A loan receivable should be removed from a government's statement of financial position when it has been repaid, the risks and rewards associated with the loan have been transferred, the right to repayment has expired or been waived, or it is written off. (PS 3050.28)

For the purposes of Write-offs and Allowances, there are two types of loans receivables:

  1. Those that are charged to a non- budgetary appropriation (G and H appropriation)
  2. Those that are charged to a budgetary appropriation (B appropriation) e.g. unconditional repayable contributions

Write-offs

For accrual accounting purposes, when the amount of a loss is known with sufficient precision, and there is no realistic prospect of recovery, the loan receivable should be reduced by the amount of that loss. (PS 3050.38)

For authority accounting purposes, loans receivables that were charged to a non-budgetary appropriation would require a charge to a budgetary appropriation when the loan is to written off (see Scenario B). Whereas, loans receivables that were originally charged to a budgetary appropriation are not charged to an appropriation at the time of write-off.

Allowances

It should be noted that Departments will not set-up an allowance for uncollectible loans receivables (for those loans charged to a non-budgetary appropriation). This will be done centrally by Treasury Board Secretariat. However, as requested, Departments will provide TBS all the necessary information required to determine the provision even though they will not record the transaction in their books.

In the case of loans receivables charged to budgetary appropriation, departments will be responsible for setting up an allowance for those loans they deem to be uncollectible.

References

  • Policy on Transfer Payments
  • TBAS 3.2 Transfers (Grants and Contributions)
  • PS 3050
  • Debt Deletion section of the Manual
  • Debt Write-off Regulations, 1994 (pursuant to section 25(1) for the FAA)
  • FAA act , sections 23, 24 and 25

Scenario A

Department makes a loan of $500,000 to an organization to finance the construction of exhibition buildings. The loan bears interest at a rate of 6% per annum, and is repayable in monthly instalments at the end of every month over a 5-year period. (There are no concessionary terms related to this Scenario ).

Journal Entries

1) Loan of $500,000 is issued

 

AMT($)

FRA

AUTH

OBJ

DR Loans Receivable

500,000

13341

H/G*

5010

CR Accounts Payable

500,000

21111

R300

6299

FRA Coding Rationale: The loan is recorded on the books at its face value.

Authority Coding Rationale: H/G* Regular loan receivables are charged to non-budgetary appropriations. In this case H201 would be appropriate but, depending on the situation the appropriation charged could be either a non-statutory Loan vote HXXX, or a Statutory Loan vote GXXX.

Object Rationale: "5010 - Acquisition of loans with cash" should be used for establishing the loan receivable. "6299 - Net Increase or Decrease to Other Liability accounts" should be used to indicate the establishment of the accounts payable.

2) Accrue interest receivable and recognize interest revenue

  

AMT($)

FRA

AUTH

OBJ

DR Accrued Interest Receivable

2,500

11234

R300

5399

CR Other ROI from outside govt (Interest Revenue)

2,500

42129

E500

4804

FRA Coding Rationale: As interest is earned on the loan the loan amount it is recognized periodically as revenue for the period. In this case, interest revenue and interest receivable is recorded monthly. However, depending on the department's materiality level the interest may be recorded less frequently. The amount of interest calculated in the first month is as follows: $2,500 =$500,000 x (6%/12months).

Authority Coding Rationale: There is no impact on authorities with respect to interest receivable, therefore R300 would be used. Interest revenue from loans will be recorded in E500.

Object Rationale: "4804 - Interest on loans and advances from other domestic private sector enterprises" would be used to record interest revenue from the loan. To indicate the net impact on the accrued interest receivable "5399 - Net Change to Accounts Receivable is used.

3) Record periodic repayments of the loan

  

AMT($)

FRA

AUTH

OBJ

DR Cash in Hands of Depts awaiting deposits to RG

9,666.40

11125

R300

5299

CR Loans Receivable

7,166.40

13341

H/G*

5015

CR Accrued Interest Receivable

2,500.00

11234

R300

5399

FRA Coding Rationale: As loan repayments are made, the cash holdings of the Department are increased. This is reflected by a debit to the Cash in Hands of Departments awaiting deposit to RG. The outstanding amount of the loan receivable is also reduced. When the interest is paid, the accrued interest receivable is reversed. The amount of loan repayment is: $9,666.40 = $7,166.40 (principal portion) + $2,500 (interest portion). These amounts are derived using a loan calculation program.

Authority Coding Rationale: H/G*, the repayment of the loan should be credited back against the appropriation it was originally charged in order for departments to complete the Source and Disposition of Authorities in Volume II Part I of the Public Accounts. Crediting the repayment back to the original loan appropriations does not give departments the authority to respend that amount for further loans. Any authority to issue further loans from the repayments would have to be determined from the specific loan authority granted to the department by the government. If there is no impact on authorities as the loan gets repaid, R300 can be used for both the loans receivable and the accrued interest receivable. Since there is no impact on the authority side for cash, R300 is used.

Object Rationale: The Department records the cash as being received by the RG resulting in the offset debit entry being reflected in the Cash Deposit Control Account. As the loan is repaid "5015 - Settlement of loans with cash" is used. To indicate the net impact on the accrued interest receivable "5399 - Net Change to Accounts Receivable is used. To record the net impact on cash accounts "5299 - Net Increase or Decrease in Cash Accounts" should be used.

Scenario B - Write-off of a loan receivable

The Department has determined that $50,000 of the loan issued will not be collectible, and will therefore have to be written off. The department has obtained the appropriate approval to write-off the loan.

Journal Entries

1) Loan write-off

  

AMT($)

FRA

AUTH

OBJ

DR Bad debt expense

50,000

51732

B161

3215/3217

CR Loans Receivable

50,000

13219

F319

5021

FRA coding rationale: A loan receivable should be written off as soon as it is known to be uncollectible. The balance is removed from the books by debiting Bad Debt Expense and crediting Loans Receivable. A charge is made directly to Bad Debt Expense since the department does not set up an allowance for doubtful loans with respect to those loans

Authority code rationale: Since the loan receivable was originally charged to a non-budgetary appropriation, a write-off would require a charge to a budgetary appropriation. In order to write-off the loan receivable, a charge to "B161-Debt write-offs" would be made. However, this code would only apply to non-statutory loans that are given out. B162 would be used if the debt was forgiven. As well, Parliamentary approval would be required to write-off the debt. With respect to write-offs the credit side of the transaction is coded with an "F" code. For further information, please refer to 3.2.4 on Debt Deletions.

Object rationale: The economic object to use is "3215- Deletion and write-off of loans, investments and advances" if the loan is written-off or "3217- Forgiveness of loans, investments and advances" if it is forgiven. The write-off of a loan would require that "5021- Write-off of loans" be used.

Departmental Financial Statement Presentation and Disclosure Requirements

Loans receivable should be disclosed under the heading Financial Assets in the Department's Statement of Financial Position.

In describing the accounting policies selected by a government and applied to its loans receivable, Departments should disclose:

  1. the basis of initial valuation on the statement of financial position;
  2. the policy with respect to valuation allowances, write-offs and recoveries; and
  3. the policy for the recognition of interest revenue. PS 3050.54

Departmental financial statements should disclose the nature and terms of significant classes of loans receivable, including:

  1. the recorded cost, the related valuation allowance and the net recoverable value;
  2. general terms and conditions of the loans receivable, such as:
    1. repayment terms;
    2. interest terms;
    3. a description of forgiveness and other conditions attached to the loans; and
    4. security held for the class of loans; and
  3. the amount of loans receivable outstanding in foreign currencies, the currencies in which such amounts are receivable, the Canadian dollar equivalents, and the basis of translation. PS 3050.56
3.2.2.1 Unconditional Repayable Contributions

Introduction

Unconditional Repayable Contributions (URCs) are contributions that must be repaid without qualification. The contribution agreement contains specific repayment terms that set out the time and amount of payment(s) due.

Unconditionally repayable contributions (URCs) are, in substance, loans. Consequently, they shall be accounted for in accordance with PS 3050 Loans Receivables and will be classified and reported as "Loans, investments and advances - transfers".

In cases where the URC has significant concessionary terms, such as a low or no interest rate, it shall be accounted for in accordance with PS 3050.20.

  • "Significant" for this purpose is defined to be when the grant portion is greater than 25% of the contribution. The grant portion would be recognized as a transfer expense. (Please note: If this condition is not met, then the loan would be recorded at its face value and no concessionary terms would be recorded.)
  • The recorded value of the loan at the date of issue should be its face value discounted by the amount of the grant portion. The amount of the loan discount should be amortized to revenue in a rational and systematic manner over the term of the loan. (PS 3050.24)
  • The Consolidated Revenue Fund Lending Rate in effect for a similar term on the date the contribution agreement is concluded will be used as the discount rate in determining the present value of the loan.

Appropriate valuation allowances shall be recorded for URC receivable by the Department to reflect collectibility and risk of loss. As well, Departments will record write-offs of uncollectible loans.

References

Scenario A - Unconditional Repayable Contributions - Concessionary Terms

The Department gives an unconditional repayable contribution (URC) to Doe's Widget Manufacturing Co. of $192,000 (this is for subsidy assistance) on June 1, 2001. The terms of the agreement are that the company must repay the full amount in 48 equal monthly payments of $4000 commencing 1 June 2004 at zero percent interest. The Department has determined that the terms of the loan result in a grant portion that is greater than 25% of the repayable contribution.

Journal Entries

1) To record disbursement of $192,000 Doe's Widget Manufacturing Co on June 1, 2001.

  

AMT($)

FRA

AUTH

OBJ

DR Loans Receivable - URC

192,000.00

13381

B15A*

2151

DR Transfer Payment Expense

48,279.90

51159

F999

3453

CR Unamortized Discount on Transfers

48,279.90

13388

F322

3453

CR Accounts Payable

192,000.00

21111

R300

6299

FRA Coding Rationale: As per PS 3050.24, the loan is recorded at its face value discounted by the amount of the grant portion. The face value ($192,000) is made up of two parts, the principal and the interest foregone. The interest is equal to the unamortized discount, which also represents the grant portion of the contribution in this Scenario. The unamortized discount of $48,279.90 is calculated by discounting the loan payment of $192,000 using the Consolidated Revenue Fund Lending Rate, assumed to be 6%. Since $48,279.90 is greater than 25% of the repayable contribution of $192,000 (i.e. $48,000), the grant portion must be recorded as a transfer payment expense.

$192,000 represents the future value of the loan since this is the total amount the recipient must repay ($4,000 x 48 payments). Therefore, this amount must be discounted to determine the net present value of the loan. Due to the structure of the loan payments, the discounting is somewhat complicated.

  • The first step is to discount the 48 monthly repayments of $4,000 back to the point where loan payments begin (June 1, 2004).
  • The second step is to discount the value calculated in the first step to the point in time when the money was loaned out to the recipient (June 1, 2001).
  • The third step is to take the difference in face value of the loan and the discounted amount of the loan to come up with the unamortized discount.

Step 1

It is assumed that the loan repayments of $4,000 are made at the beginning of each month. Therefore, a factor that represents the present value of an annuity due would be used, (PVIFA Due). The factor used in this part of the calculation would be 42.7932 (PVIFA Due for 48 periods at.005%).

  • .005% = 6% divided by 12 months. Since payments are made monthly, it is necessary to use a monthly rate of interest.
  • The following amount would result: $171,172.80 = $4,000/month X 42.7932 (PVIFA Due, 48 periods,.005%)

Step 2

  1. It is necess ary to discount the sum of the discounted payments ($171,172.80) back to when the loan was issued on June 01, 2001. A factor that represents the present value of a single sum (PVIF) is used: PVIF, 3 periods at 6% =.83962.

The following amount would result:

$143,720.10 = $171,172.80 x.83962 (PVIF 3 periods at 6%)

Step 3

The amount of the unamortized discount would be the difference between the face value of the loan and the discounted value of the loan.

The following amount would result:

$48,279.90 = $192,000.00-$143,720.10

The unamortized Discount on Transfers represents the grant portion and is a contra asset to the Loans Receivable - URC account. These two items are netted to produce the requisite balance required for the statement of financial position. The interest free portion of the loan is concessionary and is more in the nature of a grant, therefore that portion should be recognized as an expense. As a result, the $48,279.90 is debited to Transfer Payment Expense. Since the face value of the loan is what the Department is lending to the company, $192,000 is recorded as a payable.

Authority Coding Rationale: In this example an URC payment is charged to a budgetary vote that being B15A(*) - Grant and Contribution vote but depending on the department's vote structure, B11A - Program Vote could be used as well. Since accounts payable has no impact on appropriations, R300 is used. The concept of the concessionary terms resulting in a grant portion is strictly an accrual concept. This does not impact authorities, therefore F codes are used for both the Transfer Payment Expense and Unamortized Discount on Transfers.

Object Rationale: "6299 - Net Increase or Decrease to Other Liability accounts" should be used to indicate the establishment of the accounts payable. "2151 - Recoverable subsidy payments to industry" is used at this point to indicate the disbursement of the transfer payment. The concept of the concessionary terms resulting in a grant portion is strictly an accrual concept. This does not impact authorities, therefore the same object code is used for the expense and the unamortized discount, "3453 - Recognition of unamortized expenses related an asset".

2) To record the amortization of discount as at year-end March 31, 2002

  

AMT($)

FRA

AUTH

OBJ

DR Unamortized Discount on RC

5,747.60

13388

F322

7099

CR Amortization of Discount on RC

5,747.60

42161

F251

7099

FRA Coding Rationale: In accordance with PS 3050.24, the amount of the loan discount should be amortized to revenue in a rational and systematic manner over the term of the loan. For administrative ease, it is suggested that the unamortized discount be amortized on a straight-line basis over the term of the loan. The amount in the contra asset account (Unamortized Discount on RC) is reallocated to the "Amortization of Discounts on Repayable Contributions" account, which serves as the revenue account. The loan covers a period of seven years or 84 months (36 months with no payments plus 48 months of payments). The unamortized discount on the repayable contribution would be amortized over the period of the loan. The monthly rate would be $574.76 ($48,279.90 / 84 months). At 31 March 2002, an amount of $5,747.60 (10 months x $574.76) would be amortized.

Authority Coding Rationale: This is strictly an accrual entry. There is no impact on authorities, therefore only F codes are used.

Object Rationale: This is strictly an accrual entry. There is no impact on objects, therefore the same object code is used on both sides of the entry, "7099 - Net increases or decrease in Other transactions".

3) To record the monthly payment to Department starting June 01, 2004.

 

AMT($)

FRA

AUTH

OBJ

DR Cash in the Hands of Depts Awaiting deposit to RG

4,000

11125

R300

5299

CR Loans Receivable - URC

4,000

13381

E500

2151

FRA Coding Rationale: As the loan is paid back the Cash in the Hands of Depts awaiting deposit to RG is debited and the loan receivable is reduced by the corresponding amount.

Authority Coding Rationale: As the loan gets repaid the repayments hit the miscellaneous non-tax revenue authority, E500, as these amounts are credited as revenues for authority purposes. Since there is no impact on the authority side for cash, R300 is used.

Object Rationale: As the loan is paid back the objects need to reflect the repayment, "2151 - Recoverable subsidy payments to industry" is used, as this is a repayment of an amount. To record the net impact on cash accounts "5299 - Net Increase or Decrease in Cash Accounts" should be used.

Scenario B - Establish an Allowance for Doubtful Loans

Using past experience, a Department can estimate the percentage of its outstanding loans that will likely become uncollectible. The percentage of loans receivables may be applied using one composite rate that reflects an estimate of the uncollectible loan receivables. (Please note, this Scenario is completely independent from Scenario A)

The Department has estimated that $50,000 will be uncollectible with respect to these unconditional repayable contributions.

Journal Entries

1) Set up of Allowance for Loans that will not be repaid

  

AMT($)

FRA

AUTH

OBJ

DR Bad debt expense

50,000

51732

F122

3462

CR Allowance for Doubtful Loans

50,000

13389

F412

7021

FRA coding rationale: When allowances for doubtful loans are recorded, a bad debt expense is recorded at the same time. The allowance for doubtful loans is a valuation account (i.e. contra asset) and is subtracted from the gross amount of the Loans receivable on the "Statement of Financial Position".

Authority code rationale: Since the establishment of an allowance for doubtful loans does not impact appropriations, F codes are used. "F122 - Allowances set up for bad debt expenses" is used for the Bad debt expense and "F412 - Changes to allowances for doubtful accounts" is used for Allowance for doubtful loans.

Object rationale: There is no impact on objects when the allowance for doubtful accounts is set up. Bad debt expense is a non-cash expense, therefore it falls under standard object 12 and sub-category 34. The economic object used for bad expense is 3462. For non-cash items related to assets and liabilities, sub-category 70 is used. 7021 is used for Allowance for Valuation of financial claims.

Scenario C - Write-off of a URC

The Department has a URC with concessionary terms on their books with a value of $20,000 and unamortized discount of $2,000. This loan is considered uncollectible and is written off.

Journal Entries

1) Record the write-off of $20,000 URC

  

AMT($)

FRA

AUTH

OBJ

DR Allowance for Doubtful Loans

18,000

13389

F412

7021

DR Unamortized Discount on RC

2,000

13388

F322

7099

CR Loans Receivable-URC

20,000

13381

R300

5021

FRA coding rationale: An URC should be written off as soon as it is known to be uncollectible. The balance is removed from the books by debiting Allowance for Doubtful Loans, crediting Loans Receivable - URC and debiting any remaining Unamortized Discount on Transfers.

Authority code rationale: There is no effect on appropriations. Since the URC contribution was originally charged to a budgetary vote (grant and contribution or program vote), there is no requirement to get it off the books via a budgetary appropriation since it has already been charged to the budgetary appropriation. Consequently, there is no effect on appropriations. Therefore, R300 is used for loans receivable-URC, "F322 - Unamortized Discount on repayable contributions" is used for the unamortized discount on Transfers" and F412 - Changes to allowances for doubtful accounts" is used for Allowance for doubtful loans. Notwithstanding that an appropriation is not effected, Treasury Board approval may still be required. See section 25 of the FAA and sections 4 and 5 of the Debt Write-off Regulations.

Object rationale: "5021 - Write-off of loans" is used to indicate write-off of a loan receivable. For non-cash items related to assets and liabilities, sub-category 70 is used. 7021 is used for Allowance for valuation of Financial claims and 7099 is used for Unamortized Discount on Transfers.

Departmental Financial Statement Presentation and Disclosure Requirements

Loans receivable should be disclosed net of unamortized discount and allowance for bad loans under the heading Financial Assets in the Department's Statement of Financial Position.

In describing the accounting policies selected by a government and applied to its loans receivable, Departments should disclose:

  1. the basis of initial valuation on the statement of financial position;
  2. the policy with respect to valuation allowances, write-offs and recoveries; and
  3. the policy for the recognition of interest revenue.(PS 3050.54)

Departmental financial statements should disclose the nature and terms of significant classes of loans receivable, including:

  1. the recorded cost, the related valuation allowance and the net recoverable value;
  2. general terms and conditions of the loans receivable, such as:
    1. repayment terms;
    2. interest terms;
    3. a description of forgiveness and other conditions attached to the loans; and
    4. security held for the class of loans; and
  3. the amount of loans receivable outstanding in foreign currencies, the currencies in which such amounts are receivable, the Canadian dollar equivalents, and the basis of translation. (PS 3050.56)

3.2.3 Accountable Advances

Introduction

This section is provided as a guide for the accounting of Accountable Advances issued pursuant to section 38 of the FAA and the Accountable Advance Regulations. It does not apply to payments made in advance in accordance with section 34(b) of the FAA.

The accounting treatment shown hereunder does not apply to DND since it has its own Working Capital Advance Appropriation. For DFAIT, the accounting treatment does not apply to its own loan votes L11 or L12.

Accountable advances are broken into two categories, each of which is accounted for differently.

  1. Standing Advances, and;
  2. Temporary Advances other than Standing Advances.

Generally, Standing Advances include advances for such things as petty cash, change funds and standing advances for travel whereas Temporary Advances are primarily temporary advances for individual trips.

Standing Advances are recorded directly against PWGSC Loan Vote L15b Appropriation Act No. 3, 1990-1. Since departments use a PWGSC appropriation/authority to issue Standing Advances, they must first seek PWGSC approval to use this authority.

Temporary Advances which departments issue during the year are charged to their operating or program appropriation. Those advances still outstanding at year-end are credited back against the operating or program appropriation and are charged against a special "H" authority in order to carry them over to the next year. The entry is reversed in the New Year. The only temporary advances that should be carried over for authority purposes are those which are for travel either in the New Year or which span both fiscal years.

References

  • FAA-Section 38
  • Accountable Advance Regulations

Scenario A - Issuance of Standing advance

An employee is issued a standing advance of $5,000. Subsequently, expenses of $3,978.56 are incurred, at which time, a claim is submitted for reimbursement. It is later decided that the amount of the standing advance is excessive and is reduced to $4,000.

Journal Entries

1) A standing advance is issued to an employee for $5,000.00 by way of an RG cheques.

 

AMT($)

FRA

AUTH

OBJ

DR Standing advances

5,000

13315

H181

5030

CR Accounts payable

5,000

21111

R300

6299

Note: There are further entries required to discharge the accounts payable. Please refer to the Accounts Payable section.

FRA Rationale: In order to record and control the amount advanced to the employee, the financial asset account "Standing advances" is debited. It is basically a type of receivable, which is included under Loans, Investments and Advances.

Authority Rationale: Since the authority to charge these payments comes from the PWGSC Working Capital Loan Vote L15b, authority code H181 is used. As accounts payable do not affect an appropriation, R300 is used.

Object Rationale: "5030 - Acquisition of other advances with cash" is used since the object classification identifies the nature of the transaction (i.e. to provide an advance to an employee - an outside party). The appropriate objects to identify the type of goods or services acquired will be charged when the advance is reimbursed. "6299 - Net Increase or Decrease to Other Liability Accounts" is used to establish an accounts payable.

2) The employee incurs expenses of $3,978.56 and submits a request for reimbursement.

  

AMT($)

FRA

AUTH

OBJ

DR Operating expenses

3,718.28

51321

B11A/B12A

xxxx

DR GST refundable advance

260.28

13392

G111

8171

CR Accounts payable

3,978.56

21111

R300

6299

FRA Rationale: Since standing advances are operated on the Imprest System, any reimbursement of disbursements from the Standing Advance is reflected as an operating expense. The reimbursement to the holder replenishes the Standing advance to its original amount. Since the employee paid GST on his purchases, this amount should be recorded to the GST refundable advance account. Any PST paid is included with operating expenses.

Authority Rationale: The expenses, claimed by the Standing Advance holder, are a legitimate charge against a departmental appropriation. Depending on the vote structure of the particular department, B11A or B12A is appropriate. There could be other Authority Codes used for different Scenario s e.g. if the expenses were to be recorded against a Specified Purpose Account (SPA). Since GST is not to be charged to a departmental appropriation, it is set up as an advance under a special authority G111.

Object Rationale: The objects to be used depend on the nature of the expenses incurred when the standing advance was reimbursed to its original amount. Departments should code the total of all individual transactions under $100 in the same manner as the policy for purchases procured by acquisition cards. "6299 - Net Increase or Decrease to Other Liability Accounts" is used to establish or increase an accounts payable. Since there is GST/HST on the purchases, the GST must be reflected by using "8171 - Payment of GST on purchases"

3) It is decided that the amount of the standing advance is excessive and is reduced to $4,000

  

AMT($)

FRA

AUTH

OBJ

DR Cash in Hands of Depts awaiting deposit to RG

1,000

11125

R300

5299

CR Standing advances

1,000

13315

H181

5035

FRA Rationale: Since the amount that the person is responsible for has been reduced, the financial asset account "Standing Advances" must be reduced and is thus credited to reflect the payment from the holder.

Authority Rationale: Since the authority for Standing Advance flows through the PWGSC Working Capital Loan Vote, L15b, this account must be credited. This is done by using authority code H181. The Cash in Hands of Depts awaiting deposit to RG does not affect an appropriation so R300 is used.

Object Rationale: To record the net impact on Cash Accounts, 5299 would be used. "5035 - Settlement other advances with cash" is used to record either the full or partial reduction of a Standing Advance.

Scenario B - Issuance of Trip advance

1) An employee is issued a trip advance of $1,000. Subsequently, the following independent scenarios occur:

2a) claim is submitted for $1,107.10;

2b) a claim is submitted for $ 937.89;

2c) the advance is still outstanding at year-end but travel is completed; and,

2d) the advance is still outstanding at year-end because the travel will not be completed until the New Year.

1) An employee is issued a trip advance for $1,000.00 by way of a RG cheque.

 

AMT($)

FRA

AUTH

OBJ

DR Accountable advances

1,000

13314

B11A/B12A

5032

CR Accounts payable

1,000

21111

R300

6299

Note: there are further entries required to discharge the accounts payable. Please refer to the Accounts Payable section.

FRA Rationale: In order to control and record the amount advanced to the employee, the financial asset "Accountable Advance" must be debited.

Authority Rationale: Depending on the vote structure of the department, the trip advance would be charged against the department's program vote B11A or the operating vote B12A at the time the advance is made. Since accounts payable do not affect an appropriation, R300 is used.

Object Rationale: "5032 - Acquisition of travel advance" is used since the object classification identifies the nature of the transaction (i.e. to provide a travel advance). Once the claim for reimbursement has been processed the advance will be reclassified to the appropriate object that identifies the type of goods or services acquired. "6299-Net Increase or Decrease to Other Liability Accounts" is used to establish or increase an accounts payable.

2a) The employee submits his claim for settlement. The expenses claimed amount to $1,107.10
(including GST of $72.43).

  

AMT($)

FRA

AUTH

OBJ

DR Operating expenses

1,034.67

51321

B11A/B12A

0201

DR GST refundable advance

72.43

13392

G111

8171

CR Accountable advances

1,000.00

13314

B11A/B12A

5032

CR Accounts payable

107.10

21111

R300

6299

FRA Rationale: The actual operating expenses must be recorded for the period. The accountable advance is no longer outstanding, so it is reversed. Since the department owes the individual the balance of $107.10, the amount must be accrued and recorded as a payable. Since the employee paid GST on his purchases, this amount should be record the GST refundable advance account. Any PST paid would be included as part of the operating expenses.

Authority Rationale: In this case, the operating expenses are greater than the accountable advance given to the individual. This difference must be charged to the appropriate vote or other authority code e.g. SPAs. This can be achieved by netting operating expenses and accountable advances, and coding both with the same vote either B11A or B12A (depending on the department's vote structure). If the expense is to be charged to another authority code e.g. SPA, then the appropriation must be credited for the full advance and the full expense charged to the other authority. Since GST is not to be charged to a departmental appropriation, it is set up as an advance under a special authority G111.

Object Rationale: "0201-Travel -public servants " is used since operating expenses in this Scenario relate to travel for public servants. However, other economic objects under reporting object "020" could be used depending on the nature of the item. "5032- Acquisition of travel advances" is used to reflect the settlement of the travel advance. "6299-Net Increase or Decrease to Other Liability Accounts" is used to establish or increase an accounts payable. Since there is GST on the purchases, the GST must be reflected by using "8171 - Payment of GST on purchases".

2b) Expenses amount to $937.89 (including $61.36 of GST). The employee submits his claim for settlement along with a cheque for the amount owing.

  

AMT($)

FRA

AUTH

OBJ

DR Operating expenses

876.53

51321

B11A/B12A

0201

DR GST refundable advance

61.36

13392

G111

8171

DR Cash in Hands of Dept. awaiting deposit to RG

62.11

11125

R300

5299

CR Accountable advances

1,000.00

13314

B11A/B12A

5032

FRA Rationale: Operating expenses - see journal entry Scenario B 2a) above.

Since the individual spent less than the $1,000 (accountable advance), an amount of $62.11 is collected from the employee.

Authority Rationale: Since the amount of the advance was previously charged to departmental appropriations, there is a requirement to reduce the net charge to the appropriations. To achieve this effect on authorities both the debit and credit should be to the same code. In this case, it is suggested that the authority code originally used for the advance i.e. B11A or B12A be used. Cash in Hands of Dept awaiting deposit to RG does not effect appropriations, therefore "R300 - All other assets or liabilities" is used.

Object Rationale: 0201-Travel -public servants " is used since operating expenses in this Scenario relate to travel for public servants. However, other economic objects under reporting object "020" could be used depending on the nature of the travel or relocation. To record the net impact on Cash Accounts, 5299 would be used. "5032 - Acquisition and settlement of travel advances" is used to the settlement of the travel advance.

2c) The advance is still outstanding at year-end but the travel has been completed.

  

AMT($)

FRA

AUTH

OBJ

DR Operating expenses

1,000

51321

F116

0201

CR Accrued liability

1,000

21113

R300

6299

Note: all claims where the travel has been completed by 31 March should be settled and accounted for prior to the preparation of the annual financial statements. However, in situations where this has not occurred, departments should record the expenses in the proper year depending on materiality.

FRA Rationale: Since the advance is outstanding and the exact amount of the settlement is not known, an accrued liability is established for the estimated amount. This entry will be reversed in the New Year.

Authority Rationale: Since the accountable advance was already charged against the applicable appropriation when it was given, no additional charge to an appropriation should be recorded to avoid a double charge. As a result F116 is used, (an F code has no affect on appropriations). Accrued liabilities do not affect appropriations so R300 is used.

Object Rationale: "0201 - Travel/public servants" is used since these operating expenses relate directly to expenses incurred by a departmental employee for government travel purposes. However, other economic objects under reporting object "020" could be used depending on the nature of the item. "6299 - Net Increase or Decrease to Other Liability Accounts" is used to show an increase in accrued liabilities.

2d) The advance is still outstanding at year-end since the travel will not be completed until the New Year.

  

AMT($)

FRA

AUTH

OBJ

DR Accountable advances

1,000

13314

H182

5049/5032

CR Accountable advances

1,000

13314

B11A/B12A

5049/5032

Note: The amount to be reflected in this entry should only be for the advances whereby the travel is to occur in the new year or straddles over two years. The purpose of the transaction is solely for authority purposes i.e. to ensure that the carry-over of any advances is charged to the correct authority at year-end. This entry would only be made in the department's books and no interdepartmental settlements (IS) would be sent to (or be recoverable from) PWGSC.

FRA rationale: There is no effect from an accrual accounting perspective. Therefore, a debit and credit is made to the same account for same amount.

Authority Rationale: Since the amount of the advance is still outstanding at year-end, the amount should not be charged to the operating or program vote B11A/B12A of the department in that year. Consequently, it must be removed and moved to a special authority, H182 - "Payments for accountable temporary advances (e.g. trip advances at year-end)". It should only reflect the advances paid out in the old year for travel to be completed in the New Year. It is to be reversed in the new year.

Object rationale: There is no effect on objects. Therefore the same object is debited and credited for the same amount. In this case either "5049- Other adjustments to advances" or "5032 - Acquisition and settlement of travel advances" may be used.

3) The advance carried over in journal entry 2c) must be reversed in the new fiscal year.

  

AMT($)

FRA

AUTH

OBJ

DR Accrued liability

1,000

21113

R300

6299

CR Operating expenses

1,000

51321

F116

0201

Note: The purpose of this entry is to remove the accrued liability from the books in the new year since the subsequent settlement of the claim will discharge the liability. When the claim is settled, either entry 2(a) or 2(b), as applicable, will be made.

FRA rationale: This is a straight reversal of entry 2c) and therefore the same FRAs are used.

Authority rationale: There is no impact on appropriations or authority since the appropriations were charged in the previous year when the advance was given.

Object rationale: The purpose of this entry from an object perspective is to reverse the entry made in the old year, as per 2c). To record the net impact on Other Liabilities, "6299 - Net Increase or Decrease to Other Liability Accounts" is used.

4) The advance carried over in journal entry 2d) must be reversed in the new fiscal year.

 

AMT($)

FRA

AUTH

OBJ

DR Accountable advances

1,000

13314

B11A/B12A

5049

CR Accountable advances

1,000

13314

F116

5049

FRA rationale: Since the Accountable advance account would have been rolled over automatically as part of the opening balances, this entry must reflect a Nil effect. Consequently, the debit and credit are to the same account for the same amount.

Authority rationale: The purpose of this entry is to charge the departmental program (B11A) or operating (B12A) vote since this advance should be settled in the current year. Although "H182" was used to record the advance in the old year, it should not be used in the new year entry. Instead, the credit is to "F116" since these advances will be accounted for at a later date when the claim is submitted for reimbursement.

Object rationale: There is no effect on objects. However, adjustments to advances which are neither the issuance nor the settlement of advances are recorded against 5049 "Other adjustments to advances".

Departmental Financial Statement Presentation and Disclosure Requirements

Standing advances and temporary advances are recorded in the government's chart of accounts as "Standing advances to employees" or "Accountable advances (temporary advances)". They are recorded on the departmental Statement of Financial Position as part of financial assets and may be combined for presentation purposes.

3.2.4 Debt Deletions

Introduction

Debt write-off involves deleting uncollectible debts owing to the Crown but not extinguishing the legal right of the Crown to collect the debts. The purpose of write-offs is to reduce the costs of maintaining records of accounts receivable that are valueless or uncollectible. Forgiveness and remission is a process that extinguishes a debt, releases the debtor from all liability, waives the Crown's right to reinstate the debt, and permits both the Crown and the debtor to remove the debt form their accounts. The major difference between the two is that forgiveness is used for non-budgetary transactions such as loans whereas remission is applied to budgetary expenditures only.

No write-off or forgiveness of a debt can occur without an appropriate authority.

  • If a debt results from a budgetary expenditure (i.e. accounts receivable, repayable contribution) then the debt can be written off under departmental authority.
  • If a debt results from a non-budgetary expenditure (i.e. loan receivable) then the write-off and forgiveness of the debt requires a charge to a budgetary vote and parliamentary authority.

There are two Scenario s with respect to debt deletions, those that do not require a charge to an appropriation and those that do.

No charge to a Budgetary Vote Required for Write-Off of Debt

1a) A trade accounts receivable is the result of the provision of goods/services. Since the expenditures related to the products that were sold were originally charged to a budgetary vote (operating, program, capital vote etc), there is no requirement to get it off the books via a budgetary vote.

1b) Repayable contributions are charged via a budgetary vote (Grant and Contributions appropriation)when payment is made to the recipient. To write it off, section 25.1 of the FAA would apply. A charge to an appropriation is not required thus an F code would be used, but ministerial approval would be required.

Anything charged to a budgetary vote can be written off under ministerial authority except those debts identified in Section 5 of the Debt Write-off regulations. In these cases approval of TB is required but no charge to budgetary vote is required.

Charge to a Budgetary Vote Required for Write-Off of Debt

2a) If the receivable to be deleted is recorded on the Statement of Financial Position through a Loan Vote (originally charged to a non-budgetary L vote i.e. a loan or an accountable advance), then departments must charge the write-off to a budgetary vote.

For those departments that issue advances through there own Working Capital Advance Appropriations such as DND and DFAIT, the accountable advance would have arisen as a result of the original transaction having been charged to a non-budgetary vote. For example an individual submits a travel claim for an amount, which is less than the amount advanced, which was charged to an accountable advance account (an asset account). If the amount was not collected on the settlement of the claim there is amount owing by the claimant which should be set up in departmental books as an accounts receivable. In order to write this amount off, the approval of TBS would be required as well as a charge to an appropriation. This is because the payment for which recovery is being suspended has never been charged a budgetary vote. It should be noted that since this Scenario is only relevant to a few departments this will not be explored in any further detail.

Generally speaking:

Non-Budgetary votes are those for expenditures that are to be recorded on the Statement of Assets/Liabilities of the Government of Canada as some kind of asset and are identified by the letter L in the Estimates. Examples include loans, accountable advances and investments in Crown Corporations.

Budgetary Votes are those for expenditures which are charged to either a program vote, operating vote, capital vote or grants & contribution (G&C) vote.

References

  • Debt Write-off Regulations, 1994 (pursuant to section 25(1) for the FAA)
  • FAA act, sections 23, 24 and 25

Scenario A - Write off of an Accounts Receivable

See the Accounts Receivable section of the manual.

Scenario B - Write-off of a Conditional Repayable Contribution

Same as a write-off for an Account Receivable. See Accounts Receivable section of the manual.

Scenario C - Write-off of a Loan Receivable

See the Loans Receivable - General section of the manual

Scenario D - Write-off of an Unconditional Repayable Contribution

See the Unconditional Repayable Contributions section of the manual.

3.3 Inventories

Introduction

Two types of inventories are used by departments:

1- Consumable Inventories are items of tangible property that are to be consumed in a future year directly or indirectly in the delivery of program outputs. They include all items such as equipment, spare parts and material that are held in stores and warehouses for issue at a later date to be used in future program delivery. They also include inventories held for resale within the Government of Canada. Consumable inventories exclude purchases that meet the capitalization criteria specified in TBAS 3.1 Capital Assets.

2- Inventories held for resale are physical items that will be sold (or used to produce a product which will be sold, e.g. raw materials) in the future in the ordinary course of business to parties outside of the Government reporting entity.

The majority of departments will have consumable inventories. There may be some revolving funds and a handful of departments that have inventories for resale.

Determining Inventory Quantities

The physical quantities in inventory may be determined by means of a periodic inventory system or a perpetual inventory system.

(a) Periodic Inventory System

An actual physical count of goods on hand is taken at the end of each period for which financial statements are to be prepared. The goods are counted, weighed or measured, then extended at unit costs to derive the inventory valuation. When a periodic inventory system is used, end-of-the period entries are required for (a) transferring opening inventory to expense and (b) recording the ending inventory.

For inventories held for resale, where the inventory records are maintained on a periodic inventory system, typically a purchases accounting is used to record acquisition. The balance in the inventory account (which represents the beginning inventory) is unchanged during the period. At the end of the accounting period a closing entry is made that debits the Inventory account for the ending inventory amount and credits the Inventory account for the beginning inventory amount. Cost of goods sold is determined by using the following calculation: Beginning Inventory + Net Purchases - Ending Inventory.

For consumable inventories, acquisitions of inventory throughout the year may be charged to an expense account. At the end of the year, the ending inventory would be recorded with an equivalent reduction in expenses.

It would not be practical for departments with sizeable inventories to do a physical count every year for the purpose of determining ending inventory. Where amounts are significant, central agencies need to know the expenses associated with inventory usage more frequently than annually. It is strongly recommended that departments maintain their records on a perpetual inventory system (see below)

(b) Perpetual Inventory System

It is particularly useful (a) to control and safeguard inventory and (b) to facilitate preparation of monthly statements. Furthermore, it is considered to be one of the essential characteristics of a good cost accounting system.

Purchases are debited directly to the inventory control account and concurrently entered into the detailed inventory records. As items of inventory are issued, the transaction is recorded in the accounts so that it carries a perpetual or continuing balance of the goods that should be on hand at each date.

Physical counts are usually made at least annually or on a continuous rotation basis (using sampling) when large inventories are involved to verify if there is any loss or error in the record keeping.

Discrepancies in Inventory Count

Regardless of the inventory control and records in place, loss and errors are always present. When a difference exists between the count and the perpetual inventory account balance, an entry is needed for reconciliation.

Note that in the periodic inventory system, the Inventory Over and Short account does not exist because there are no accounting records available against which to compare the physical count. Consequently, overages and shortages are buried in cost of goods sold (for inventories held for resale) or operating expenses (for consumable inventories).

References

  • TBAS 3.4 Inventories
  • CICA Handbook Sections 1520.04, 3030.05-.06, 3030.09-.10
  • PS 1500-47, 1500.49

Scenario A - Purchasing and Issuing Inventory Under a Perpetual Inventory System

Department purchases spare parts for vehicles for $50,000. Freight charges of $500 are included on the invoice. Assuming the Department uses a perpetual system, purchases & issues are recorded directly in the inventory account as they occur.

Journal Entries

1) To record the purchase of inventories

  

AMT($)

FRA

AUTH

OBJ

DR Inventories held for consumption

50,000

15110

B11A/B12A*

1267

DR Inventories held for consumption

500

15110

B11A/B12A*

0210

DR GST Refundable Advance Account

3,535

13392

G111

8171

CR Accounts payable

54,035

21111

R300

6299

See the Accounts Payable section of the manual to see related entries required for the settlement of the accounts payable. See the GST/HST section of the manual to see related entries required for the settlement of the GST.

FRA coding rationale: The purchase of consumable inventories is recorded as a debit to Inventories -Consumables. Delivery cost should be capitalized as part of the cost of the inventories. At this point the Department is being charged GST on the purchase of inventories, and must pay it. However, the Department will eventually recover this amount from Canada Customer and Revenue Agency (CCRA) and should record it as "13392 GST/HST Refundable advance accounts". The cost of the consumable inventories plus 7% GST would be set up as an accounts payable in the period since costs were incurred but not yet paid. Note: if the inventory had been held for resale, FRA "15120 - Inventories held for resale" would be used instead of 15110.

Authority coding rationale: B11/B12* Since this is a legitimate charge against an operating appropriation, it would be recorded against either B11A or B12A depending on whether the department has a program vote (B11A) or an operating vote (B12A). Please note that if the entity is a revolving fund the charge to the appropriation would be to A5XX. Since GST is not to be charged to a departmental appropriation, it is set up as an advance under a special authority, G111. There is no impact on authorities for the accounts payable so the code to be used would be "R300-All other assets and liabilities"

Object coding rationale: Object 1267 is used in this example since spare parts were purchased for the Department's vehicles. The appropriate object is used depending on the nature of the purchase. "0210 - Transportation of things not elsewhere specified" is used to record the freight charges. If a department's system cannot handle the use of more than one object code per asset, the freight charges may be charged to the same code as the asset. Since there is GST/HST payable, the GST must be reflected by using, "8171 - Payment of GST on purchases". " 6299 - Accounts Payable/Accrued Charges" is used to establish the accrual of the amount owing.

2) To record inventory issuances of $10,000 from inventory

  

AMT($)

FRA

AUTH

OBJ

DR Operating Expense

10,000

51321

F112

3452

CR Inventories held for consumption

10,000

15110

F312

3452

FRA coding rationale: The charge to 51321 - "Operating Expense" reflects the consumption of inventories used for program delivery and the reduction of 15110 - "Inventories held for consumption" is required to remove the items that have been consumed. Note if the inventory had been held for resale, the appropriate FRA would be "15210 - Inventories for resale" for the credit entry and "51324 - Cost of goods sold" for the debit entry.

Authority rationale: There is no impact on the authorities with respect to issuance of inventory since the appropriations was charged when the inventory was purchased in journal entry 1). Therefore, F codes are used in this transaction. "F112 - Inventory charged to program expenses" would be used for operating expenses. "F312 - reductions from (increases to) inventory balances" is used for the inventory account.

Object coding rationale: There is no impact on the objects with respect to the issuance of inventory since the objects were impacted at the time inventory was purchased in Journal entry 1). "3452 - Usage of inventory" is used on both sides of the entry.

Scenario B - Purchasing and Issuing Inventory Under a Periodic Inventory System

Department purchases spare parts for vehicles for $50,000. Freight charges of $500 are included on the invoice. Assuming the Department uses a periodic system, purchases & issues are recorded directly in the inventory account as they occur.

Journal Entries

1a) To record the purchase of consumable inventories

  

AMT($)

FRA

AUTH

OBJ

DR Operating Expense

50,000

51321

B11A/B12A*

1267

DR Operating Expense

500

51321

B11A/B12A*

0210

DR GST Refundable Advance Account

3,535

13392

G111

8171

CR Accounts payable

54,035

21111

R300

6299

See the Accounts Payable section of the manual to see related entries required for the settlement of the accounts payable. See the GST/HST section of the manual to see related entries required for the settlement of the GST.

FRA coding rationale: The purchase of consumable inventories is recorded as a debit to operating expenses. Alternatively, the inventories account (FRA 15110) could be debited to record the purchase of inventories.

Authority rationale: Same as Scenario A, entry 1).

Object coding rationale: Same as Scenario A, entry 1).

1b) To record the purchase of inventories held for resale

  

AMT($)

FRA

AUTH

OBJ

DR Cost of goods sold

50,000

51325

B11A/B12A*

1267

DR Cost of goods sold

500

51325

B11A/B12A*

0210

DR GST Refundable Advance Account

3,535

13392

G111

8171

CR Accounts payable

54,035

21111

R300

6299

FRA coding rationale: The purchase of inventories held for resale is recorded as a debit to cost of goods sold. Alternatively, the inventories account (FRA 15210) could be debited to record the purchase of inventory.

Authority rationale: Same as entry 1a).

Object coding rationale: Same as entry 1a).

2) To record the issuance of inventories

No entry performed.

3a) To adjust consumable inventory balance after an inventory count; inventory balance determined to be $5,000 (assume opening balance was $2,000)

   

AMT($)

FRA

AUTH

OBJ

DR Inventories held for consumption

5,000

15110

F312

3452

CR Operating Expense

3,000

51321

F112

3452

CR Inventories held for consumption

2,000

15110

F312

3452

FRA coding rationale: The ending balance of inventory is recorded as an asset while the opening balance is removed (alternatively entry could be done on a net basis). The operating expense is reduced to reflect inventory items previously expensed but not actually consumed. In the case where purchases of inventory were recorded to the inventory account (FRA 15110) instead of operating expense, the same FRAs would be used but the direction of the transactions would change. The inventory account would be credited and the operating expense debited to reflect the inventories consumed during the period.

Authority rationale: Same as Scenario A, entry 2).

Object coding rationale: Same as Scenario A, entry 2).

3b) To adjust inventory held for resale balance after an inventory count; inventory balance determined to be $5,000 (assuming opening inventory balance $2,000)

   

AMT($)

FRA

AUTH

OBJ

DR Inventories held for resale

5,000

15210

F312

3452

CR Cost of goods sold

3,000

51325

F112

3452

DR Inventories held for resale

2,000

15210

F312

3452

FRA rationale: The ending balance of inventory is recorded as an asset while the opening balance is removed (alternatively entry could be done on a net basis). The cost of goods sold is reduced to reflect inventory items previously expensed but not actually sold. In the case where purchases of inventory were recorded to the inventory account (FRA 15210) instead of cost of goods sold, the same FRAs would be used but the direction of the transactions would change. The inventory account would be credited and the cost of goods sold debited to reflect the inventories sold during the period.

Authority rationale: Same as Scenario A, entry 2).

Object coding rationale: Same as Scenario A, entry 2).

Scenario C - Inventory Count is lower than records indicate - Write-off required

A department performs a physical count of its inventory under a perpetual inventory system and determines that there are fewer inventory items present than there should be according to the records. In this case the department must write off the portion of the inventory that is no longer available to it. Note that shortages would not be detected under a periodic inventory system as a current record of the inventory balance is not maintained. Any lost inventory would be charged to cost of goods sold (for inventories for resale) or operating expense (for consumable inventories) as part of the year-end adjustment to record the ending inventory balance.

A physical count determined that the count was lower than the perpetual inventory records balance by $1,000.

Journal Entries

1) To record the write-off

  

AMT($)

FRA

AUTH

OBJ

DR Losses on write-offs and write-downs

1,000

51733

F112

3452

CR Inventories held for consumption

1,000

15110

F312

3452

FRA coding rationale: Since there were fewer items found as a result of the inventory count, a loss (expense) will result. When a discrepancy is found between the inventory count and inventory records, the perpetual inventory records must be adjusted for the shortages (loss). If the inventory had been held for resale, the appropriate FRA would be 15210.

Authority rationale: This is strictly and accrual accounting entry, there is no impact on authorities, therefore F codes are used.

Object coding rationale: This is strictly and accrual accounting entry, there is no impact on objects, therefore 3452 is used on both sides of the transaction.

Scenario D - Inventory Count is higher than records indicate - Record Overage

When the department performs a physical count of its inventory, occasionally there is more inventory present than there should have been according to the Perpetual Inventory account balance. Such overages are usually the result of a record keeping error. Note that overages would not be detected under a periodic inventory system as a current record of the inventory balance is not maintained. Any excess inventory would be result in a reduction to cost of goods sold (for inventories for resale) or operating expense (for consumable inventories) as part of the year-end adjustment to record the ending inventory balance.

A physical count determined that the count was higher than the perpetual inventory account balance by $800.

Journal Entries

1) To record the overage

 

AMT($)

FRA

AUTH

OBJ

DR Inventories held for consumption

800

15110

F312

3452

CR Operating expense

800

51321

F112

3452

FRA coding rationale: Since there were more items found as a result of the inventory count, a reduction in operating expenses would be recorded. The perpetual inventory records must be increased to reflect the overage. If the inventory had been held for resale, the debit entry would be to FRA "15210 - inventories held for resale" with the credit entry to FRA "51325 - Cost of goods sold".

Authority rationale: This is strictly and accrual accounting entry, there is no impact on authorities, therefore F codes are used.

Object coding rationale: This is strictly and accrual accounting entry, there is no impact on objects, therefore 3452 is used on both sides of the entry.

Scenario E - Inventory Obsolescence - Write-off required

A physical count determined that the items worth $2,000 were obsolete.

Journal Entries

1) To record inventory obsolescence for both periodic and perpetual inventory systems

  

AMT($)

FRA

AUTH

OBJ

DR Losses on write-offs and write-downs

2,000

51733

F112

3452

CR Inventories - consumable

2,000

15110

F312

3452

FRA Coding Rationale: When inventory is determined to be obsolete, it should be written off. To record inventory obsolescence, the inventories account must be reduced by the dollar amount of the obsolescence and a loss recorded. If the inventory was held for resale, the credit entry would be to FRA 15210.

Authority rationale: This is strictly and accrual accounting entry, there is no impact on authorities, therefore F codes are used.

Object coding rationale: This is strictly and accrual accounting entry, there is no impact on objects, therefore 3452 is used on both sides of the entry.

Departmental Financial Statement Presentation and Disclosure Requirements

Inventories are to be classified as a non-financial asset on the Statement of Financial Position. If a department has a significant value of inventories held for resale, it may choose to report these as a financial asset.

3.4 Prepayments (including Prepaids and Deferred Charges)

Introduction

Prepayments

Prepayments are comprised of contract payments before the receipt of the goods and /or services, advance payments under the terms of contribution agreements, prepaid expenses and deferred charges.

Contract Payments

Contract advances made prior to the receipt of goods and services shall be charged to expense in the period in which all the eligibility criteria have been met or the goods and services received as applicable.

Advance Payments under Contribution Agreements

In accordance with the Policy on Transfer Payments, advance payments of the government's share of allowable expenditures under a contribution agreement may be made where it is essential to the achievement of the program objectives and is specifically provided for in the agreement. As the disbursement is for expenses to be incurred in the future, the payment is recorded as a prepayment and is recognized as an expense once the eligible costs have been incurred.

Prepaid Expenses and Deferred Charges

A prepaid expense or a deferred charge is an allocation to current and/or future periods of past costs where benefits will occur in the current and/or future periods. The distinction between the two is the duration of the benefits to be realized; prepaid expenses provide future benefits over a shorter period of time than do deferred charges.

It should be noted that all research and development costs will be expensed in the period in which they are incurred. Costs related to in-house developed software will be accounted for in accordance with the provisions of Treasury Board Accounting Standard 3.1.1 on Software and not as a component of research and development costs.

Amortization

Government departments have many expenses that they incur on a regular basis. Rent, utilities, subscriptions, payments in lieu of taxes and many other expenses must be paid monthly, or on some other cyclical basis. When expenses are prepaid, an asset is recognized for the amount paid. This is charged to expenses gradually as the prepaid expense is consumed.

Where appropriate, amortization of any deferred charge or prepaid expense will be charged as an expense on a systematic and rational basis related to use.

Write-offs

The balance of any prepaid expense or deferred charge shall be written off to expense in the period that no future benefits remain.

References

  • TBAS 3.3 Prepayments
  • TBAS 3.1.1 Software
  • CICA 3040, 3070, 3450
  • Section 34(b) of the FAA

Scenario A - Prepaid Expenses

A government department rents space in an office building for $25,000 per month. However, the owner of the building demands that all tenants of the building prepay at least a year's rent. At the time the department pays the owner the desired amount of prepaid rent, there are four months left in the fiscal year.

Journal Entries

1) To record the cost of the prepaid rent.

 

AMT($)

FRA

AUTH

OBJ

DR Prepaid Expenses- Rent

300,000

14110

B11A/B12A

0511

DR GST refundable advance

21,000

13392

G111

8171

CR Accounts Payable

321,000

21111

R300

6299

FRA Coding Rationale: Since the department paid for a years' rent, it must record an asset for the amount that it paid. "14110 - Prepaid Expenses" is used to record the asset. A payable is set up for the amount owing. GST is payable on rent (excludes rent paid to PWGSC) or is included as part of rent charges and hence should be recorded to the GST refundable advance account.

Authority Coding Rationale: It is assumed that the rent expense will be charged to the Operating Vote (B12A), but it could also be charged to the Program Vote (B11A) depending on the Department's vote structure. Since Accounts Payable does not affect appropriations, R300 is used. Since GST is not to be charged to a departmental appropriation, it is set up as an advance under a special authority, G111.

Object Coding Rationale: The objects are affected when the transaction is made, so "0511 Rental of office buildings" is used to record the prepaid rent, because the rent is for an office building. "6299 - Net Increase or Decrease to Other Liability Accounts" is used to establish an account payable for the amount owing. The GST must be reflected by using, "8171 - Payment of GST on purchases"

2) To record the rent consumed by the end of the fiscal year.

  

AMT($)

FRA

AUTH

OBJ

DR Rent Expense

100,000

51321

F119

3459/0511

CR Prepaid Expenses

100,000

14110

F313

3459/0511

FRA Coding Rationale: At year-end, the department must record an expense equivalent to 4 months of rent $100,000 (4 months x $25,000) and reduce the prepaid expense (asset) by an equivalent amount. Please note if the monthly rent is material to the operations of the Department the expense could be recorded on a monthly basis. In this case the Rent expense would be debited for $25,000 every month with a corresponding credit to Prepaid expenses.

Authority Coding Rationale: This is a strictly an accrual transaction, there is no impact on the appropriations. Therefore, F codes are used.

Object Coding Rationale: This is strictly an accrual transaction with no impact on the objects as they are impacted in the previous transaction. Standard object 12 does not impact good, services or transfer payments therefore, either "3459 - Amortization of other asset accounts" or "0511 Rental of office buildings" may be used on both sides of the entry.

Scenario B - Advance Payment under a Contribution Agreement

On April 1, the Department makes an advance payment to an individual for research and development in the amount of $50,000. The contribution is to cover eligible expenses that will be incurred over the next 4 months.

Journal Entries

1) To record the prepayment.

  

AMT($)

FRA

AUTH

OBJ

DR Prepayments of Transfers

50,000

14120

B15A/B11A

2041

CR Accounts Payable

50,000

21111

R300

6299

FRA Coding Rationale: Since the payment was made in advance of the period for which the eligible costs are to be incurred, the payment must be recorded as an asset. A payable is set up for the amount owing.

Authority Coding Rationale: In this example, the grant could be charged to either B15A(*) - Grant and Contribution vote or B11A - Program Vote. Since Accounts Payable does not affect appropriations, R300 is used.

Object Coding Rationale: "2041 Transfer Payments to persons for research and development (incl. Scholarships)". "6299 - Net Increase or Decrease to Other Liability Accounts" is used to establish an account payable for the amount owing.

2) Eligible costs are incurred

 

AMT($)

FRA

AUTH

OBJ

DR Transfer Payment Expense

50,000

51119

F119

3459/2041

CR Prepayments of Transfers

50,000

14120

F313

3459/2041

FRA Coding Rationale: Once the eligibility criteria are met an expense is recorded and the prepayment (the asset) is reduced.

Authority Coding Rationale: This is strictly an accrual transaction. Since the applicable appropriation was previously charged when the payment was made, there is no further effect on appropriations. Consequently, "F" codes are used.

Object Coding Rationale: This is strictly an accrual transaction with no impact on the objects as they are impacted in the previous transaction. Standard object 12 does not impact good, services or transfer payments therefore, either "3459-Amortization of other asset accounts" or "2041 Transfer Payments to persons for research and development (incl. Scholarships)" is used on both sides of the entry.

Alternative Journal Entries

Departments may also account for a prepayment by recording the full charge as an expense and then calculating the prepayment at each month or year-end.

1) To record the transfer payment.

  

AMT($)

FRA

AUTH

OBJ

DR Transfer payment expense

50,000

51119

B15A/B11A

2041

CR Accounts payable

50,000

21111

R300

6299

2) To record the prepayment at month-end or year-end

  

AMT($)

FRA

AUTH

OBJ

DR Prepayments of transfers

50,000

14120

F999

3459/2041

CR Transfer payment expense

50,000

51119

F999

3459/2041

FRA, Authority and Object coding rationale same as above.

Scenario C - Payments made in advance of receiving goods.

The Department enters into a contract for goods where by they are required to make a payment in advance of receiving those goods in accordance with section 34(b) of the FAA. The amount of the prepayment is $21,400 (including GST).

Journal Entries

1) To record the prepayment.

  

AMT($)

FRA

AUTH

OBJ

DR Prepaid expense

20,000

14110

B11A/B12A*

1xxx

DR GST refundable advance

1,400

13392

G111

8171

CR Accounts Payable

21,400

21111

R300

6299

FRA Coding Rationale: Since the department paid for goods in advance, it must record an asset for the amount that it paid. "14110-Prepaid Expenses" is used to record the asset. A payable is set up for the amount owing. GST is recorded to the GST refundable advance account.

Authority Coding Rationale: It is assumed that the prepaid expense will be charged to the Operating Vote (B12A), but it could also be charged to the Program Vote (B11A) depending on the Department's vote structure. Since Accounts Payable does not affect appropriations, R300 is used. Since GST is not to be charged to a departmental appropriation, it is set up as an advance under a special authority, G111.

Object Coding Rationale: The objects are affected when the transaction is made, depending on the nature of the good the appropriate code would be used. "6299-Net Increase or Decrease to Other Liability Accounts" is used to establish an account payable for the amount owing. The GST must be reflected by using "8171-Payment of GST on purchases"

2) Goods are received.

  

AMT($)

FRA

AUTH

OBJ

DR Operating Expense

20,000

51119

F119

3459

CR Prepaid Expenses

20,000

14110

F313

3459

FRA Coding Rationale: Once the goods are received the department must record an expense $20,000 and reduce prepaid expense (asset) by an equivalent amount.

Authority Coding Rationale: This is a strictly an accrual transaction. Since the applicable appropriation was previously charged when the payment was made, there is no further effect on appropriations. Consequently, "F" codes are used.

Object Coding Rationale: This is strictly an accrual transaction with no impact on the objects as they are impacted in the previous transaction. Standard object 12 does not impact good, services or transfer payments therefore, "3459-Amortization of other asset accounts" is used on both sides of the entry.

Departmental Financial Statement Presentation and Disclosure Requirements

Prepaid expenses, deferred charges and prepayments will be reflected on the Statement of Financial Position as non-financial assets under the heading Prepayments. Major items should be shown separately. Please note that this in variance with the current PS 3410 which records transfer payments in advance as a financial asset.

3.5 Capital Assets

Capital Assets are tangible assets that are purchased, constructed, developed or otherwise acquired and:

  1. are held for use in the production or supply of goods, the delivery of services or to produce program outputs;
  2. have a useful life extending beyond one fiscal year and are intended to be used on a continuing basis; and,
  3. are not intended for resale in the ordinary course of operations.

For the government, capital assets have the following characteristics:

  1. beneficial ownership and control clearly rest with the government;
  2. the asset is used to achieve government objectives; and,
  3. risks and benefits of ownership clearly rest with the government (as is the case of capital leases).

For government accounting purposes capital assets generally include all assets treated as capital assets under Public Sector Accounting Board recommendations and generally accepted accounting principles in Canada, having an initial cost of $10,000 or more. Departments may choose a lower threshold value.

The cost of property, equipment and other capital assets including betterments is essentially a long-term prepayment of an expense in advance of the use of an asset. As the economic service life of the asset expires, the cost of the asset is systematically allocated to operations as an expense called "amortization".

References

  • TBAS 3.1 Capital Assets
  • TBAS 3.1.1 Software
  • PS 3150
  • CICA 3060

3.5.1 Tangible Capital Assets

Introduction

Tangible capital assets are a significant economic resource managed by governments and a key component in the delivery of many government programs. Tangible capital assets include such diverse items as land, heritage buildings, military assets, infrastructure assets, purchased computer software, in-house developed software, computer hardware, assets acquired by capital leases or by donations, etc.

Betterments versus Repairs

The cost incurred to enhance the service potential of a capital asset is a betterment. Service potential may be enhanced when there is an increase in the previously assessed physical output or service capacity, associated operating costs are lowered, the useful life is extended, or the quality of output is improved. The cost incurred in the maintenance of the service potential of a capital asset is a repair, not a betterment.

Write-down

A department would write down the cost of a tangible capital asset when it can demonstrate that the reduction in future economic benefits is expected to be permanent. Conditions that may indicate that the future economic benefits associated with a tangible capital asset have been reduced and a write-down is appropriate include:

  1. a change in the extent to which the asset is used;
  2. a change in the manner in which the asset is used;
  3. significant technological developments;
  4. physical damage;
  5. removal of the asset from service;
  6. a decline in or cessation of, the need for the services provided by the asset;
  7. a decision to halt construction of the asset before it is complete or in usable or saleable condition;
  8. a change in the law or environment affecting the extent to which the asset can be used.

PS 3150.36

References

  • TBAS 3.1 - Capital Assets
  • TBAS 3.1.1 - Software
  • TBAS 1.2
  • CICA 3060
  • PS 3150

Scenario A - Purchase of a Tangible Capital Asset

The Department purchased and received a vehicle for $23,500 on January 31, 2000. Delivery costs are an additional $500. Total GST is $1,680. Payment does not take place until the following fiscal year, April 15, 2000. The vehicle has a useful life of 10 years with no estimated residual value.

Journal Entries

These entries assume the vehicle is charged directly to the asset FRA. See alternative entry if amounts are to be initially charged to an operating expense and then re-allocated to a capital asset FRA.

1) To record the purchase and receipt of the vehicle on January 31, 2000.

  

AMT($)

FRA

AUTH

OBJ

DR Vehicle

23,500

16133

B14A(*)

1261

DR Vehicle

500

16133

B14A(*)

0210

DR GST Refundable Advance

1,680

13392

G111

8171

CR Accounts payable

25,680

21111

R300

6299

FRA coding rationale: The Department must capitalize this asset as a debit to the capital asset (vehicle) account, since it is above the $10,000 threshold. Delivery costs should be capitalized as part of the laid down cost of the asset. At this point the Department is being charged GST on the vehicle, and must pay it to the vendor. However, as the Department will eventually recover this amount from Canada Customs and Revenue Agency (CCRA), they should record it as an asset in "13392 GST/HST Refundable advance accounts". Since the Department has not paid for the vehicle, a liability must be recorded for the amount owing.

Authority coding rationale: (*) In this example it is assumed this purchase would be charged to the capital vote. However, depending on the department and the asset purchased, the following authority codes could be used: B11A - Program Vote, B12A Operating Vote, or A131 Spending of amounts equivalent to proceeds from disposal of surplus Crown assets. Since GST is not to be charged to a departmental appropriation, it is set up as an advance under a special authority, G111. There is no impact on authorities for the accounts payable so the code to be used would be "R300-All other assets and liabilities"

Object coding rationale: As economic objects are recorded on an expenditure basis, the economic object is recorded at this point. Economic object 1261 is used in this example since the purchase was a motor vehicle. The appropriate economic object is used depending on the nature of the purchase. Economic object "0210-Transportation of things not elsewhere specified" would be used to record freight. However, where a department's system cannot handle the use of more than one economic object for an asset, the cost of freight may be coded to the same object code as the asset. Since there is GST/HST payable, the GST must be reflected by using, "8171-Payment of GST on purchases". "6299-Net Increase or Decrease to Other Liability Accounts" is used to establish the accrual of the amount owing.

Alternative set of entries: Departments may choose to record the purchase as an operating expense and reallocate amounts to an asset FRA. This method involves two entries: 1) recording the purchase as operating expense with all objects, 2) reallocating the amounts for all objects to an asset class.

First entry: To record the purchase and receipt of the vehicle on January 31, 2000.

  

AMT($)

FRA

AUTH

OBJ

DR Operating Expenses

23,500

51321

B11A/B12A

1261

DR Operating Expenses

500

51321

B11A/B12A

0210

DR GST Refundable Advance

1,680

13392

G111

8171

CR Accounts payable

25,680

21111

R300

6299

Coding rationale - there is no change in the coding from entry 1, except for the use of the operating expense FRA instead of the asset FRA.

Second entry: To reallocate amounts for all objects.

  

AMT($)

FRA

AUTH

OBJ

DR Vehicle

23,500

16133

B11A/B12A(*)

1261/3425

DR Vehicle

500

16133

B11A/B12A(*)

0210/3425

CR Operating Expenses

500

51321

B11A/B12A

0210/3425

CR Operating Expenses

23,500

51321

B11A/B12A

1261/3425

Coding rationale - (*)There is no impact on the authority code unless it is moved to a capital appropriation (B14A). Object Coding: Departments may either use "3425 - Reallocation of expenditures/costs within a department" for all lines of the transaction or the asset and freight object codes used in entry 1. If more than one object is used, the same object must be used in the same amount for both the debit and credit sides of the entry. Note: if the transaction involves revenue credited to the vote, the economic object to use is "3717 - Recoveries of expenditures/costs within a department" for the credit side of the entry and "3425 - Reallocation of expenditures/costs within a department" for the debit side of the entry.

3) To record the amortization expense and the accumulated amortization at February 28, 2000.

  

AMT($)

FRA

AUTH

OBJ

DR Amortization Expense

200

51433

F111

3451

CR Accumulated Amortization

200

16233

F311

7061/7099

FRA coding rationale: It is necessary to allocate the cost of the asset as an expense in a rational and systematic manner over those periods expected to benefit from the use of the asset. Using straight-line amortization, the monthly charge to amortization expense and accumulated amortization would be $200 ($24,000/10yrs = $2,400/year; $2,400/12mths = $200/month).

Authority coding rationale: Expenditures for the acquisition were charged to an appropriation in the previous journal entry, therefore the appropriations are not affected in this journal entry. To assist with departmental reconciliations, F codes are used for these non-appropriated amounts. "F111 - Expenditures previously charged to appropriations/Amortization expenses for capital assets" is used for amortization expense and "F311 - Non-appropriated amounts added to or deducted from asset balances/ Increases (decreases) to accumulated amortization of capital assets" is used for accumulated amortization.

Object coding rationale: As these are non-cash (non-expenditure) items, they have no effect on economic objects." 7061 - Accumulated amortization on capital assets" is used to capture accumulated amortization. Alternatively, "7099 - Net increase or decrease in other transactions" may also be used. "3451 - Amortization expense for capital assets" is used to capture amortization expense.

4) To record payment of vehicle on April 15, 2000.

See section on Accounts Payable for related entries.

Scenario B - Betterment

A betterment should be capitalized if the amount exceeds the department's threshold for betterments. The maximum threshold for betterments is $10,000. A department may choose a lower threshold. If the amount of the betterment is less the department's threshold for betterments, then the department should expense it.

The Department owns a building with an original cost of $250,000 and a useful life of 40 years. After 20 years the Department decides to do a major renovation that will increase the amount of usable space. The renovation work is contracted to one company and has a cost of $75,000. At this point the net book value of the building is $125,000 ($250,000/40yrs = $6,250/yr) ($6,250/yrx20yrs = 125,000) ($250,000-$125,000 = $125,000)

Journal Entries

1) Record the betterment

  

AMT($)

FRA

AUTH

OBJ

DR Buildings

75000

16112

B14A(*)

1340

DR GST Refundable Advance

5250

13392

G111

8171

CR Accounts Payable

80,250

21111

R300

6299

FRA coding rationale: Since the renovation is a betterment, it is added to the cost of the building i.e. capitalized as part of the building cost. The new value of the building is $200,000 ($125,000+$75,000). The amortization expense on the building will now increase to $10,000 ($200,000/20 years).

Authority coding rationale: (*) In this example it is assumed this purchase would be charged to the capital vote. However, depending on the department and the asset purchased, the following authority codes could be used: B11A - Program Vote, B12A Operating Vote, or A131 Spending of amounts equivalent to proceeds from disposal of surplus Crown assets. There is no impact on the authority side for the accounts payable but as the system requires that a code be used, it would be "R300 - All other assets and liabilities"

Object coding rationale: As economic objects are recorded on an expenditure basis, the economic object is recorded at this point, and not when the cash (disbursement) is paid out. Economic object 1340 is used (in this example) since the renovation was on a building. If the details of the renovation expenditures are provided on the contractor's invoices and the department's system can accommodate the use of more than one economic object per asset class, it would be preferable to use the different economic object codes depending on the nature of the purchase (as done in Scenario C). "6299 - Net Increase or Decrease to Other Liability Accounts" is used to record the accrual of the amount owing.

Scenario C - Betterment - Work Managed by Department

Same details as in Scenario B except the department is contracting the work. The cost of the betterment include: wages, freight, architect fees, rentals of machinery; materials, equipment and fixtures. An alternative entry involving the detailed re-allocation of all objects is shown for the second and third entries.

1) Record the $25,000 of expenses incurred during the first month

   

AMT($)

FRA

AUTH

OBJ

DR Operating expense

10,000

51321

B11A/B12A

0101

DR Operating expense

3,000

51321

B11A/B12A

0421

DR Operating expense

500

51321

B11A/B12A

0533

DR Operating expense

7,900

51321

B11A/B12A

1141

DR Operating expense

2,000

51321

B11A/B12A

1219

DR Operating expense

1,600

51321

B11A/B12A

1246

DR GST Refundable Advance

1,750

13392

G111

8171

CR Accounts Payable

26,750

21111

R300

6299

FRA coding rationale: The expenses are charged to operating expenses rather than being charged directly to the building asset account.

Authority coding rationale: It is assumed the expenses would be charged to B11A - Program Vote or B12A Operating Vote. Since GST is not to be charged to a departmental appropriation, it is set up as an advance under a special authority, G111. There is no impact on authorities for the accounts payable so the code to be used would be "R300-All other assets and liabilities"

Object coding rationale: The economic object code matching each type of purchase is recorded.

2) At month-end, transfer expenses to work-in-process account

   

AMT($)

FRA

AUTH

OBJ

DR Work in process

25,000

16319

F152

3425

CR Operating expense

25,000

51321

F152

3425

FRA coding rationale: At month-end the expenses incurred are transferred to a work in process asset account. As the work has not yet been completed, the expenses may not be charged to the building account as amortization should not be recorded against the expenses until the work is substantially complete.

Authority coding rationale: These expenses have already been charged against an authority hence there is no effect on appropriations. "F152 - Reallocation of capital asset expenditures" is used.

Object coding rationale: Object information was recorded at the time the expenses were incurred, hence "3425 - Reallocation of expenditures/costs within a department" is used on both sides of the entry. Note: if revenue credited to the vote is involved, then the object code on the credit side would change to "3717 - Recoveries of expenditures/costs within a department".

Alternatively, a department may choose to record the details by object. In this case the transaction would be as follows:

     

AMT($)

FRA

AUTH

OBJ

DR Work in process

10,000

16319

F152

0101

DR Work in process

3,000

16319

F152

0421

DR Work in process

500

16319

F152

0533

DR Work in process

7,900

16319

F152

1141

DR Work in process

2,000

16319

F152

1219

DR Work in process

1,600

16319

F152

1246

CR Operating expense

10,000

51321

F152

0101

CR Operating expense

3,000

51321

F152

0421

CR Operating expense

500

51321

F152

0533

CR Operating expense

7,900

51321

F152

1141

CR Operating expense

2,000

51321

F152

1219

CR Operating expense

1,600

51321

F152

1246

If this alternative is used, the same object code must be used for the same amounts on both the debit and credit sides of the entry.

3) Once all work complete, (assume final costs were $75,000):

   

AMT($)

FRA

AUTH

OBJ

DR Buildings

75,000

16112

F152

3425

CR Work in process

75,000

16319

F152

3425

FRA coding rationale: Once all renovation work has been completed,the costs are transferred from a work in process asset account to a capital asset account. These costs will now be amortized along with the remaining costs of the building. However, if the betterment had a significantly different useful life than that of the building, it should be amortized separately.

Authority coding rationale: : It is assumed that there is no impact on authorities hence "F152- Re-allocation of capital asset expenditures" is used. However, a department may choose the reallocate the expenses from an operating authority to a capital authority, in which case B11A/B12A and B14A would be used.

Object coding rationale: Object information was recorded at the time the expenses were incurred, hence "3425 - Reallocation of expenditures/costs within a department" is used on both sides of the entry. Note: if revenue credited to the vote is involved, then the object code on the credit side would change to "3717- Recoveries of expenditures/costs within a department".

Alternatively, a department may choose to record the details by object. In this case the transaction would be as follows:

   

AMT($)

FRA

AUTH

OBJ

DR Buildings

10,000

16112

F152

0101

DR Buildings

3,000

16112

F152

0421

DR Buildings

500

16112

F152

0533

DR Buildings

7,900

16112

F152

1141

DR Buildings

2,000

16112

F152

1219

DR Buildings

1,600

16112

F152

1246

CR Work in process

10,000

16319

F152

0101

CR Work in process

3,000

16319

F152

0421

CR Work in process

500

16319

F152

0533

CR Work in process

7,900

16319

F152

1141

CR Work in process

2,000

16319

F152

1219

CR Work in process

1,600

16319

F152

1246

If this alternative is used, the same object must be used for the same amounts on both the debit and credit sides of the entry.

Scenario D - Disposal via Sale of Tangible Capital Asset

On May 1, 2000, the Department purchased informatics-hardware for $32,000 with an estimated service life of five years and an estimated residual value after five years of $2,000. The Department uses straight-line amortization and decides to sell the asset on November 1, 2004, for $8,000.

Alternative entries using a suspense account for proceeds from asset sales, and involving two entries in each case are shown below.

Journal Entries

1a) Record the disposal of the asset and related gain in November 2004.

   

AMT($)

FRA

AUTH

OBJ

DR Cash in the hands of the dept awaiting deposit to RG

8,000

11125

R300

5299

DR Accumulated Amortization - informatics hardware

27,000

16222

D321

4843

CR Informatics hardware

32,000

16122

D321

4843

CR Gain from disposal of equipment

3,000

42411

D321

4843

FRA coding rationale: The Department must record the proceeds received ($8,000) by debiting Cash in the hands of the department awaiting deposit to the RG. The equipment and related accumulated amortization must be written off the books. In this case the net of these three items results in a gain which will be credited to the non-tax revenue FRA. The accumulated amortization is $27,000 and is calculated as follows ($32,000-2,000 = $30,000) ($30,000/60 mths = $500/mth) (54 mths x $500 = $27,000)

Authority coding rationale: There is no authority impact for the cash received, R300 is used. "D321- Proceeds from disposal of crown assets" is used for the remaining debits and credits ($27,000-$32,000-$3,000) as it reflects the allocation of the proceeds of $8,000 received by the Department.

Object coding rationale: To record the net impact on Cash Accounts, 5299 would be used. As economic objects are recorded on an expenditure basis, one object should be used to record the proceeds from sale. "4843 - Sales of surplus Crown assets to outside parties".

Alternative entries: There is an alternative method to record the sale of an asset that uses two entries with a suspense account in the middle

First entry:

   

AMT($)

FRA

AUTH

OBJ

DR Cash in the hands of the dept awaiting deposit to RG

8,000

11125

R300

5299

CR Suspense acct: Proceeds from Asset Sale

8,000

21627

D321

4843

Second entry:

   

AMT($)

FRA

AUTH

OBJ

DR Suspense acct: contra proceeds

8,000

21627

F999

7099/3425

DR Accumulated Amortization - informatics hardware

27,000

16222

F999

7099/3425

CR Gain from disposal of equipment

3,000

42411

F999

7099/3425

CR Informatics hardware

32,000

16122

F999

7099/3425

Rationale: The FRAs used are the same with the exception of the addition of a suspense account (FRA 21627). All the authority and object information are in the first entry, while the second entry provides the accrual accounting data, while having a nil impact on the authority and object information. To ensure a nil effect on economic objects, the same code, "7099-Net Increase or Decrease in Other Transactions" or "3425-Reallocation of expenditures/costs within a department" should be used throughout the transaction.

1b) Assuming the circumstance is the same as above except the Department decides to sell the asset for $3,000, on November 1, 2004. Record the disposal of the asset and the related loss.

  

AMT($)

FRA

AUTH

OBJ

DRCash in the hands of the Dept awaiting deposit to RG

3,000

11125

R300

5299

DR Accumulated Amortization - informatics hardware

27,000

16222

D321

4843

DR Loss on disposal of physical assets

2,000

51511

D321

4843

CR Informatics hardware

32,000

16122

D321

4843

FRA coding rationale: The Department must record the proceeds received ($3,000) by debiting Cash in the hands of the department awaiting deposit to the RG. The equipment and related accumulated amortization must be written off the books. In this case the net of these three items results in a loss which will be debited to an expense FRA.

Authority coding rationale: There is no authority impact for cash received, but the system requires that a code be used. In this case R300 is used. "D321- Proceeds from disposal of crown assets" is used for the remaining debits and credits ($27,000-$32,000+$2,000) as it reflects the allocation of the proceeds of $3,000 received by the Department.

Object coding rationale: As economic objects are recorded on an expenditure basis, one object is used to record the proceeds from sale "4843-Sales of surplus Crown assets to outside parties". To record the net impact on Cash Accounts, 5299 would be used.

Alternative entries: There is an alternative method to record the sale of an asset which uses two entries with a suspense account in the middle

First entry:

  

AMT($)

FRA

AUTH

OBJ

DR Cash in the hands of the dept awaiting deposit to RG

3,000

11125

R300

5299

CR Suspense acct: Proceeds from Asset Sale

3,000

21627

D321

4843

Second entry:

  

AMT($)

FRA

AUTH

OBJ

DR Asset Sale - Contra Proceeds awaiting deposit to RG

3,000

21627

F999

7099/3425

DR Accumulated Amortization - informatics hardware

27,000

16222

F999

7099/3425

DR Loss on disposal of physical assets

2,000

51511

F999

7099/3425

CR Informatics hardware

32,000

16122

F999

7099/3425

Rationale: The FRAs used are the same with the exception of the addition of a suspense account (FRA 21627). All the authority and object information are in the first entry, while the second entry provides the accrual accounting data, while having a nil impact on the authority and object information. To ensure a nil effect on economic objects, the same code, "7099 - Net Increase or Decrease in Other Transactions" or "3425 - Reallocation of expenditures/costs within a department" should be used throughout the transaction.

Scenario E - Disposal via Trade-In

It should be noted that there are restrictions on what moveable assets departments can trade-in (e.g. passenger cars, wagons and light commercial trucks) and whether departments can trade these assets for similar or different types of assets (see the Material Management Policy and Motor Vehicle Policy: /pubs_pol/dcgpubs/materielmanage/siglist_eng.asp).

The Department trades in an old piece of research equipment for a new piece of research equipment. The old equipment has an accumulated amortization of $7,000 and an original cost of $8,000. The department receives $600 on the trade in. The new equipment has a value of $10,000.

Journal Entries

1) Record the trade-in

 

AMT($)

FRA

AUTH

OBJ

DR Other equipment (new)

10,000

16129

B14A(*)

1219

DR Accumulated Amortization equipment (old)

7,000

16229

D321

4843

DR Loss on disposal of physical assets

400

51511

D321

4843

DR GST refundable advance account

658

13392

G111

8171

CR Other equipment (old)

8,000

16129

D321

4843

CR Accounts Payable

10,058

21111

R300

6299

FRA coding rationale: The equipment (old) and related accumulated amortization must be written off the books. Because the Department received $600 for the trade-in, the loss on the disposal of the trade-in is $400 ($8,000-$7,000-$600). The equipment (new) is recorded at its original purchase price and the amount payable to the vendor is the difference between the purchase price of the equipment (new) and the $600 received for the trade in, plus GST of $658. GST is payable on the net purchase price of the equipment (7% of $9,400).

Authority coding rationale: (*) In this example it is assumed this purchase (equipment (new)) would be charged to the capital vote. However, depending on the department and the asset purchased, the following authority codes could be used: B11A - Program Vote, B12A Operating Vote, or A131 Spending of amounts equivalent to proceeds from disposal of surplus Crown assets. There is no impact on the authority side for the accounts payable, "R300- All other assets and liabilities" would be used. "D321 - Proceeds from disposal of crown assets" is used ($7,000+$400-$8,000) to reflect proceeds of $600 received by the Department for the old equipment. Since GST is not to be charged to a departmental appropriation, it is set up as an advance under a special authority, G111.

Object coding rationale: The economic object is recorded at this point since objects are recorded on an expenditure basis. Economic object 1219 is used to record the purchase of the new equipment - other machinery parts. " 6299 - Net Increase or Decrease to Other Liability Accounts" is used to establish the payable for the amount owing. The GST is reflected by using "8171 - Payment of GST on purchases". "4843 - Sales of surplus Crown assets to outside parties" is used in the remainder of this entry, because it relates to all the proceeds received for the asset being sold.

2) Transfer of funds (optional entry)

     

AMT($)

FRA

AUTH

OBJ

DR Other equipment (new)

600

16129

A131

7099

CR Other equipment (new)

600

16129

B14*

7099

FRA coding rationale: The purpose of this entry is purely for authority purposes, there is no effect on FRAs. The same FRA is debited and credited.

Authority coding rationale: The proceeds from the trade-in of $600 are credited to whichever B code the purchase was charged to. In this way, the charge to the appropriation is the net cost of the asset. This entry is optional depending on how departments choose to use the funds related to A131 - Spending of amounts equivalent to proceeds from disposal of surplus crown assets.

Object coding rationale: The purpose of this entry is purely for authority purposes, there is no effect on economic objects. "7099 - Net increase or decrease in other transactions" is used on both sides of the transaction.

Scenario F - Write-off of Tangible Capital Asset

Informatics hardware originally costing $120,000 with a useful life of 5 years has a $60,000 accumulated amortization balance on April 1, 2000. It is amortized at $2,000 per month. In July a fire caused substantial damage to the equipment. The Department decides the equipment has no future benefits and should be written off immediately.

Journal Entries

1) Write-off (bringing the value of the capital asset to zero)

     

AMT($)

FRA

AUTH

OBJ

DR Accumulated Amortization - informatics hardware

66,000

16222

F351

7099/3425

DR Loss on disposal of physical assets

54,000

51511

F351

7099/3425

CR Informatics hardware

120,000

16122

F351

7099/3425

FRA coding rationale: The equipment and related accumulated amortization (after adding an additional $6,000 in amortization expense to the accumulated amortization for the informatics hardware in year 2000) must be written off the books. The net result of these items will result in a loss of $54,000. FRA 51511 is used as the department has disposed of the asset. FRA 51733 "Losses on write-offs and write-downs" would be used if the asset continues to be used (see Scenario G).

Authority coding rationale: This is strictly an accrual accounting transaction. There is no impact on the authorities as the appropriation was charged when the asset was purchased. In order to ensure there is a nil effect on authorities, the same authority code is used for all debits and credits. In this case "F351 - Write off of Capital Assets was used."

Object coding rationale: This is strictly an accrual accounting transaction with no impact on the economic objects, as there is no impact on the economy. The economic objects were affected when the asset was purchased. To ensure a nil effect on economic objects, the same code, "7099 - Net Increase or Decrease in Other Transactions" or "3425 - Reallocation of expenditures/costs within a department" should be used throughout the transaction.

Scenario G - Write-down of Tangible Capital Asset

Internally developed software put into operation a year ago has a cost of $400,000 and accumulated amortization of $40,000. The department determines that the software will not provide the full benefits expected (e.g. the software cannot handle the volume of processing required and additional software will have to be purchased to supplement it). The department determines that the cost of the software should be reduced by $100,000 to reflect the decline in the asset's value (this could be the amount of the additional costs required to supplement the software).

Note: other reasons supporting the need for the write-down of an asset can be found in PS 3150.36.

Journal Entries

1) Write-down

     

AMT($)

FRA

AUTH

OBJ

DR Losses on write-downs

100,000

51733

F351

7099/3425

CR Accumulated amortization: informatics software

100,000

16223

F351

7099/3425

FRA coding rationale: FRA 51733 "Losses on write-downs" would be used as the asset continues to be used. The credit is to accumulated amortization to reflect the decrease in the net book value of the asset.

Authority coding rationale: This is strictly an accrual accounting transaction. There is no impact on the authorities as the appropriation was charged when the asset was purchased. In order to ensure there is a nil effect on authorities, the same authority code is used for the debit and credit. In this case "F351 - Write off of Capital Assets was used."

Object coding rationale: This is strictly an accrual accounting transaction with no impact on the economic objects, as there is no impact on the economy. The economic objects were affected when the asset was purchased. To ensure a nil effect on economic objects, the same code "7099 - Net Increase or Decrease in Other Transactions" or "3425 - Reallocation of expenditures/costs within a department" should be used throughout the transaction.

Departmental Financial Statement Presentation and Disclosure Requirements

As per TBAS 1.2, for each category of capital asset disclose original cost, additions, disposals, write-downs, accumulated amortization, amortization, and net book value on the Schedule of Capital Assets in the departmental financial statements. Also, for those capital assets where the net book value is already nil, the original historic cost should be disclosed in the notes to the financial statements as an indication of their existence.

3.5.1.1 Capital Leases

A lease is a contractual agreement between a lessor and a lessee that gives the lessee the right to use specific property owned by the lessor for a specific period of time in return for generally periodic cash payments.

If a government department is the lessee, the lease is classified for accounting purposes as either an operating lease or a capital lease. The department would classify a lease as capital if any one of the following conditions are met:

  • Is there a transfer of ownership?
  • Is there a bargain purchase option?
  • Is the lease term greater than or equal to 75% of the asset's economic life?
  • Is the present value of payments greater than or equal to 90% of the fair value of the asset?

If a government department is the lessor, then the leases would be classified for accounting purposes as either:

  • Operating leases; or
  • Direct financing leases or sales-type leases

References

  • CICA 3065 (particularly CICA 3065.21-26)

Scenario A - Department enters into Capital Lease agreement as Lessee

Lessor Company and the Department sign a lease agreement that calls for Lessor Company to lease informatics equipment to the Department beginning January 1, 2005. The lease contains the following terms and provisions.

  1. The term of the lease is five years, and the lease agreement is non-cancellable, requiring equal payments of $25,981.62 at the beginning of each year (annuity due basis) plus GST.
  2. The equipment has a fair value at the inception of the lease of $100,000, an estimated economic life of five years, and no residual value at the end of the 5 years.
  3. The Department pays all the executory costs directly except for maintenance costs of $2,000 per year, which are included in the annual payments to the lessor.
  4. The lease contains no renewal options and the equipment reverts to Lessor Company at the termination of the lease.
  5. The Department amortizes similar equipment it owns on a straight-line basis.
  6. Lessor Company set the annual rental to ensure a rate of return on its investments of 10% per year; the Department is aware of this fact. In the event that the Department did not know the lessor's rate of return, the Department would use the CRF lending rate at the time the agreement is signed.

The lease meets the criteria for classification as a capital lease because (1) the lease term of five years, being equal to the equipment's estimated economic life of five years, satisfies the 75% test; or because (2) the present value of the minimum lease payments ($100, 000 as computed below) exceeds 90% of the fair value of the property ($100,000).

Journal Entries

1) To record the capital lease on January 1, 2005.

    

AMT($)

FRA

AUTH

OBJ

DR Informatics Equip-Capital Leases (asset)

100,000

16622

R300

7099

CR Informatics Equip-Capital Lease (obligation)

100,000

24222

R300

6299

FRA coding rationale: The asset value and the amount of the obligation are recorded at the beginning of the lease term at the present value of the lease payments, excluding the portion relating to executory costs.

The minimum lease payments are $119,908.10 ($23,981.62 x 5) and the amount capitalized as leased assets is $100,000, the present value of the minimum lease payments is determined as follows:

Capitalized amount

= ($25981.62-$2 000) x present value of an annuity due of $1 for 5 periods at 10%.

  

= $23981.62 x 4.16986

  

= $100000

The lessor's implicit interest rate of 10% is used instead of the lessee's incremental borrowing rate of 11% because (1) it is lower, and (2) the lessee has knowledge of it.

Authority coding rationale: This is strictly an accrual entry. The appropriations are not affected at this point. The appropriation is charged only when the lease, interest payments and executory payments are made. "R300 - All other assets and liabilities" is used here for both sides of the entry.

Object coding rationale: As economic objects are recorded on an expenditure basis, the economic object is not recorded at this point but when the lease payment is made. "7099-Net increase or decrease in other transactions" is used. "6299-Net Increases or Decreases in Other Liability Accounts" is used to establish the accrual of the amount owing.

2) To record the first lease payment on January 1, 2005.

     

AMT($)

FRA

AUTH

OBJ

DR Operating Expenses (executory costs)

2,000.00

51321

(**)

0525

DR Informatics Equip-Capital Lease (obligation)

23,981.62

24222

(**)

1221

DR GST refundable advance

1,818.71

13392

G111

8171

CR Accounts Payable

27,800.33

21111

R300

6299

FRA coding rationale: The first lease payment of $23,981.62 represents a reduction of the principal of the lease obligation. There is no interest paid out at this point. At year-end the expense is accrued, (see journal entry 3) below. The executory costs are coded to operating expenses. The Department must record a payable for the amount owing of $25,981.62 plus GST of $1,818.71.

Authority coding rationale: (**) In this example, it is assumed this lease payment and operating expense would be charged to the capital vote -B14A. However, depending on the departmental appropriations, the following authority codes could be used: B11A - Program Vote, B12A Operating Vote, and A131 Spending of amounts equivalent to proceeds from disposal of surplus Crown assets. As there is no impact on the authorities for accounts payable, the code would be "R300- All other assets and liabilities" since the system requires that a code be used. Since GST is not to be charged to a departmental appropriation, it is set up as an advance under a special authority, G111.

Object coding rationale: At this point expenditures are made for the executory costs and lease costs. Therefore economic objects are affected. In this case, "0525-Rental of computer equipment" is used for the executory costs and "1221-Voice communication equipment" is used for the lease payment. "6299-Net Increase or Decrease to Other Liability Accounts" is used establish an accounts payable. The GST must be reflected by using "8171-Payment of GST on purchases".

Each rental payment of $25,981.62 consists of three elements: (1) a reduction in the principal of the lease obligation; (2) a financing cost (interest expense); and (3) executory costs. The total financing cost or interest expense over the term of the lease is the difference between the present value of the lease payments ($100,000) and the actual cash disbursed, net of executory costs ($119,908.10), or $19,908.10. Note: In the journal entry 2) above no portion of the 23,981.62 relates to interest expense. The interest is accrued at the end of the year, (see journal entry 3) below) and is paid in the beginning of the following year (see 5) below).

Lease Amortization Schedule
(Annuity Due Basis)

Date

Annual Lease Payment

Interest (10%) on Unpaid Obligation

Reduction of Lease Obligation

Balance of Lease Obligation

  

(a)

(b)

(c)

(d)

Jan.1/05

      

$100,000.00

Jan.1/05

$23,981.62

0

$23,981.62

76,018.38

Jan.1/06

23,981.62

$7,601.84

16,379.78

59,638.60

Jan.1/07

23,981.62

5,963.86

18,017.76

41,620.84

Jan.1/08

23,981.62

4,162.08

19,819.54

21,801.30

Jan.1/09

   23,981.62

   * 2,180.32

   21,801.30

0

Total

$119,908.10

$19,908.10

$100,000

  
  1. Lease payment as required by lessor, excluding executory costs.
  2. 10% of the preceding balance of (d) except for January 1, 2005; since this is an annuity due, no time has elapsed at the date of the first payment and no interest has accrued.
  3. (a) minus (b)
  4. Preceding balance minus (c).

* Rounded by 19 cents.

3a) To record the interest expense for the period between Jan 01, 2005 and March 31, 2005.

     

AMT($)

FRA

AUTH

OBJ

DR Interest Component on capital lease pymt

1,900.46

51713

F129

3469/7099

CR Accrued Interest Payable on Capital Leases

1,900.46

21154

R300

6299

Accrued interest payable on capital leases would be reversed and put into Accounts Payable on January 1, 2006, (see 5) below).

FRA coding rationale: The interest expense over the term of the lease is the difference between the present value of the lease payments and the actual cash disbursed for the lease payment. The interest expense is a function of the outstanding obligation. $7,601.84 = ((100,000-23,981.62) x 10%). It is necessary to set up an accrual for the three months Jan 01, 2005 to March 31, 2005 since the department's fiscal year ends on March 31. This would amount to $1,900.46 ($7,601.84 / 12mths x 3mths) interest owing. The Accrued Interest Payable on Capital Leases would be reversed in the following year. Please note: if material, the interest expense would recorded on a monthly basis.

Authority coding rationale: This is strictly an accrual transaction. The appropriation is not affected at this time. The charge to the appropriation occurs when the interest is actually paid out as part of the periodic lease payment. Therefore, it is necessary to use an F code. For the interest expense portion "F129 - Expenses to be charged later to appropriations/Other amounts to be charged later". Accrued interest payable on capital leases does not affect the appropriations, thus "R300 - Total amounts of all other assets and liabilities" would be used.

Object coding rationale: This is strictly an accrual transaction and there is no effect on economic objects. "3469- Charges to other liability account" or "7099- Net increase of decrease in other transactions" should be used. To establish the payable "6299-Net Increase or Decrease to Other Liability Accounts" should be used.

3b) To record the interest expense for the period between April 01, 2005 and Dec. 31, 2005.

     

AMT($)

FRA

AUTH

OBJ

DR Interest Component on capital lease pymt

5,701.38

51713

F129

3469/7099

CR Accrued Interest Payable on Capital leases

5,701.38

21154

R300

6299

Accrued interest payable on capital leases would be reversed and put into Accounts Payable on January 1, 2006, see 5) below.

FRA coding rationale: It is necessary to set up an accrual for nine months April 01, 2005 to December 31, 2005. This would amount to $5,701.38 ($7,601.84 / 12mths x 9mths) interest owing. The accrued interest payable on capital leases would be reversed in the following year. Please note: If material the interest expense would recorded on a monthly basis.

Authority coding rationale: Same as 3a).

Object coding rationale: Same as 3a).

4) To record the amortization expense and accumulated amortization for the month.

     

AMT($)

FRA

AUTH

OBJ

DR Amortization Expense - Infor Equip (leased)

1,667

51422

F111

3451

CR Accumulated Amortization - Infor Equip (leased)

1,667

16722

F311

7061/7099

FRA coding rationale: The Department should record amortization expense and accumulated amortization as per the Department's normal amortization policy (e.g. straight-line method). $100,000/5years= $20,000/yr $20,000/12mths=$1,666.67/mth

Authority coding rationale: Since the expenditure for the acquisition was already charged to an appropriation in previous journal entries, the appropriations are not affected. F codes would be used to assist with departmental reconciliations. "F111 - Amortization expenses for capital assets" is used for amortization expense and "F311 - Increases (decreases) to accumulated amortization of capital assets" is used for accumulated amortization.

Object coding rationale: These non-cash items have no effect on economic objects."7061- Accumulated amortization on capital assets" or "7099 - Net increase or decrease in other transactions" is used to capture accumulated amortization. "3451 - Amortization expense for capital assets" is used to capture amortization expense.

5) To record the lease payment and to charge the interest expense to the appropriation on January 1, 2006.

5a) To record the lease payment on January 1, 2006

   

AMT($)

FRA

AUTH

OBJ

DR Operating Expenses (executory costs)

2,000.00

51321

(**)

0525

DR Accrued Interest Payable on Capital Leases

7,601.84

21154

R300

6299

DR Informatics Equip-Capital Lease (obligation)

16,379.78

24222

(**)

1221

DR GST refundable advance account

1,818.71

13392

G111

8171

CR Accounts Payable

27,800.33

21111

R300

6299

See the Accounts payable section for journal entries used to settle this payable.

Note: entries through 2009 follow the pattern above.

FRA coding rationale: The recording of the lease payment results in a reduction of the lease obligation and the recording of a payable to reflect an amount owing to the lessor. The accrued interest charges are reversed and recorded as an accounts payable to reflect an amount owing the lessor as well. The executory costs are charged to an operating expense.

Authority coding rationale: (**) In this example, it is assumed this lease payment and operating expenses would be charged to the capital vote B14A. However, depending on the departmental appropriations, the following authority codes could be used: B11A - Program Vote, B12A Operating Vote, and A131 Spending of amounts equivalent to proceeds from disposal of surplus Crown assets. As there in no impact on authorities for accounts payable and accrued interest payable on capital leases, R300 would be used, as the system requires that a code be input.

Object coding rationale: "6299-Net Increase or Decrease to Other Liability Accounts" is used to record the net impact on other liabilities. At this point expenditures are incurred for the executory costs and the lease costs, therefore economic objects are affected. In this case "0525-Rental of computer equipment" and "1221-Voice communication equipment" are used.

5b) To charge the interest expense to the appropriation on January 1, 2006

  

AMT($)

FRA

AUTH

OBJ

DR Interest Component on capital lease pymt

7,601.84

51713

(***)

3252

CR Interest Component on capital lease pymt

7,601.84

51713

F159

7099

FRA coding rationale: This transaction does not affect accruals only appropriations. However, the system requires that FRA codes be input. To ensure a nil effect on departmental FRAs, it would be necessary to debit and credit the same FRA code for the same amount.

Authority coding rationale: (***) In this example, it is assumed the lease payment and operating expense would be charged to the capital vote B14A, therefore the interest expense would be charged to the same vote. This is not considered to be a public debt charge. However, depending on the department, the following authority codes could be used: B11A - Program Vote, B12A Operating Vote, and A131 Spending of amounts equivalent to proceeds from disposal of surplus Crown assets. Since this transaction is required to affect an appropriation, only one side of the transaction will get charged. As a result it is necessary to use an F code on the other (credit) side of the transaction. In this case, "F159 - Other expenses not being charged to appropriations at the same time" is used.

Object coding rationale: The economic object "3252- Interest administration or service charges, and other penalty charges" would be used to record the interest expense. The credit entry would be to "7099 - Net Increase or Decrease in Other Transactions".

Scenario B - Department purchases leased equipment at the end of the lease term.

Please note that same terms and conditions apply in this Scenario as in Scenario A except that the Department purchases the leased equipment at the end of the lease term for $5,000. (The estimated useful life has been increased by 2 years)

Journal Entries

Journal entries 1 to 5 - see Scenario A above.

6) To record the purchase of the leased equipment at end of lease term for $5,000.

  

AMT($)

FRA

AUTH

OBJ

DR Informatics Equipment

100,000

16122

F351

7099

DR Informatics Equipment

5,000

16122

(****)

1221

DR Accumulated Amortiz - Infor Equip (leased)

100,000

16722

F311

7061/7099

DR GST refundable advance account

350

13392

G111

8171

CR Informatics Equip-Capital Leases (asset)

100,000

16622

F351

7099

CR Accumulated Amortization - Equipment

100,000

16222

F311

7061/7099

CR Accounts Payable

5,350

21111

R300

6299

See Accounts Payable section for related entries regarding settlement of payable.

FRA coding rationale: Since the $5,000 is a component of the total cost of the equipment, it is capitalized. Upon expiration of the lease, the amount capitalized as leased equipment is fully amortized and taken off the books (note: at this point the lease obligation is fully discharged). Since the equipment has already been amortized for 5 years, the accumulated amortization must be recorded on the books. The remaining $5,000 will be amortized over the next two years. GST of $350 (7% on $5,000) is owed on the purchase.

Authority coding rationale: Only $5,000 will get charged to an appropriation since the $100,000 was already charged when the lease payments were made over the last 5 years.

(****) In this example, it is assumed the purchase would be charged to a capital vote- B14A. However, depending on the department, the following authority codes could be used: B11A - Program Vote, B12A Operating Vote, and A131 Spending of amounts equivalent to proceeds from disposal of surplus Crown assets. There is no affect on appropriations throughout the rest of the entry therefore the applicable F codes are used, as well as R300 for the accounts payable set up.

Object coding rationale: There is no affect on expenditures in this transaction except for the additional $5,000 spent on the Informatics equipment. To capture the accumulated amortization on the equipment 7061 or 7099 is used. Economic object 1221 reflects the $5,000 acquisition of the residual Informatics capital asset. "6299-Net Increase or Decrease to Other Liability Accounts" is used to establish the payable. To indicate the nil effect on the remainder of the transaction "7099-Net Increase or Decrease in Other Transactions.

Departmental Financial Statement Presentation and Disclosure Requirements

The gross amount of assets under capital leases and related accumulated amortization should be disclosed. Obligations related to leased assets should be shown separately from other financial obligations. Particulars of obligations related to leased assets, including interest rates and expiry dates, should be shown separately in the notes to the financial statements from other financial obligations. Significant restrictions imposed on the lessee as a result of the lease agreement should be disclosed.

Disclosure should be made of the future minimum lease payments in aggregate and for each of the five succeeding years. A separate deduction should be made from the aggregate figure for amounts included in the minimum lease payments representing executory costs and imputed interest. The resultant net amount would be the balance of the unpaid obligation.

The amount of amortization for leased property should be disclosed separately or as part of amortization and amortization expense for fixed assets. Disclosure should be made of methods and rates of amortization.

Interest expense related to lease obligations should be disclosed separately.

3.5.1.2 Assets Under Construction

Introduction

The cost of a constructed asset would include direct construction or development costs (such as materials and labour), and overhead costs directly attributable to the construction or development activity. PS 3150.12

Capitalization of costs ceases, however, when a tangible capital asset is ready for use. Determining when a tangible capital asset, or a portion thereof, is ready for productive use requires consideration of the circumstances in which it is to be operated. Normally it would be predetermined by reference to factors such as productive capacity, occupancy level, or the passage of time. PS 3150.17

Assets under construction also include those assets that have been acquired but require additional work to get them ready for use. See Scenario A.

Amortization

Assets under construction are not amortized while they are still being constructed. This is because the asset is not being used in program delivery. The amortization process starts when the asset's construction is complete and has begun being used by the department.

  1. to which the asset can be used.

References

  • PS 3150.12,.17,.36,.45
  • TBAS 3.1 Capital Assets
  • TBAS 1.2 Departmental and Agency Financial Statements

Scenario A - Department purchases a computer but work is still required to get it ready for use.

Department buys computer hardware for $200,000. The equipment is not functional until it has been installed properly and is ready for use. Until that time the equipment will not be amortized. The following costs are associated with getting the equipment ready for use.

  • Freight $500
  • Computer consultants to set up the hardware $35,000
  • Departmental Staff salaries used to set up hardware $20,000
  • Additional circuits required to modify the hardware to adapt to Departmental needs $5,000
  • It is assumed that the department has a separate capital vote.

Journal Entries

1) Purchase of the computer hardware

 

AMT($)

FRA

AUTH

OBJ

DR Other WIP - Computer Hardware

200,000

16319

B14A(*)

1226

DR GST Refundable Advance Account

14,000

13392

G111

8171

CR Accounts Payable

214,000

21111

R300

6299

FRA Coding Rationale: The asset is over the threshold $10,000 amount and must be capitalized. However, since the asset is not ready for use, the costs must be allocated to a work in progress (WIP) account. This is essential since the asset should not be amortized. At this point the Department is being charged GST on the computer, and must pay it to the vendor. However, as the Department will eventually recover this amount from Canada Customs and Revenue Agency (CCRA) they should record it as an asset in "13392 GST/HST Refundable advance accounts". Since the Department has not paid for the computer equipment, a payable must be recorded for the amount owing.

Note: if the department's system cannot accommodate this entry, the purchase of hardware may first be charged to operating expenses and then transferred to the work in process account. See Section 3.5.1 Capital Assets, Scenario C, journal entries 1 and 2 for an example of this type of entry.

Authority Coding Rationale: (*) In this example it is assumed this purchase would be charged to the capital vote. However, depending on the department's vote structure and the asset purchased, the following authority codes could be used: B11A - Program Vote or B12A Operating Vote. Since GST is not to be charged to a departmental appropriation, it is set up as an advance under a special authority, G111. Since Accounts Payable has no impact on the authority side, "R300 - All Other Assets and Liabilities" is used.

Object Coding Rationale: "1226 - Computer Equipment - Large/medium- mainframe, mini" would be used to reflect the purchase of this equipment. Since there is GST/HST payable, the GST must be reflected by using, "8171-Payment of GST on purchases". "6299-Net Increase or Decrease to Other Liability Accounts" is used to establish the accrual of the amount owing.

2) Departmental salaries are paid and a portion is allocated to the WIP account

2a) Departmental Salaries and wages are paid

 

AMT($)

FRA

AUTH

OBJ

DR Salaries and wages Expense

100,000

51311

B11A/B12A

0101

CR Payroll Control Account 100,000

63DDD

0000

0000

  

FRA Coding Rationale: Salaries and wages for employees in the department are recorded as an operating expense and the amount is paid through the Payroll Control Account. The amount that pertains to the asset in question will get allocated to the Computer equipment WIP account accordingly (see below).

Authority Coding Rationale: Salaries can be charged to of the Department's capital, program or operating appropriation depending on the vote structure of the Department. Payroll Control account has no impact on appropriations and is therefore coded as 0000.

Object Coding Rationale: "0101- Civilian regular time - continuing employment" is used for salaries paid to full-time indeterminate employees. All RG interface Control Accounts are zero filled (0000), with the exception of I/S Control Accounts, at the object level.

2b) Salaries related to the computer equipment ($20,000) are charged to the WIP account

 

AMT($)

FRA

AUTH

OBJ

DR Other WIP - Computer Hardware

20,000

16319

B14A

3425

CR Salaries and wages Expense

20,000

51311

B11A/B12A

3717

FRA Coding Rationale: $20,000 of salaries and wages that relate directly to the computer hardware will get re-allocated from operating expenses to the computer equipment WIP account.

Authority Coding Rationale: The salaries and wages should be re-allocated from the program or operating vote to the capital vote.

Object Coding Rationale: Since the salaries are being reallocated to a WIP account within the same department "3425 - Reallocation of expenditures/costs within a department" is used for the debit side of the transaction and "3717 - Recoveries of expenditures/costs within a department" is used on the credit side of the transaction. Since both of these items relate to standard object 12 they will be netted against each other, therefore having a nil effect.

3) To record additional expenses related to the computer hardware

  

AMT($)

FRA

AUTH

OBJ

DR Other WIP - Computer Hardware (Consulting)

35,000

16319

B14A(*)

0472

DR Other WIP - Computer Hardware (Freight)

500

16319

B14A(*)

0210

DR Other WIP - Computer Hardware (Circuits)

5,000

16319

B14A(*)

1229

DR GST refundable advance

2,485

13392

G111

8171

CR Accounts Payable

42,985

21111

R300

6299

FRA Coding Rationale: Once again the asset is still not ready for use, invoices has been received for consulting fees, additional circuits and freight so these amounts must be capitalized to the computer hardware WIP account. As well, a liability must be set up for the amount owing to the contractor. In this case, "21111 - Accounts Payable" is used.

Note: if the department's system cannot accommodate this entry, these costs may first be charged to operating expenses and then transferred to the work in process account. See Section 3.5.1 Capital Assets, Scenario C, journal entries 1 and 2 for an example of this type of entry.

Authority Coding Rationale: B14A(*) Consulting fees, freight and circuits that pertain to the computer is to be paid out of the Department's capital, program or operating appropriation depending the vote structure of the Department. Since Accounts Payable has no impact on the authority side, "R300 - All Other Assets and Liabilities" is used

Object Coding Rationale: Assuming that the freight charges are billed separately from the computer hardware purchase "0210 - Transportation of things not elsewhere specified" is used. "0472 - Information Technology consultants" is used for the consulting fees incurred by the department."1229 - Computer Equipment parts" is used for the circuits. "6299 - Net Increase or Decrease to Other Liability Accounts" is used to establish the accrual of the amount owing.

4) The computer is ready for use

  

AMT($)

FRA

AUTH

OBJ

DR Computer Hardware

260,500

16122

F999

3425

CR Other WIP-Computer Hardware

260,500

16319

F999

3717

FRA Coding Rationale: Since the asset is now ready for use, it also now must start being amortized. This means that the balance in WIP must reallocated to the Computer Hardware (asset) account.

Authority Coding Rationale: This is strictly an accrual transaction, so there is no impact on the authority side. The charge to the appropriation was made in the previous entry. In this case, "F999 - Other F Codes" will be both debited and credited, so there will be no effect on the authorities.

Object Coding Rationale: Since this is a re-allocation from the WIP account to the asset account within the same department, "3425 - Reallocation of expenditures/costs within a department" is used for the debit side of the transaction and "3717 - Recoveries of expenditures/costs within a department" is used on the credit side of the transaction. Since both of these items relate to standard object 12 they will be netted against each other, therefore having a nil effect.

Departmental Financial Statement Presentation and Disclosure Requirements

The department's Statement of Financial Position should disclose the net book value of tangible capital assets not being amortized because they are under construction or development. PS 3150.45.

4.0 Liabilities

Liabilities are financial obligations to outside organizations and individuals as a result of transactions and events on or before the accounting date. They are the result of contracts, agreements and legislation in force at the accounting date that require the government to repay borrowings or to pay for goods and services acquired or provided prior to the accounting date. PS 1500.39

Reporting on a government's total liabilities at the accounting date is necessary to ensure a complete reporting of transactions and events, and to understand and assess demands on financial resources. PS 1500.40

Liabilities are presented on the Statement of Financial Position, and include accounts payable and accrued liabilities, allowances for employee benefits, deferred revenue etc.

4.1 Accounts Payable

Introduction

Accounts payable are balances owed to trade creditors, sundry creditors and others for goods, services, loans, transfer payments etc. Payables arise because of the time lag between the requirement to record the obligation and the requirement to satisfy the obligation at a later date.

Particular attention must be paid to transactions occurring near the end of one accounting period and at the beginning of the next to ascertain that the goods received (the inventory) and the liability (accounts payable) for those goods both are recorded in the same period.

Accrued liabilities should be set up for estimated amounts for goods or services received but not recorded at the end of each month, for any material amounts. These should be subsequently reversed when definitive amounts are known, at which time an accounts payable would be set up, or at the beginning of the next month depending on a department's system.

Since Accounts Payable do not affect appropriations, the R300 authority code should always be used.

References

  • PS 1500.41, 1500.43, 1800.25
  • CICA 3860.43-.95 (for disclosure)

Scenario A

Supplies of $500 are purchased and received.

Journal Entries

1) To record purchase of supplies (assume purchase and receipt of goods at same time)

  

AMT($)

FRA

AUTH

OBJ

DR Operating Expenses

500

51321

B11A/B12A

11XX

DR GST/HST Refundable Advance Account

35

13392

G111

8171

CR Accounts Payable

535

21111

R300

6299

For entries related to the settlement of the GST Refundable Advance Account please see the Sales Tax section of the manual.

FRA coding rationale: Since supplies were purchased and received in the period, operating expenses must be recorded. At this point the Department is being charged GST on the purchase of supplies, and must pay it. However, the Department will eventually recover this amount from Canada Customer and Revenue Agency (CCRA) and should record it as "13392 GST/HST Refundable advance accounts". The cost of the operating expenses plus 7% GST would be accrued as an accounts payable in the period since expenses were incurred but not yet paid.

Authority coding rationale: Since this is a legitimate charge against an operating appropriation, it would be recorded against either B11A or B12A depending on whether the department has a program vote (B11A) or an operating vote (B12A). Since GST is not to be charged to a departmental appropriation, authority G111 is used. Accounts Payable does not affect the appropriations, thus "R300 -Total amounts of all other assets and liabilities" would be used.

Object coding rationale: Depending on the actual supplies purchased, the appropriate economic object in sub-category 11 should be used. "6299-Net Increase or Decrease to Other Liability Accounts" is used to record the establishment an accounts payable. Since there has been an acquisition of goods on which GST/HST is payable, the related GST must be reflected by using, "8171 - Payment of GST on purchases"

2) Department requisitions Receiver General (RG) for payment.

  

AMT($)

FRA

AUTH

OBJ

DR Accounts Payable

535

21111

R300

6299

CR Payments in Transit

535

11134

R300

5299

FRA coding rationale: Since the payment is being requisitioned, the payable is reversed and the Payment in Transit account would reflect these payments requisitioned but not yet paid. The control account should not be charged until PWGSC has confirmed that the payment has been made.

Authority coding rationale: Neither of the accounts impacts appropriations so both sides of the entry must therefore be coded to R300-Total amounts of all other assets and liabilities.

Object coding rationale: "6299-Net Increase or Decrease to Other Liability Accounts" are used to indicate a settlement of accounts payable. To record the net impact on Cash Accounts, 5299 would be used.

3) The Receiver General (RG) notifies the department that the payment is made at which time the Department will make the following entry:

  

AMT($)

FRA

AUTH

OBJ

DR Payments in Transit

535

11134

R300

5299

CR Cash Payment Control Account

535

61DDD

0000

0000

FRA coding rationale: Once the payment is made, Payments in Transit is reversed and the Cash Payment Control account is credited to reflect that the RG has made the payment. The last three digits of the control account will be the department number.

Authority coding rationale: Neither of these accounts affect appropriations. The authority code is 0000 for the "Cash Payment Control Account" and "R300-All other assets and liabilities" for Payments in Transit.

Object coding rationale: To record the net impact on Cash Accounts, 5299 would be used. All RG interface Control Accounts are zero filled (0000), with the exception of I/S Control Accounts, at the object level.

Departmental Financial Statement Presentation and Disclosure Requirements

Accounts payable are to be classified as a liability in the Statement of Financial Position.

4.2 Deferred Revenues

Introduction

Deferred revenues or unearned revenues are monies received in advance from parties external to government for which a government entity will provide specified goods or services in the near future. Deferred revenues related to unspecified goods and services are recorded in specified purpose accounts (see Specified Purpose Accounts section of this manual).

The unearned revenues may arise from the following types of sales of goods and services to outside parties:

  • Rights and privileges;
  • Lease and Use of Public Property;
  • Services of a regulatory nature;
  • Services of a non-regulatory nature;
  • Sales of goods and information products;
  • Other fees and charges; etc.

For government accounting purposes, the revenue recognition principle dictates that revenue is recorded in the period it is realized. When revenues are received prior to being realized, the amount applicable to future periods is deferred to those future periods.

The amount unearned or deferred (received in advance of realisation) is considered a liability because it represents an obligation arising from a past transaction to provide a good or service in the future.

As the goods are provided or the services are rendered the government entity will realize and recognize its revenue in the appropriate accounting period.

The following transactions deal with the " normal day to day situations" with respect to external non-tax revenues. More complex transactions that deal with specified purpose accounts can be found in the section entitled "Specified Purpose Accounts" of the manual.

References

  • CICA 1510.05, 1510.07, 3400
  • PS 1500.34, 1800.25, 1800.40, 3100.07-.12, 3410.47-.48

Scenario A - Non Respendable Revenue

The Department receives $100 in year 1 for services that will not be performed until year 2.

Journal Entries

1) To record the fee of $100 collected in Year 1.

  

AMT($)

FRA

AUTH

OBJ

DR Cash in the hands of the Departments awaiting deposit to the RG

100

11125

R300

5299

CR Deferred revenues

100

21510

D/E(*)

45xx

FRA Rationale: The Department must recognize the monies received in advance from the outside party in the appropriate cash account. Since the fees relate to revenue that will be realized in a subsequent period, the Department must recognize this fee as other deferred revenue (a liability account).

Authority Rationale: There is no impact on the authority side for cash. Therefore R300 would be used. D/E(*) Depending on which type of revenue is considered in the scenario, the Department would choose the appropriate code from the following chart.

 

Statutory Non-Tax Revenue

Non Statutory Non-Tax Revenue

Non-Respendable Revenue

D221 to D223

E221 to E223

Object Rationale: To record the net impact on Cash Accounts, 5299 would be used. Economic objects are recorded on a cash receipt basis for deferred revenues. Depending on the type of revenue received, the appropriate economic object within the 45xx category would be used.

2) The Department performs the required service or provides the required goods for the outside party

  

AMT($)

FRA

AUTH

OBJ

DR Deferred revenues

100

21510

D/E(*)

4888

CR Non tax revenue

100

4231x

D/E(*)

4888

FRA Rationale: As revenue is earned by performing the required service or providing the good, the appropriate amount is brought into revenue. At this point it is permissible for the Department to recognize revenue. At the same time the equivalent amount will be removed from the liability account for the deferred revenue (21510).

Authority Rationale: This is strictly an accrual transaction. Authorities are not affected here at all. However, the system requires that authority codes be input. In order to achieve a nil effect on departmental authorities one option would be to debit and credit the same authority for the same amount. D/E(*) Depending on which type of revenue is considered in the Scenario , the department would choose the appropriate code from the following chart. Note: if E221 was the applicable code then it would be used on both the credit and debit side of the entry.

 

Statutory Non-Tax Revenue

Non Statutory Non-Tax Revenue

Non-Respendable Revenue

D221 to D223

E221 to E223

Another option would be use R300 for Other Deferred revenues and F259 for non- tax revenue. Both the R300 and F259 have no effect on appropriations thereby producing the same results as the above option.

Object Rationale: "4888 - reallocation from non budgetary funds and accounts" must be used here since this is a reallocation of deferred revenue to non-tax revenue. There is no effect on the economic object at this point. The economic object captured the revenue in the previous journal entry.

Scenario B - Respendable Revenue

The Department receives $100 in year 1 for services that will not be performed until year 2.

Journal Entries

1) To record the fee of $100 collected in Year 1 and record revenue credited to the vote (done at the same time).

1a) To record the fee of $100 collected in Year 1

  

AMT($)

FRA

AUTH

OBJ

DR Cash in the hands of the Departments awaiting deposit to the RG

100

11125

R300

5299

CR Deferred revenues

100

21510

D/E(*)

45xx

FRA Rationale: The Department must recognize the monies received in advance from the outside party in the appropriate cash account. Since the fees relate to revenue that will be realized in a subsequent period, the Department must recognize this fee as deferred revenue (a liability account).

Authority Rationale: There is no impact on the authority side for cash, therefore R300 would be used. D/E(*) Depending on which type of revenue is considered in the Scenario , the Department would choose the appropriate code from the following chart.

 

Statutory Non-Tax Revenue

Non Statutory Non-Tax Revenue

Respendable Revenue

D211 to D213

E211 to E213

Object Rationale: To record the net impact on Cash Accounts, 5299 would be used. Economic objects are recorded on a cash receipt basis for deferred revenues. Depending on the type of revenue received, the appropriate economic object within the 45xx category would be used.

1b) Since the cash is received by the Department, and the Department has the authority to respend it, the revenue is credited to the vote

  

AMT($)

FRA

AUTH

OBJ

DR Deferred revenues

100

21510

D218/E218

7099

CR Deferred revenues

100

21510

B13A

7099

FRA rationale: This is strictly an authority transaction. To ensure there is no effect on FRAs, the same FRA is debited and credited for the same amount.

Authority rationale: When a Department has authority to re-spend revenue, it can only be re-spent when the revenue is actually received (i.e. on a cash basis). Only the revenue portion of the transaction is affected. In this case, $100. To reflect this, the cash received is credited to "B13A Revenues credited to the vote". The debit will be to either a D218 (statutory) or E218 (non-statutory) depending on the situation It is important that either D218 and E218 be used in this transaction and that the authority code used to set up the revenue transaction not be used. Otherwise, the revenue charging authority information would be lost.

Object rationale: This is strictly an authority transaction. To ensure there is no effect on objects, the same object is debited and credited for the same amount. "7099- Net Increase or Decrease in Other Transactions" is used here since this will have a nil effect on objects

2) The Department performs the required service or provides the required goods for the outside party

  

AMT($)

FRA

AUTH

OBJ

DR Deferred revenues

100

21510

D/E(*)

4888

CR Non tax revenue

100

4231x

D/E(*)

4888

FRA Rationale: As revenue is earned by performing the required service or providing the good, the appropriate amount is brought into revenue. At this point it is permissible for the Department to recognize revenue. At the same time the equivalent amount will be removed from the liability account for the deferred revenue (21510).

Authority Rationale: This is strictly an accrual transaction. Authorities are not affected here at all. However, the system requires that authority codes be input. In order to achieve a nil effect on departmental authorities one option would be to debit and credit the same authority for the same amount. D/E(*) Depending on which type of revenue is considered in the Scenario , the department would choose the appropriate code from the following chart. Note: if D211 was the applicable code then it would be used on both the credit and debit side of the entry.

 

Statutory Non-Tax Revenue

Non Statutory Non-Tax Revenue

Respendable Revenue

D211 to D213

E211 to E213

Another option would be use R300 for Other Deferred revenues and F259 for non- tax revenue. Both the R300 and F259 have no effect on appropriations thereby producing the same results as the above option.

Object Rationale: "4888 - reallocation from non budgetary funds and accounts" must be used here since this is a reallocation of deferred revenue to non-tax revenue. There is no effect on the economic object at this point. The economic object has captured the revenue in the previous journal entry.

Scenario C - Refund

The outside party requests a refund prior to the Department performing the required service or providing the required goods.

Journal Entries

1) Same as Scenario A 1)

2) The outside party requests a refund prior to the Department performing the required service or providing the required goods.

  

AMT($)

FRA

AUTH

OBJ

DR Deferred revenues

100

21510

D/E(*)

45xx

CR Accounts Payable

100

21111

R300

6299

FRA Rationale: The Department proceeds with the refund of money received in advance from the appropriate cash account. Since the revenue was never realized the Department must reduce the Other Deferred Revenue and set up a payable.

Authority Rationale: The authority code for the deferred revenue would be debited by the equivalent amount since the service or good was not provided. D/E(*) Depending on which type of revenue is considered in the Scenario , the department would choose the appropriate code from the following chart.

 

Statutory Non-Tax Revenue

Non Statutory Non-Tax Revenue

Respendable Revenue

D211 to D213

E211 to E213

Non-Respendable Revenue

D221 to D223

E221 to E223

Accounts payables do not affect appropriations, the code R300 would be used.

Object Rationale: The same economic object 45xx would be reversed since the payment was refunded. "6299-Net Increase or Decrease to Other Liability Accounts" is used to establish an accounts payable".

Please note: If the transaction deals with respendable revenue it would necessary to reverse the entry that is described in Scenario B, Journal entry 1b) of this section as well.

Departmental Financial Statement Presentation and Disclosure Requirements

Deferred Revenue should be recorded under the liability section of the Department's Statement of Financial Position.

4.3 Loan Guarantees

Introduction

A loan guarantee is a promise to pay all or a part of the principal and/or interest on a debt obligation in the event of default by the borrower.

Contingent Liability

A loan guarantee is a contingent liability of the government. The generally accepted accounting principles for contingent liabilities are, therefore, appropriate for loan guarantees. See the Contingencies Section of the Manual.

To the extent that the future event is likely to occur or fail to occur, and a reasonable estimate of the loss can be made, an estimated liability is accrued and an expense recorded on the government consolidated financial statements and NOT on the departmental financial statements unless so advised by TBS.

Departments will only set up a liability (payable) and a corresponding expense once the criteria of the PAYE policy has been met.

Departments will provide information on loan guarantees to Receiver General in accordance with the Public Accounts Instruction Manual (PAIM).

Provision for Losses

For the time being, TBS will be recording the provision for losses on loan guarantees based on information provided by departments to the Receiver General. Please see FY 2001-02 FIS Transition Period -Transition Protocol and Accounting Requirements document issued on November 15, 2000.

Payment of Loan Guarantees

If the Department has made payments under the terms of a guarantee and has recourse to recover amounts paid from the borrower, such amounts should be accounted for in accordance with LOANS RECEIVABLE Section PS 3050. (PS 3310.21). See Loans Receivable Section of this manual.

References

  • PS 3310
  • Contingencies Section of the FIS Accounting Manual
  • TBAS 1.2 Departmental and Agency Financial Statements
  • PS 1500
  • Loans Receivable Section of the FIS Accounting Manual

FY 2001-02 FIS Transition Period -Transition Protocol and Accounting Requirements document issued on November 15, 2000

Scenario A - Department provides loan guarantee.

A Department has provided an outside organization for the purpose of development assistance to foreign countries with a loan guarantee in year 1. The outside organization defaults on the loan in year 2. The amount of the loan is $100,000.

Journal Entries

1) Year 1 - Department provides Loan Guarantee

No journal entry is required.

The Department will only disclose by way of a note to the departmental financial statement that they have contingencies in the form of loan guarantees. (See TBAS 3.6 Contingencies)

2a) Year 2 - Borrower defaults and Department pays out loan guarantee to lender

  

AMT($)

FRA

AUTH

OBJ

DR Expenses related to loan guarantees

100,000

51727

A/B(*)

2304

CR Accounts Payable

100,000

21111

R300

6299

(See section on Accounts Payable for the entries required for settlement of accounts payable)

FRA Coding Rationale: When the borrower defaults on the loan the department is required to make the payment to the lender and an expense is incurred. The Department must set up a payable for the amount owing. It should be noted, that due to system limitations and requirements to charge an appropriation the debit is made to Expenses related to loan guarantees instead of a receivable. As a result, the Expenses related to loan guarantee is subsequently removed from the books by a credit in journal entry 3) see below.

Authority Coding Rationale: A/B(*) Depending on the Department's vote structure the following the payment can be charged either B11A(*) - Program Vote, B12A - Operating Vote. If a department has a specific statutory budgetary appropriation for this purpose, it may use this appropriation (i.e. Indian and Northern Affairs A852). Since accounts payable has no impact on appropriations, R300 is used.

Object Rationale: "6299- Net Increase or Decrease to Other Liability accounts" should be used to indicate the establishment of the accrued payable. "2304- Other payments for development assistance to foreign countries" would be used in this case.

2b) Year 2 - Set up a receivable to record money owed to the corporation by the borrower

  

AMT($)

FRA

AUTH

OBJ

DR Loans/advances on expired loan guarantees

100,000

13371

R300

5010

CR Expenses related to loan guarantees

100,000

51727

F154

2304

FRA Coding Rationale: Since the Department has made payments under the terms of a guarantee and has recourse to recover amounts paid from the borrower, such amounts should be accounted for as a loans receivable. Normally, the credit would be an allowance for doubtful loans. However, since departments do not record an allowance (See Loans Receivable section of manual), the credit will be to expenses related to loan guarantees.

Authority Coding Rationale: There is no impact on appropriations at this stage. R300 is used to reflect the receivable and "F154-Expenses related to loan guarantees" is used for the other side of the transaction.

Object Rationale: "5010 - Acquisition of loans with cash" should be used for establishing the loan receivable. The economic object debited in entry 2a) would be credited in this entry, in this case 2304.

2c) Year 2 - Record an allowance to reflect impairment of the loan (assume 50%)

 

AMT($)

FRA

AUTH

OBJ

DR Bad debt expense

50,000

51732

F122/F119

3462

CR Allowance for doubtful loans

50,000

13379

F412/F119

7021

FRA Coding Rationale: The fact that the borrower has already defaulted on the loan once raises questions regarding the ability of the department to collect on the loan. Hence an allowance for doubtful loans is recorded. The department is able to record an allowance as the disbursement, which established the loan receivable, was charged to a budgetary appropriation.

Authority Coding Rationale: There is no impact on appropriations. "F122-Allowances set up for bad debt expenses" and "F412-Changes to allowances for doubtful accounts" are used. Alternatively, "F119-Expenditures previously charged to appropriations - other amounts to be charged to program expenses" could be used on both sides of the entry.

Object Rationale: There is no impact on economic objects. Bad debt expense is a non-cash expense, therefore it falls under standard object 12 and sub-category 34, "3462 -Allowance for bad debts". For a non-cash item related to assets and liabilities, sub category 70 is used, "7021 - Allowance for valuation of financial claims".

3) Year 3 - The department determines that the loan should be written-off

  

AMT($)

FRA

AUTH

OBJ

DR Bad debt expense

50,000

51732

F122/F119

3462

DR Allowance for doubtful loans

50,000

13379

F412/F119

7021

CR Loans/advances on expired loan guarantees

100,000

13371

R300

5399

FRA Coding Rationale: The allowance for $50,000 established in entry 2c is reversed and an additional expense of $50,000 is recorded for the remaining balance of the loan.

Authority Coding Rationale: There is no impact on appropriations. "F122-Allowances set up for bad debt expense" and "F412-Changes to allowances for doubtful accounts" would be used. Alternatively, "F119-Expenditures previously charged to appropriations - other amounts to be charged to program expenses" could be for these two lines. R300 is used for the other side of the transaction.

Object Rationale: Since there is a change in receivables "5399-Net change to accounts receivable" would be used. 7021 is used for the allowance for doubtful accounts while 3462 is used for the bad debt expense.

Departmental Financial Statement and Presentation Disclosure Requirements

Because loan guarantees are contingent liabilities, departments will include only high-level note disclosure. See TBAS 3.6 Contingencies.

4.4 Future Site Restoration Costs

Introduction

Future site restoration costs encompass costs for dismantling, abandoning and cleaning up a property. These costs may be incurred as a result of a contract or because the government has established a policy to restore a site. When such costs can be reasonably estimated, they should be accrued (net of expected recoveries), as part of the capital asset and amortized over its useful life. The provision for future site restoration costs is to be recorded as a liability until the future site restoration takes place. Where future site restoration costs are expected to be significant but cannot be reasonably estimated, a contingent liability should be reported.

Costs to capitalized exclude costs related to environmental liabilities due to contaminated sites and solid waste landfills. Accounting and disclosure requirements for these costs will be communicated once the Policy on Accounting for Costs and Liabilities Related to Contaminated Sites is finalized.

References

  • TBAS 3.1 Capital Assets
  • CICA 3060.39

Scenario A

A department constructs an observation tower on leased land, with the condition that it restores the site to its original condition at the end of the lease term. The tower cost $100,000 to construct and it is estimated to cost $10,000 to dismantle and remove the tower at the end of the ten-year term.

1) To record cost of tower and future site restoration costs

  

AMT($)

FRA

AUTH

OBJ

DR Works and infrastructure

100,000

16113

B14A(*)

1339

DR Works and infrastructure

10,000

16113

F129

7099

DR GST refundable advance account

7,000

13392

G111

8171

CR Future site restoration costs

10,000

24112

R300

6299

CR Accounts Payable

107,000

21111

R300

6299

FRA Coding Rationale: The $10,000 in future site restoration costs is capitalized as part of the asset balance. The $10,000 credit is to a liability account that will remain until the restoration work is performed in ten years time.

Authority Coding Rationale: (*) In this example it is assumed the cost of the observation tower would be charged to the capital vote. However, depending on the department and the asset involved, the following authority codes could be used: B11A- Program vote, B12A -Operating vote, or A131 Spending of amounts equivalent to proceeds from disposal of surplus Crown assets. As the costs associated with the future site restoration will only be incurred in the future, "F129 -Other amounts to be charged later" is used. Since GST is not to be charged to a departmental appropriation, it is set up as an advance under a special authority, G111. There is no impact on authorities for the accounts payable and future site restoration costs liability hence R300 - All other assets and liabilities" is used.

Object Rationale: "1339- Other engineering works" is used to record the observation tower. The recording of the future site restoration costs would have no impact economic objects as these are recorded on an expenditure basis; "7099- Net increase or decrease in other transactions" is used. Since there is GST/HST payable, the GST is reflected by using "8171 - Payment of GST on purchases". "6299 - Net increase or decrease to other liability accounts" is used for the two liability accounts.

2) Record amortization of the observation tower

  

AMT($)

FRA

AUTH

OBJ

DR Amortization expense

11,000

51413

F111

3451

CR Accumulated amortization

11,000

16213

F311

7061/7099

FRA Coding Rationale: Using straight-line amortization of 10 years, the cost of the asset and the future site restoration is allocated over the life of the asset (110,000/10 years).

Authority Coding Rationale: Expenditures for the acquisition were charged to an appropriation in the previous journal entry, therefore the appropriations are not affected in this journal entry. To assist with departmental reconciliation, F codes are used for these non-appropriated amounts. "F111- Expenditures previously charged to appropriations/Amortization expenses for capital assets" is used for amortization expense and "F311-Non-appropriated amounts added to or deducted from asset balances/ Increases (decreases) to accumulated amortization of capital assets" is used for accumulated amortization.

Object Coding Rationale: As these are non-cash (non-expenditure) items, they have no effect on economic objects." 7061-Accumulated amortization on capital assets" is used to capture accumulated amortization. Alternatively, "7099-Net increase or decrease in other transactions" may also be used. "3451-Amortization expense for capital assets" is used to capture amortization expense.

3) Record the actual restoration costs: Ten years have passed, the demolition of the tower and clean-up costs amount to $12,000.

  

AMT($)

FRA

AUTH

OBJ

DR Future site restoration costs

10,000

24112

B11A/B12A

0819

DR Other miscellaneous expenses

2,000

51729

B11A/B12A

0819

CR Accounts Payable

12,000

21111

R300

6299

FRA Coding Rationale: The liability of $10,000 that was recorded in entry 1 to record the future site restoration costs is credited. The additional costs of $2,000 would be recorded as an expense of the current year.

Authority Coding Rationale: The restoration costs would be charged to the operating or program vote, as appropriate. Accounts payable has no impact on authorities hence "R300 - All other assets and liabilities" is used

Object Coding Rationale: The economic object used for the restoration costs is "0819 - Non-professional personal service contracts not elsewhere specified". "6299 - Net increase or decrease to other liability accounts" is used for accounts payable.

Departmental Financial Statement and Presentation Disclosure Requirements

Where future site restoration costs are expected to be significant but cannot be reasonably estimated, a contingent liability should be reported. See section 9.4 Contingencies and TBAS 3.6 Contingencies for guidance.

5.0 Net Assets (Liabilities)

Introduction

Net Assets/Liabilities represent the difference between total assets and liabilities. When the total assets exceed total liabilities, the resulting amount represents Net Assets. When total liabilities exceed total assets, the resulting amount represents Net Liabilities.

The Net Assets/Liabilities portion of the Statement of Financial Position can be broken down into two categories i.e. unrestricted Net Assets/Liabilities and restricted Net Assets/Liabilities.

Unrestricted Net Assets/Liabilities

As a minimum, all departments will have an unrestricted Net Assets/Liabilities component made up of the departmental Financial Reporting Account 32DDD, where DDD represents the departmental number.

Transactions that flow through this unrestricted account of the Net Assets/Liabilities at year end are the:

  • closing entries associated with revenues accounts;
  • closing entries associated with expense accounts and;
  • Cash Reconciliation Control Accounts (6XDDD).

Restricted Net Assets/Liabilities

Some departments may also have a restricted portion of their Net Assets/Liabilities. This portion of the Net Assets/Liabilities would be an earmarking of accounts which the government wishes to restrict for specific purposes. These accounts are contained in Financial Reporting Accounts in the 312XX range and consist primarily of consolidated specified purpose accounts.

Consolidated specified purpose accounts are special categories of revenues and expenditures which report transactions of certain accounts where enabling legislation requires that revenues be earmarked, and that related payments and expenses be charged against such revenues. They are used principally where the activities are similar in nature to departmental activities and the transactions do not represent liabilities to third parties but in essence constitute Government revenues and expenditures.

Further, enabling legislation requires that the transactions in each of these accounts be accounted for separately. (Volume 1, Section 4.10 of the 1999-2000 Public Accounts).

For all intents and purposes, these accounts are Internally Restricted Entities as defined by PS 3100.20. Please see the special purpose account section of the manual for additional information.

Accounting for Restricted Net Assets

These accounts are identified in the Equity portion of the COA as FRA 312XX.The transactions of these accounts are recorded in revenues (FRA 426XX) and expenses (FRA 516XX) as applicable, in order to provide a more comprehensive reporting of the Government's operating results. As a result, these revenue and expense accounts must be closed separately into the relevant (312XX) account. They are not closed to Unrestricted Net Assets/Liabilities as are all other revenue and expense accounts.

References

  • PS 3100
  • TBAS 1.2 Departmental and Agency Financial Statements
  • Volume 1, Section 4.10 of the 1999-2000 Public Accounts

Scenario A - Closing of Items to Unrestricted Net Assets/Liabilities

The following is a partial listing of accounts that will be used to highlight the closing of items to Restricted and Unrestricted Net Assets and Liabilities. All of the Scenario s in this section will refer to the accounts listed here.

FRA

Account Name

DR

CR

11221

Accounts receivable - non-tax revenue

$462,000

  

16121

Machinery and Equipment

$753,000

  

16221

Accumulated amortization - Machinery and Equipment

  

$200,000

21111

Accounts payable ongoing

  

$248,000

24211

Capital Leases - Land

  

$502,000

42624

Donations and bequests to endowment accounts

  

$320,000

42132

Interest

  

$75,000

42311

Sales of goods and services - Rights and privileges

  

$124,000

42616

Revenue from Western Grain Stabilisation account

  

$220,000

42622

Premiums and other receipts to other insurance accounts

  

$378,000

42725

Donations and bequests to other accounts

  

$294,000

42635

Fines and other levies

  

$383,000

42712

Other non-tax revenue - Gifts to the Crown

  

$200,000

51159

Other transfers to industry

$570,000

  

51311

Salaries and wages (including allowances)

$340,000

  

51321

Operating expenses

$252,000

  

51421

Amortisation expense - Machinery and Equipment

$52,000

  

51612

Western Grain Stabilisation account expenses

$210,000

  

51622

Payments from other insurance accounts

$275,000

  

51635

Payments from earmarked fines and other levies

$200,000

  

61DDD

Cash Payment Control Account

  

$470,000

62DDD

Cash Deposit Control Account

  

$300,000

Journal Entries

1) Items are closed to the Unrestricted Net Assets/Liabilities account.

  

AMT($)

FRA

AUTH

OBJ

DR Interest

75,000

42132

0000

0000

DR Donations & bequests to other accounts

294,000

42725

0000

0000

DR Sales of goods and services - Rights and privileges

124,000

42311

0000

0000

DR Other non-tax revenue - Gifts to the Crown

200,000

42712

0000

0000

DR Cash Payment Control Account

470,000

61DDD

0000

0000

DR Net Equity Advanced

351,000

32DDD*

0000

0000

CR Other transfers to industry

570,000

51159

0000

0000

CR Salaries and wages (including allowances)

340,000

51311

0000

0000

CR Operating expenses

252,000

51321

0000

0000

CR Amortisation expense - Machinery and Equipment

52,000

51421

0000

0000

CR Cash Deposit Control Account

300,000

62DDD*

0000

 

* DDD refers to department number.

FRA Coding Rationale: Revenues and expenses are temporary (nominal) accounts only intended to be used for one fiscal period. They are intended to report a department's financial performance, which is always reported on a period-by-period basis. In the long term, net losses or gains are reflected in 32DDD, "Net Equity Advanced". Therefore, at the end of each period, the revenue and expense accounts must be "closed" to this Equity account. This is done by reducing the balance in the revenue and expense accounts to zero, and adding their balances to Equity. If an account carries a debit balance (like an Expense), it must be credited in the amount of its balance, and Equity must be debited for the same amount. So in this entry, all revenue accounts have been debited, because they carry credit balances, and all expense accounts have been credited because they carry debit balances. The difference between Revenues and Expenses is entered into the Equity account. In this case, there are more Expenses than Revenues, so a debit is entered.

Authority Coding Rationale: This is strictly an accrual transaction, so the Authority codes are not involved. Therefore, all amounts are coded 0000.

Object Coding Rationale: This is strictly an accrual transaction, with no impact on the Objects. Therefore, all amounts are coded 0000.

Scenario B - Closing of Items to Restricted Net Assets/Liabilities

Restricted Net Assets and Liabilities are disclosed separately, therefore they are not closed into the same Equity account as unrestricted assets and liabilities. The accounts they are closed in to are more specific, and require separate entries.

Journal Entries

1) Restricted Revenues and Expenses are closed to their appropriate Equity accounts

1a)

  

AMT($)

FRA

AUTH

OBJ

DR Premiums and other receipts to other insurance accounts

$378,000

42622

0000

0000

CR Payments from other insurance accounts

$275,000

51622

0000

0000

CR Other insurance accounts

$103,000

31222

0000

0000

1b)

  

AMT($)

FRA

AUTH

OBJ

DR Fines and other levies

$383,000

42635

0000

0000

CR Payments from earmarked fines and other levies

$200,000

51635

0000

0000

CR Earmarked fees and levies

$183,000

31235

0000

0000

1c)

  

AMT($)

FRA

AUTH

OBJ

DR Revenue from Western Grain Stabilization account

$220,000

42616

0000

0000

CR Western Grain Stabilization Account

$10,000

31212

0000

0000

CR Western Grain Stabilization account expenses

$210,000

51612

0000

0000

1d)

  

AMT($)

FRA

AUTH

OBJ

DR Donations and bequests to Endowment accounts

$320,000

42624

0000

0000

CR Endowment Accounts

$320,000

31224

0000

0000

FRA Coding Rationale: The closing process in this Scenario is similar to the process already explored in the previous Scenario , except that these revenue and expense accounts must be closed to their respective Equity accounts (312XX) instead of a general one. In this case, revenues and expenses relating to Insurance accounts, Endowments and the Consolidated Specified Purpose accounts (Earmarked Fees and Levies, Western Grain Stabilization Account) are closed to 31222 - "Other insurance accounts", 31224 - "Endowment accounts", 31235 - "Earmarked fees and levies", 31212-"Western Grain Stabilization Account", respectively.

Authority Coding Rationale: This is strictly an accrual transaction, so the Authority codes are not involved. Therefore, all amounts are coded 0000.

Object Coding Rationale: This is strictly an accrual transaction, with no impact on the Objects. Therefore, all amounts are coded 0000.

The following is a summary of what gets recorded into the unrestricted and the restricted net asset/liability sections based on the above transactions Please note, this is not the disclosure required for the Net Assets/Liabilities section of the financial statements.

Unrestricted Net Assets/Liabilities
  • Net Equity Advanced

DR $351,000 (Scenario A, Journal Entry 1)

Restricted Net Assets /Liabilities

  • Consolidated SPAs
  • Western Grain Stabilization account

CR $10,000 (Scenario B, Journal Entry 1c)

  • Earmarked Fines and Levies

CR $183,000 (Scenario B, Journal Entry 1b)

  • Insurance Accounts

CR $103,000 (Scenario B, Journal Entry 1a)

  • Endowments

CR $320,000 (Scenario B, Journal Entry 1d)

Total restricted Net Assets/Liabilities

CR $616,000

Total Net Assets/Liabilities

CR $265,000

Departmental Financial Statement Presentation and Disclosure Requirements

Departments which have both unrestricted and restricted Net Asset/Liabilities accounts will be required to include a Schedule of such as part of their financial statement package. Please see TBAS 1.2 Departmental and Agency Financial Statements.

6.0 Revenue

Revenues are increases in economic resources, either by way of inflows or enhancements of assets or reductions of liabilities, resulting from the ordinary activities of a department. They can result from activities such as the sale of goods, gain on sales of assets, interest and penalties earned on tax and non-tax revenue, and return on investments. The manual will only explore non-tax revenue.

Revenues appear on the departmental Statement of Operations, where they are netted against expenses to determine the net cost of each business line in the department. Revenues by type are disclosed by way of a Schedule to the Financial Statements.

6.1 Respendable versus Non-Respendable Revenue

Introduction

This section addresses non-tax revenues only. (Tax revenues are not addressed in this manual, as they only apply to CCRA.). Non-tax revenue transactions can be external or internal to the Government and can be respendable or non-respendable. Departments require specific authority to be able to respend revenues, either through a voted appropriation or in a statutory appropriation, or specific legislation.

Revenue is defined as the inflow of cash, receivables or other consideration arising in the course of the ordinary activities of the government entity, normally from the sale of goods, the rendering of services, and the earning of interest, royalties and dividends. It does not include borrowings, such as debenture proceeds, or transfers from other funds or include repayments of loans, receivables, advances, etc.

Deferred Revenue is defined as the inflow of cash, receivables or other consideration arising in the course of the ordinary activities of the government entity BEFORE the transactions or events occur that give rise to the earning of the revenues. (See section on Deferred Revenues) Only after the government meets the obligation for which it collected those funds can the transactions be recognized as actual revenue.

Revenue Recognition

Revenues should be accounted for in the period in which the transactions or events giving rise to the revenues occurred. For example, user fees are recorded in the period when the goods or services are provided, sales when the sales are made and revenue from cost sharing arrangements when the costs are incurred to earn that revenue. Revenues should be recognized based on the revenue recognition criteria set out in the CICA handbook [Section 3400.6 to 3400.15] and for administrative simplicity, they are normally recorded at the time the invoice is issued. However, care must be exercised when goods or services are provided near the end of a particular accounting period since revenues must be recognized in the period even though an invoice may not have been issued. This can be accomplished through setting up an accrued or accounts receivable. Items not practically measurable until cash is received would be accounted for at that time. (PS 1500.83)

Examples of Non-Tax Revenues include:

  • Sales of goods and services to parties outside or within the government
  • Gain on sales of assets (both capital and non-capital)
  • Interest and penalties earned on tax and non-tax revenue
  • Revenue on consolidated and non-consolidated Specified Purpose Accounts
  • Revenue from Cost Sharing Arrangements (other)
  • Return on Investments
  • Consolidated Crown Corporation revenue
  • Other non-tax revenue

References

  • PSA 1500.83-1500.87, 1800.37-1800.40
  • CICA Handbook Sections 1000.37, 3400

Scenario A1 - External Transactions - Non respendable

The department sells information products to an outside party for $500. (Assumption: Sale takes place in Ontario. See section on Sales Tax for rules on sale tax with respect to sales in other provinces.)

Journal Entries

1) Department has delivered information products to an outside party for $500

  

AMT($)

FRA

AUTH

OBJ

DR Accounts receivable

575

11221

R300

5399

CR GST payable

35

21134

R300

6299

CR PST payable

40

21151

R300

6299

CR Sales of goods and information products

500

42315

D/E(*)

4546

Note: The entries for the settlement of GST payable can be found in the section related to Sales Tax Section. Entries required when the accounts receivable is paid are covered in the Accounts Receivable section of this manual.

FRA Coding rationale: At this point the Department should recognize the revenue since the amount is known and the risks and rewards of ownership have been transferred to the buyer and the seller has completed all significant acts. Once the goods have been provided, the revenue should be recorded in the Department's books, as well as the relevant GST and PST that is payable on the revenue. Assuming this transaction takes place in Ontario, the PST payable is calculated as 8% of the sale price and is a payable to the Ontario Government in accordance with the applicable provincial government requirements for reporting and remitting provincial sales taxes. The GST payable is calculated as 7% of the sales price and is payable to Canada Customs and Revenue Agency. A receivable must be set up to record the amount to be received (which includes the GST and PST) by the outside party. Where an invoice has not been issued, an accrued receivable for an estimated amount should be set up using FRA 11223 and ignoring the GST and PST payable. This accrual can be reversed in the next period before the invoice is issued.

Authority code rationale: Since there are no impacts on the authorities for payables and receivables "R300- All other assets and liabilities" is used. D/E(*) With respect to revenue, depending on the nature of the revenue any of the following applicable codes could be used:

 

Statutory Non-Tax Revenue

Non Statutory Non-Tax Revenue

Non-Respendable Revenue

D221 to D223

E221 to E223

Please note that these D and E codes capture the relevant revenue charging authority. D is used for those which are statutory whereas E captures those which are non-statutory. These do not affect appropriations, and no further entries for authorities are required when the cash is received from the customer.

Object coding rationale: "To record the GST Payable and PST payable "6299-Net Increase or Decrease to Other Liability Accounts" would be used. "5399 - Net Change to Accounts Receivable" is used to establish an accounts receivable. At this point the revenue is earned, therefore the object is affected. "4546-Sales of information products" would be used in this particular Scenario. However, depending on the nature of the good or service provided, the appropriate non-tax revenue object (45xx or 48xx) would be used.

Scenario A 2 - Internal Transactions - Non-respendable

There is no conceptual difference between transactions with external parties and those with other government departments but there are procedural differences. The major difference is that, for sales of goods and services, the billing department (creditor) does not have to wait for payment by the invoiced department (debtor). Instead, the creditor is deemed to have been paid when a transaction is processed by the Interdepartmental Settlement functionality of the Standard Payment System (SPS/IS). The Receiver General Manual should be consulted for more information on the Interdepartmental Settlement process.

For the purposes of the accounting transactions, there is no requirement for the creditor department (the selling department) to affect accounts receivable with the new FIS Interdepartmental Settlement (IS) process, and to separate the billing process from the settlement process for their revenue transactions. However, for the following reasons it may be advantageous to use the Accounts Receivable functionality of your financial system, especially if there are multiple potential sources of IS initiation, for example, more than one billing or invoicing system:

  • Single point for the processing of transactions to and from SPS/IS,
  • Centralized record of transactions per customer,
  • More accurately reflects cross-year transactions (revenue earned in one fiscal year, IS initiation in the following fiscal year)

May facilitate reconciliation with the IS Control Accounts.

Journal Entries

1) Department has sold goods to another department for $500

1a) If Accounts Receivable functionality is used:

  

AMT($)

FRA

AUTH

OBJ

DR Other Receivables from OGD

500

11242

R300

5399

CR Sales of goods and information products

500

42315

D/E(*)

4546

Receipt of the return file from the Standard Payment System would be used to clear the accounts receivable entry.

  

AMT($)

FRA

AUTH

OBJ

DR IS Debit Control Accounts

500

64DDD(**)

0000

9DDD(***)

CR Other Receivables from OGD

500

11242

R300

5399

1b) If Accounts Receivable functionality is not used:

  

AMT($)

FRA

AUTH

OBJ

DR IS in Transit to RG

500

11245

R300

5299

CR Sales of goods and information products

500

42315

D/E(*)

4546

Receipt of the return file from the Standard Payment System would be used to clear the "In Transit" account.

  

AMT($)

FRA

AUTH

OBJ

DR IS Debit Control Accounts

500

64DDD(**)

0000

9DDD(***)

CR IS in Transit to RG

500

11245

R300

5299

(**) The DDD is the department number of the department selling the goods.

(***) The DDD is the department number of the department purchasing the goods.

FRA Coding rationale: At this point the Department should recognize the revenue since the amount is known and the risks and rewards of ownership have transferred to the buyer as well the seller has completed all significant acts. The Department is deemed to have been paid on successful processing of the transaction through SPS/IS; the IS Debit Control Account is used on receipt of the return file from SPS/IS. (Departments are not obliged to use the "In Transit" accounts. The alternative is to affect the Control Account on initiation of the transaction to the Receiver General system and adjusting for any rejected items after receipt of the appropriate return file.)

Authority code rationale: D/E(*) See Scenario A1, Journal Entry 1, Authority Code Rationale. Since there is no impact on authorities with respect to Transit accounts R300 is used, All RG Interface Control Accounts are zero-filled.

Object coding rationale: "5399-Net Change to Accounts Receivable" is used to establish an interdepartmental account receivable. To record the net impact on Cash Accounts, 5299 would be used. "4546-Sales of information products" should be used in this particular Scenario. But depending on the nature of the good or service sold the appropriate non-tax revenue object in sub-categories 45, 46, or 48 would be used. 9DDD is used for interdepartmental settlements.

Scenario B1 - External Transactions - Respendable

The department sells information products to an outside party for $500. (Assumption: Sale takes place in Ontario. See section on Sales Tax for rules on sales tax with respect to sales in other provinces.)

Journal Entries

1) Department has delivered information products to an outside party for $500

  

AMT($)

FRA

AUTH

OBJ

DR Accounts receivable

575

11221

R300

5399

PST payable

40

21151

R300

6299

GST payable

35

21134

R300

6299

CR Sales of goods and information products

500

42315

D/E(*)

4546

Note: The entries for the settlement for GST payable can be found in the section related to Sales Tax. Entries required when the accounts receivable is paid by customers are covered in the Accounts Receivable section of this manual.

FRA Coding rationale: At this point the Department should recognize the revenue since the amount is known and the risks and rewards of ownership have transferred to the buyer as well the seller has completed all significant acts. Once the goods have been provided, the revenue should be recorded in the Department's books, as well as the relevant GST and PST that is payable on the revenue. Assuming this transaction takes place in Ontario, the PST payable is calculated as 8% of the sale price and is a payable to the Ontario Government in accordance with the applicable provincial government requirements for reporting and remitting provincial sales taxes. The GST payable is calculated as 7% of the sales price and is payable to Canada Customs and Revenue Agency. A receivable must be set up to record the amount to be received (which includes the GST and PST) by the outside party. Where an invoice has not been issued, an accrued receivable for an estimated amount should be set up using FRA 11223, but ignoring the GST and PST payable.

Authority code rationale: Since there are no impacts on the authorities for payables and receivables "R300- All other assets and liabilities" is used. D/E(*) With respect to revenue, depending on the nature of the revenue any of the following applicable codes could be used:

  

Statutory Non-Tax Revenue

Non Statutory Non-Tax Revenue

Respendable Revenue

D211 to D213

E211 to E213

Please note that these D and E codes capture the relevant revenue charging authority. D is used for those which are statutory whereas E captures those which are non-statutory. These do not affect appropriations at this stage, but further entries for authorities are required when the settlement is received from the customer.

Object coding rationale: To establish the PST and GST payable "6299-Net Increase or Decrease to Other Liability Accounts" would be used. "5399 - Net Change to Accounts Receivable" is used to establish an accounts receivable. At this point the revenue is earned, therefore the object is affected. "4546-Sales of information products" would be used in this particular Scenario , as this amount is respendable revenue that is included in standard object 13. However, on the nature of the good or service provided, the appropriate non-tax revenue object in sub-category 35 would be used.

2) Subsequently, the invoice is paid in full and revenue is credited to the vote (Department has authority to respend)

2a) Outside party pays invoice in full

  

AMT($)

FRA

AUTH

OBJ

DR Cash in Hands of Depts
(awaiting deposit to RG)

575

11125

R300

5299

CR Accounts receivable

575

11221

R300

5399

See Cash section for further entries related to the settlement of Cash in Hands of Departments (awaiting deposit to RG).

FRA coding rationale: At this point the outside party has paid the department thereby reversing the accounts receivable and increasing the Department's "Cash in hands of Depts (awaiting deposit to RG)" holdings.

Authority coding rationale: Since there is no effect on appropriations with respect to the settlement of the accounts receivable, R300 is used.

Object coding rationale: To record the net impact on Cash Accounts, 5299 would be used. To indicate the net impact on accounts receivable" 5399-Net Change to Accounts Receivable" is used.

2b) Now that the revenue has been received, it can be credited to departmental appropriations (i.e. as respendable revenue)

  

AMT($)

FRA

AUTH

OBJ

DR Sales of goods and information products

500

42315

D218/E218

7099

CR Sales of goods and information products

500

42315

B13A

7099

FRA rationale: This transaction is strictly recorded for authority purposes only. To ensure there is no effect on FRAs, the same FRA is debited and credited for the same amount.

Authority rationale: When a Department has authority to re-spend revenue, it can only be respent when the revenue is actually received (i.e. on a cash basis). Only the revenue portion of the transaction is affected-in this case, $500. To reflect this, the cash received is credited to "B13A Revenues credited to the vote". The debit will be to either a D218 (statutory) or E218 (non-statutory) depending on where the original sale was recorded. It is important that either D218 and E218 be used in this transaction and that the authority code used to set up the revenue transaction not be used. Otherwise, information on the revenue charging authorities would be lost.

Object rationale: This is strictly an authority transaction. To ensure there is no effect on objects, the same object, "7099- Net Increase or Decrease in Other Transactions", is debited and credited for the same amount so it will have a nil effect on objects.

Scenario B2 - Internal Transactions - Respendable

As with transactions with external parties, the only differences between the entries for respendable revenue and those for non-respendable revenue are the authority code used on the recognition of Revenue and the requirement to affect the authority for Revenue Credited to the Vote.

The authority code rationale in Journal Entry 1 in Scenario B1 applies to the entry to recognize revenue used in the first journal entry of Scenario A2, regardless of whether Accounts Receivable is used or not.

The same transaction as Journal Entry 2b of Scenario B1 must be recorded whenever the Department considers itself to have been "paid".

Scenario C - Recognition of Gains on Sales of Assets

See Tangible Capital Asset Section

Scenario D - Interest Revenue on Overdue Receivables

An outside party is overdue in paying their trade receivables for goods sold to them by the Department. The Department is owed $50 in interest on these overdue accounts receivable.

Journal Entries

1) Record interest on non-tax revenue

  

AMT($)

FRA

AUTH

OBJ

DR Accounts receivable non-tax revenue

50

11221

R300

5399

CR Interest on overdue accounts receivable

50

42541

E500

4832

FRA coding rationale: Since the amount of revenue is measurable and ultimate collection is reasonably assured, the department will recognize $50 in interest revenue on overdue accounts receivable. Since the amount is yet to be received from the outside party, an accounts receivable is set up. If the department wants to separate these receivables from the regular receivables, FRA 11223 is available for this purpose.

Authority coding rationale: There is no impact on authorities with respect to receivables, R300 is used. "E500 - All other non-tax revenue" would be used in this Scenario since there is no other specific authority to capture this information. It should be noted that this authority is credited on an accrual basis and not when the cash is received.

Object coding rationale: 5399 is used to establish an accounts receivable. "4832-Interest on overdue accounts receivable" is used to indicate that the revenue has been earned. If the original revenue is respendable, object 3593 should be used instead of 4832.

Departmental Financial Statement Presentation and Disclosure Requirements

Revenues are to be recorded by program and business line on the Department's Statement of Operations. The amounts of individual items that make up the total non-tax revenue of the Department are to be captured in the Schedule of Non-tax Revenues.

6.2 Unrestricted Gifts, Bequests, Donations

Introduction

This section applies to the receipt of physical assets through gifts, bequests and donations. This section also applies to the receipt of financial assets through gifts, bequests and donations that do not have a specified purpose. Gifts, bequests and donations of financial assets that are received for a specified purpose should be accounted for as a specified purpose account (see section 9.3).

Authorities Perspective:

Any amount received as a gift to the Crown without any condition or requirement as to the use of the amount shall be credited to the Debt Servicing Reduction Account.

Accrual Accounting Perspective:

Donations are treated differently depending on whether they are restricted donations or unrestricted donations.

Restricted Contributions:

If the external parties specify how the resources are to be used, those inflows are restricted in nature. For example, a third party could donate a parcel of land, conditional that a building or other structure be built on it. This would constitute an external restriction since the asset is restricted by agreement with the external party. Restricted contributions for the purchase of capital assets that will be amortized should be deferred and recognized as revenue on the same basis as the amortization expense relate to the acquired capital assets (CICA 4410.33).

It should be noted that a contribution restricted for the purchase of a capital asset or a contribution of the capital asset itself is a type of restricted contribution (CICA 4410.02(b(i))).

Unrestricted Contributions:

Unrestricted contributions (i.e. cash) should be recognized as revenue in the current period (CICA 4410.47).

A donated capital asset would be recorded at its fair value at the date of contribution. Fair value may be estimated using market or appraisal values. When an estimate of fair value cannot reasonably be made, the capital asset would be recognized at a nominal value (CICA 4430.09).

References

  • Policy on Specified Purpose Accounts - Appendix A Section 4 (available at: /pol/doc-eng.aspx?id=12249
  • CICA 4410, 4430
  • Debt Service Reduction Act

Scenario A - Donation of money - No specified purpose & no conditions attached

A third party donates $15,000. There are no conditions attached to this gift.

Journal Entries

1) To record the receipt of an unrestricted contribution.

  

AMT($)

FRA

AUTH

OBJ

DR Cash in the hand of the Depts awaiting deposit to RG

15,000

11125

R300

5299

CR Gifts to the Crown

15,000

42712

D341

4899

FRA coding rationale: Since this is an unrestricted donation it should be brought into revenue in the current period.

Authority coding rationale: Since the entire amount of revenue is being recognized at this point an authority will be affected. In this case, D341-Gifts to the Crown would be credited. The use of this code would alert PWGSC that the amount must be reported as part of the Debt Service Reduction Account in the Public Account. There is no impact on the authority side for "cash", therefore, "R300-All other assets and liabilities" is used.

Object coding rationale: To record the net impact on Cash Accounts, 5299 would be used. To reflect incoming revenue in the period "4899-Other non-tax revenue" would be used.

Scenario B1 - Contribution is land - without restriction

A third party donates land with a fair market value of $12,000. There is no restriction placed by the donor on the use of the land.

Journal Entries

1) To record the receipt of the donated land.

  

AMT($)

FRA

AUTH

OBJ

DR Land

12,000

16111

R300

1301

CR Gifts to the Crown

12,000

42712

E500

4899

FRA coding rationale: Because the contribution of land is without restriction, the fair value of the land should be used. The donation is credited to revenue.

Authority coding rationale: "E500-All other non-tax revenue" is used for the revenue side of the transaction as there is no specific authority associated with donations of assets. "R300 - all other assets and all other liabilities" is used to record the land. Alternatively, "F999 - Non-appropriated amounts" could be used on both sides of the entry as a donated asset has no effect on authorities.

Object coding rationale: 1301 would be used for the land and "4899 - Other miscellaneous non-tax revenue" would be used for the revenue side.

Scenario B2 - Contribution is land - with restriction

A third party donates land with a fair market value of $12,000 provided that it be used to build a monument

Journal Entries

1) To record the receipt of the donated land.

  

AMT($)

FRA

AUTH

OBJ

DR Land

12,000

16111

R300

1301

CR Deferred Revenue

12,000

21510

E500

4899

FRA coding rationale: As the donation of land has a restriction which has not yet been fulfilled, the donation cannot yet be recognized as revenue.

Authority coding rationale: "E500-All other non-tax revenue" is used for the deferred revenue side of the transaction as there is no specific authority associated with donations of assets. "R300 - all other assets and all other liabilities" is used to record the land. Alternatively, "F999 - Non-appropriated amounts" could be used on both sides of the entry as a donated asset has no effect on authorities.

Object coding rationale: 1301 would be used for the land and "4899 - Other miscellaneous non-tax revenue" would be used for the revenue side.

2) The monument is now built, thus the restriction is no longer in effect and the donation can now be recognized in revenue.

  

AMT($)

FRA

AUTH

OBJ

DR Deferred Revenue

12,000

21510

F450

7099

CR Gifts to the Crown

12,000

42712

F259

7099

FRA coding rationale: Once the land is used for the purpose specified, there is no longer a restriction on the contribution. Therefore, it is necessary to reduce deferred revenue (the liability) and record revenue.

Authority coding rationale:. There is no impact on authorities/appropriations, F codes will be used in order to assist in departmental reconciliations. "F450- Other non-appropriated amounts added to or deducted from liability balances" would be used for the deferred revenue amount. "F259- Other revenue not being credited to appropriations or other authorities at the same time" should be used for the revenue amount.

Object coding rationale: Since the object information was recorded at the time of the donation there is no impact on the objects for this entry. "7099 - Net increase or decrease in other transactions" would be used for both sides of the entry.

Scenario C - Contribution is an asset which is above the departmental capital asset threshold.

A third party donates equipment with a fair market value of $20,000 and it is required that the equipment be used for a specified purpose. The equipment has an expected useful life of two years with no residual value.

Journal Entries

1) To record the receipt of the donated equipment.

    

AMT($)

FRA

AUTH

OBJ

DR Machinery and equipment

20,000

16121

R300

1243

CR Deferred Revenue

20,000

21510

E500

4899

FRA coding rationale: Contributions of assets should be recognized as increases in revenue. The fair value of the asset of $20,000 is credited to a revenue account. Since the fair value of the asset donated is above the Department's capital asset threshold, the charge is made to an asset account.

Authority coding rationale: "E500-All other non-tax revenue" is used for the deferred revenue side of the transaction as there is no specific authority associated with donations of assets. "R300 - all other assets and all other liabilities" is used to record the land. Alternatively, "F999 - Non-appropriated amounts" could be used on both sides of the entry as a donated asset has no effect on authorities.

Object coding rationale: Only one side of the transaction will have an impact on the objects. At this point equipment has been donated, therefore 1243 would be used. "4899 - Other miscellaneous non-tax revenue" would be used for the revenue side.

2) To record the amortization expense and the accumulated amortization for one month

  

AMT($)

FRA

AUTH

OBJ

DR Amortization Expense

833

51433

F111

3451

CR Accumulated Amortization

833

16233

F311

7061

FRA coding rationale: It is necessary to allocate the cost of the asset as an expense in a rational and systematic manner over those periods expected to benefit from the use of the asset. Using straight-line amortization, the monthly charge to amortization expense and accumulated amortization would be $833 ($20,000/2yrs = $10,000/year; $10,000/12mths = $833/month).

Authority coding rationale: Expenditures for the acquisition were charged to an appropriation in the previous journal entry, therefore the appropriations are not affected in this journal entry. To assist with departmental reconciliations, F codes are used for these non-appropriated amounts. "F111- Expenditures previously charged to appropriations/Amortization expenses for capital assets" is used for amortization expense and "F311-Non-appropriated amounts added to or deducted from asset balances/ Increases (decreases) to accumulated amortization of capital assets" is used for accumulated amortization.

Object coding rationale: As these are non-cash (non-expenditure) items, they have no effect on economic objects." 7061-Accumulated amortization on capital assets" is used to capture accumulated amortization. "3451-Amortization expense for capital assets" is used to capture amortization expense.

3) To recognize revenue earned

  

AMT($)

FRA

AUTH

OBJ

DR Deferred revenue

833

21510

F450

7099

CR Gifts to the Crown

833

42712

F259

7099

FRA coding rationale: As the equipment is used for the purpose specified, there is no longer a restriction on the contribution. Therefore, revenue is recognized in the same amounts as the amortization expense. The deferred revenue account (the liability) is reduced as revenue is recorded.

Authority coding rationale:. There is no impact on authorities/appropriations, F codes will be used in order to assist in departmental reconciliations. "F450- Other non-appropriated amounts added to or deducted from liability balances" would be used for the deferred revenue amount. "F259- Other revenue not being credited to appropriations or other authorities at the same time" should be used for the revenue amount.

Object coding rationale: Since the object information was recorded at the time of the donation there is no impact on the objects for this entry. "7099 - Net increase or decrease in other transactions" would be used for both sides of the entry.

Scenario D - Contribution is an asset which is less than the departmental capital asset threshold.

A third party donates equipment with a fair market value of $4,000 and it is required that the equipment be used for a specified purpose.

Journal Entries

1) To record the receipt of the donated equipment.

  

AMT($)

FRA

AUTH

OBJ

DR Operating Expense

4,000

16111

R300

1243

CR Gifts to the Crown

4,000

42712

E500

4899

FRA coding rationale: Contributions of assets should be recognized as increases in revenue. The fair value of the asset of $4,000 is credited to a revenue account. Since the fair value of the asset donated is below the Department's capital asset threshold, the charge is made to operating expense.

Authority coding rationale: "E500-All other non-tax revenue" is used for the revenue side of the transaction as there is no specific authority associated with donations of assets. "R300 - all other assets and all other liabilities" is used to record the land. Alternatively, "F999 - Non-appropriated amounts" could be used on both sides of the entry as a donated asset has no effect on authorities.

Object coding rationale: Only one side of the transaction will have an impact on the objects. At this point equipment has been donated, therefore 1243 would be used. "4899 - Other miscellaneous non-tax revenue" would be used for the revenue side.

Departmental Financial Statement Presentation and Disclosure Requirements

Unrestricted gifts, bequests and donations of financial assets are reported on the department's Statement of Operations under the heading Revenues.

Capital assets received as a result of gifts, bequests and donations should be included in the department's disclosure of capital assets. See presentation and disclosure requirements in Section 3.5.1.

7.0 Expenses

Expenses are the cost of resources consumed in and identifiable with the operations of the accounting period. PS 1500.93 Examples of expenses include operating expenses, grants and contributions, salaries, etc.

Expenses by business line appear on the departmental Statement of Operations. Expenses by object are reflected in a Schedule to the Financial Statements.

7.1 Operating Expenses

Introduction

The majority of transactions that a department will record relate to operating expenses. These are expenses that the departments incur in the course of delivering program outputs. Operating expenses include such items as personnel costs, office supplies, capital assets purchases which are below the department's capitalization threshold, repair and maintenance, consulting fees, operating leases, etc.

In addition to the proper accrual accounting treatment, it is important to ensure that the operating expenses are charged to the correct appropriation or authority whether it is the program vote, operating vote, capital vote, a statutory authority, or a specified purpose account etc. It should also be noted that some expenses e.g. amortization, bad debts and provision for accumulated vacation pay are not charged to an appropriation. As well, it is important to ensure that the appropriate economic object is selected to reflect the nature of the transaction.

References

  • TBAS 1.2 Departmental and Agency Financial Statements
  • PS 1500.74-.75, 1500.79-.81, 1500.93-.97

Scenario A - Department incurs consulting fee expenses

The Department incurs $8,000 in consulting fees for a feasibility study.

Journal Entries

1) Consulting for the feasibility study has been completed.

  

AMT($)

FRA

AUTH

OBJ

DR Operating Expenses

8,000

51321

(**)

0491

DR GST refundable advance

560

13392

G111

8171

CR Accounts Payable*

8,560

21111

R300

6299

* See Accounts Payable section for explanation on coding and rationale.

Note: There are further entries required to discharge the accounts payable. Please refer to the Accounts Payable section.

FRA coding rationale: Once the operating expenses have been incurred, (regardless of when it is paid for or whether the invoice has been received), the Department must record the expenses in the period by debiting "51321-Operating Expenses". The consulting fees are recorded as operating expenses. Either a payable must be set up to record the amount owing by the Department or an accrued liability if it is for an estimated amount (in this case GST would not be recorded). In this example, it is assumed that the Department has been invoiced and hence is being charged GST on the consulting fees and must pay it to the vendor. However, as the Department will eventually recover this amount from Canada Customs and Revenue Agency (CCRA) they should record it as an asset in "13392 GST/HST Refundable advance accounts".

Authority coding rationale: (**) Once the service has been received, (regardless of when it is paid for or whether the invoice has been received), the Department would charge an appropriation (either the Program vote - B11A or the Operating Vote- B12A). In the event that the expense relates to a SPA, then the operating expenses would be charged to the appropriate non-budgetary authority. If the SPA relates to a non-statutory authority then one of the following authority codes would be used; P3xx, P5xx, P7xx or P8xx and if the SPA relates to a statutory authority, then either N3xx or N5xx would be used. Since GST is not to be charged to a departmental appropriation, it is set up as an advance under a special authority, G111.

Object coding rationale: At this point the service has been rendered, therefore an economic object has to be charged. In this particular instance the expenses relate to management consulting therefore the code " 0491-Management consulting" would be used. However, depending on the good or service acquired, the appropriate economic object in sub-categories 01 to 13 would be used. To record the net impact on Accounts Payable, "6299-Net Increase or Decrease to Other Liability Accounts" would be used. Since there is GST/HST payable, the GST must be reflected by using, "8171-Payment of GST on purchases".

Scenario B - Department incurs repair expenses

The Department incurs $6,500 in repairs for a heating system for an office building.

Journal Entries

1) Repairs for the heating system are completed.

  

AMT($)

FRA

AUTH

OBJ

DR Operating Expenses

6,500

51321

(**)

0630

DR GST refundable advance

455

13392

G111

8171

CR Accounts Payable*

6,955

21111

R300

6299

* See Accounts Payable section for explanations of coding and rationale.

Note: There are further entries required to discharge the accounts payable. Please refer to the Accounts Payable section.

FRA coding rationale: See journal entry Scenario A 1)

Authority coding rationale: See journal entry Scenario A 1)

Object coding rationale: At this point the service has been rendered, therefore an economic object has to be charged. In this particular instance the expenses relate to the repairs of an office building, therefore, "0630 - Repair of Buildings/Office buildings" would be used. However, depending on the good or service acquired the appropriate economic object in sub-categories 01 to 13 would be used. To record the net impact on Accounts Payable, "6299-Net Increase or Decrease to Other Liability Accounts" would be used.

Scenario C - Department purchases equipment for less than the Departmental Capital Asset Threshold (maximum $10,000)

The Department purchases and receives computer equipment (monitors) for $4,000.

Journal Entries

1) Purchase and receipt of computer monitors for a cost less than the department's capital threshold.

  

AMT($)

FRA

AUTH

OBJ

DR Operating Expenses

4,000

51321

(**)

1227

DR GST refundable advance

280

13392

G111

8171

CR Accounts Payable*

4,280

21111

R300

6299

* See Accounts Payable section for explanations of coding and rationale. There are further entries required to discharge the accounts payable. Please refer to the Accounts Payable section.

FRA coding rationale: Since the purchase of equipment is less than the $10,000 threshold the $4,000 will be expensed instead of capitalized. See journal entry Scenario A 1)

Authority coding rationale: See journal entry Scenario A 1) As well this expenditure could be charged to the Capital vote B14A, depending on the department's vote structure.

Object coding rationale: At this point the service has been rendered, therefore an economic object has to be charged. In this particular instance the expenses relate to the purchase of computer hardware, "1227 - Computer equipment -small-desktop/personal/portable/keyboard" would be used. This object will be used, regardless of whether the computer monitors are capitalized for FRA purposes and the authority code used for appropriation purposes. However, depending on the good or service acquired the appropriate economic object in sub-categories 11 to 13 would be used. To record the net impact on Accounts Payable, "6299-Net Increase or Decrease to Other Liability Accounts" would be used.

Departmental Financial Statement Presentation and Disclosure Requirements

As per TBAS 1.2 Departmental and Agency Financial Statements, operating expenses will be disclosed in total by business line on the Statement of Operations and will be broken out by type on the Schedule of Operating Expenses.

7.2 Grants and Contributions

Authorities Perspective:

A grant is a transfer payment made to an individual or organization which is not subject to being accounted for or audited but for which eligibility and entitlement may be verified or for which the recipient may need to meet pre-conditions (Transfer Payment Policy).

A contribution is a conditional transfer payment to an individual or organization for a specified purpose pursuant to a contribution agreement that is subject to being accounted for and audited (Transfer Payment Policy).

For appropriation purposes, grants and contributions are charged to either a Grants and Contribution vote or a Program Expenditures vote depending if a department has a separate vote or not.

Accrual Accounting Perspective:

Grants and contributions are transfers of money and/or goods from the government to an individual, an organization or another government for which the federal government does not:

  1. receive any goods or services directly in return;
  2. expect to be repaid; or
  3. expect a financial return;

Grants and contributions shall be accounted for in accordance with PS 3410. They shall be recognized as an expense in the department's Statement of Operations in the period that the events giving rise to the transfer occurred, as long as:

  1. the transfer is authorized;
  2. eligibility criteria, if any, have been met by the recipient; and,

a reasonable estimate of the amount can be made.

Repayable contributions are those transfers whereby the recipient is expected to repay the amount or the government expects to receive a financial return. The terms may specify a calendar date or dates for repayment, or may describe the particular time(s) or circumstances(s) that will determine repayment. (PS 3050.07)

For the accounting treatment of repayable contributions see the following sections of the manual:

  1. Unconditional Repayable Contributions - See Loans Receivable Section

Conditional Repayable Contributions - See Conditional Repayable Contributions Section (9.8.1).

References

Scenario A - Disbursement of Grant

A scholarship is awarded to an individual for $36,000, where $9,000 is given out at the beginning of each year for four years, provided the individual stays in the learning institution. It should be noted that if the individual fails to meet the requirements of the grant he/she will be required to repay the amounts transferred.

Journal Entries

1) To record disbursement of the first instalment, $9,000, to the individual

  

AMT($)

FRA

AUTH

OBJ

DR Transfer Payments-Scholarship

9,000

51119

B15A(*)

2041

CR Accounts Payable

9,000

21111

R300

6299

(See section on Accounts Payable for the entries required for settlement of accounts payable)

FRA Coding Rationale: At this point, the eligibility criterion for the first instalment has been met, the individual is in school, the amount can be estimated and the transfer is authorized. Because the eligibility requirements require the individual to be in school only the first instalment can be recognized. An accounts payable is set up for the corresponding amount to be paid to the individual. It would be appropriate to establish a commitment for the remainder.

Authority Coding Rationale: In this example the grant is charged to the B15A(*) - Grant and Contribution vote but depending on the department B11A - Program Vote could be used as well. Since accounts payable has no impact on appropriations, R300 is used.

Object Rationale: In this example, the transfer payment is made to an individual, therefore 2041 is used. However depending on whom the recipient of the grant is, the appropriate object would be used. "6299- Net Increase or Decrease to Other Liability accounts" should be used to indicate the establishment of the accounts payable.

2) To record disbursement of the second instalment, $9,000 to the individual

See Journal entry 1

3) To record disbursement of the third instalment, $9,000 to the individual

See Journal entry 1

Scenario B - Recipient dropped out of school - Required to repay grant

In the middle of year 3 the recipient drops out of school and is required to repay $9,000 (only the third instalment, conditions were satisfied for year 1 and 2). It has been determined that is likely that recovery will be realized.

Journal Entries

1) The individual drops out of school and is required to repay grant.

  

AMT($)

FRA

AUTH

OBJ

DR Accounts Receivable for refunds of program expenses

9,000

11231

R300

5399

CR Transfer Payments-Scholarship

9,000

51119

E500

4731

(See section on Accounts Receivable for the entries required for settlement of accounts receivable.)

FRA Coding Rationale: Once it is certain that full or partial repayment is required, departments will set up a receivable and reduce the transfer expenses of the current period.

Authority Coding Rationale: Since accounts receivable has no impact on appropriations, R300 is used. E500 is used to record revenue from this source for authority purposes.

Object Rationale: To indicate the net impact on accounts receivable"5399-Net Change to Accounts Receivable" is used. "4731- Repayment of Recoverable Items/ Contribution recoveries" is used to capture the revenue associated with the repayment of this grant.

Please note: The appropriate valuation allowance would be recorded. See Accounts Receivable Section, Scenario B.

Departmental Financial Statement Presentation and Disclosure Requirements

Grants and contributions will be recorded as expenses in the Department's Statement of Operations.

7.3 Compensation

Compensation is a major component of a Department's operating expenses. Some components of compensation are recorded by the department and others are recorded centrally by Treasury Board Secretariat.

Employer Pension Contributions

TBS will not devolve additional responsibilities to the departments with respect to accounting for pensions. All departments will continue to record employer contributions as an expense as per the current practice.

SPA Pension Accounts

Those departments, responsible for maintaining a specified purpose account (SPA) for Pensions, will continue to account for these pensions as per the relevant legislation. Because of these legislative requirements there will be no change in the accounting for these pension accounts. However, departments will have to ensure the timely recording of the employer's contribution and of the recovery of administrative costs from the account (when applicable) in the month which these transactions relate. These departments will also now record a liability in the form of a SPA pension account on their departmental Statement of Financial Position.

Any issues that these departments may have will be handled off-line with Treasury Board Secretariat.

TBS will continue to amortise any gains and losses and estimation adjustments related to actuarial surpluses or deficiencies for Public Accounts presentation

Please note: Those departments that compensate any of their employees using their own pay systems (i.e. not through the PWGSC Pay System) will be handled off-line with TBS.

TBS will continue to record:

  • Amortization of actuarial gains or losses and estimation adjustments related to pensions (allowance for pension);
  • Accrued liabilities (allowances) for severance pay;
  • Unsigned collective agreements (as per PAYE policy); and
  • Other post-retirement benefits.

Department will record:

Departments will record all amounts that are provided by the Compensation System at PWGSC. Where amounts are material or as stated in a Treasury Board Policy (for example, Policy on Payables at Year-end), Departments should accrue for all compensation elements. (See "List of Pay Entitlement Codes" in Appendix A of Master List of Objects - Chart of Accounts for the fiscal year 2001-2002 for a complete list of compensation elements.)

Entitlements that do not affect a departmental appropriation shall not be recorded as an accrued liability (allowance) by a Department except for accumulated vacation leave and compensated absences.

Salaries

If material to departmental operations, departments will record at month end amounts incurred and payable, such as salaries and wages, overtime, retroactive wage and salary settlements, and other entitlements for items such as compensatory leave, extra duty, shift work and lay days for ships crews. Departments will also record year-end accruals for amounts incurred by March 31 and to be paid after this date for these items (as per instructions in the PAYE policy and Information Bulletin of January 27, 2000 called: "Payables at Year-end (PAYE) for FIS and non-FIS departments".

Retroactive salary settlements

Retroactive salaries determined by collective agreements negotiated but not paid will be recorded as liabilities by the departments under the following conditions:

  • When collective agreements have been ratified and signed before March 31, the retroactive amounts incurred under the agreement must be charged to the appropriation.
  • If the collective agreements have been ratified but not signed, the amounts must be accrued, but only upon direction of the Treasury Board Secretariat.

Other pay accruals

Amounts owing but not yet paid for severance and separation payments to individuals who have been struck off strength by March 31st must also be accrued.

References

Scenario A - Accrued salaries at year end

A Department accrues salaries of $400,000 on March 31, 2003. This amount will get reversed out in the new year. The old year salary of $400,000 and new year salary expense of $100,000 is paid in new year.

Journal Entries

1) Old Year Accrual of $400,000

  

AMT($)

FRA

AUTH

OBJ

DR Salaries and wages

400,000

51311

B11A(*)

3469/7099

CR Accrued Salaries and Wages

400,000

21112

R300

6299

(See section on Accounts Payable for the entries required for settlement of accounts payable)

FRA Coding Rationale: At the end of the year the Department owes its employees amounts that will not actually get paid until the next accounting period. These amounts will include basic pay, as well as other material amounts such as overtime or performance pay. The Department must record an operating expense for this amount and set up an accrual for a corresponding amount.

Authority Coding Rationale: In this example the salaries are charged to the B11A(*) - Program Vote but depending on the department B12A - Operating Vote could be used as well. Since accrued salaries and wages have no impact on appropriations, R300 is used.

Object Rationale: "6299- Net Increase or Decrease to Other Liability accounts" should be used to indicate the establishment of the accrued payable. Since this is an accrual transaction and economic objects are recorded on an expenditure basis, "7099- Net increase of decrease in other transactions" or "3469-Charges to other liability account" would be used.

2) To record the payment of the salaries for the new year ($100,000) and reverse and pay the accrued salaries of the previous year ($400,000).

2a) Reverse the old year salary accrual

  

AMT($)

FRA

AUTH

OBJ

DR Accrued Salaries and Wages

400,000

21112

R300

6299

CR Salaries and wages

400,000

51311

B11A(*)

3469/ 7099

2b) Pay New year Salary for the 1st week of April ($100,000) and old year salary.

  

AMT($)

FRA

AUTH

OBJ

DR Salaries and wages

500,000

51311

B11A(*)

0102

CR Payroll Control Account

500,000

63DDD

0000

0000

FRA Coding Rationale: Entry 2a) is a reversal of entry 1). This amount of $400,000 must be reversed in the new year. The new year expense of $100,000 is the net amount charged to salaries and wages expense. The total of $500,000 is charged directly to the Payroll Control Account (2b).

Authority Coding Rationale: In entry 1) the salaries of $400,000 were charged to B11A or B12A of the previous year. In entry 2a) the new year appropriation is being credited for the same amount (due to reversal requirements) and in entry 2b) $500,000 is charged to the appropriation. The net result is that the appropriation is only charged for $100,000, which is the new year salary. Please note that the credit to the appropriation is so that the new year appropriation is not over-charged when the payment of salaries is made in the new year. Since accrued salaries and wages (which is a payable) have no impact on appropriations, R300 is used. Control accounts are zero filled, since they do not impact on appropriations.

Object Rationale: Since 2a) is a reversal entry, the $400,000 (old year salary) is credited to the same code used in entry 1. The expenditure of $500,000 in salaries is charged to object "0102- Civilian regular time, part-time, seasonal and casual". "6299- Net Increase or Decrease to Other Liability accounts" is used to indicate the reduction of the accrued payable. All RG interface Control Accounts are zero filled (0000), with the exception of I/S Control Accounts, at the object level.

Scenario B - Employee transfers from one department to another department

For the time being there are no accounting entries required for employees transferred from department to department. Year-end accruals will automatically remove those individuals set up at the end of the previous year and will automatically include those individuals on strength at the end of year.

Scenario C - Unpaid overtime accruals at year-end

A Department accrues unpaid overtime of $100,000 on March 31, 2003. This amount will get reversed out in the new year. The old year overtime of $100,000 and new year overtime of $50,000 is paid in new year.

Journal Entries

1) Old Year Accrual of $100,000

  

AMT($)

FRA

AUTH

OBJ

DR Salaries and wages

100,000

51311

B11A(*)

3469/7099

CR Accrued Salaries and Wages

100,000

21112

R300

6299

(See section on Accounts Payable for the entries required for settlement of accounts payable)

FRA Coding Rationale: At the end of the year the Department owes its employees overtime amounts that will not actually get paid until the next accounting period. The Department must record an operating expense for this amount and set up an accrual for a corresponding amount.

Authority Coding Rationale: In this example the salaries are charged to the B11A(*) - Program Vote but depending on the department B12A - Operating Vote could be used as well. B14A could be used if the salary costs of a particular employee are being capitalized. Since accrued salaries and wages have no impact on appropriations, R300 is used.

Object Rationale: "6299- Net Increase or Decrease to Other Liability accounts" should be used to indicate the establishment of the accrued payable. Since this is an accrual transaction and economic objects are recorded on expenditure basis, "7099-Net increase or decrease in other transactions" or "3469-Charges to other liability account" would be used.

2) To record the payment of the overtime for the new year ($50,000) and reverse and pay the accrued salaries of the previous year ($100,000).

2a) Reverse the old year overtime accrual

  

AMT($)

FRA

AUTH

OBJ

DR Accrued Salaries and Wages

100,000

21112

R300

6299

CR Salaries and wages

100,000

51311

B11A(*)

3469/7099

2b) Pay new year overtime ($50,000) and old year overtime ($100,000).

 

AMT($)

FRA

AUTH

OBJ

DR Salaries and wages

150,000

51311

B11A(*)

0105

CR Payroll Control Account

150,000

63XXX

0000

0000

FRA Coding Rationale: Entry 2a) is a reversal of entry 1). This amount of $100,000 must be reversed in the new year. The new year expense of $50,000 is the net amount charged to salaries and wages expense. The total of $150,000 is charged directly to the Payroll Control Account (2b).

Authority Coding Rationale: In entry 1) the salaries of $100,000 were charged to B11A(*) or B12A or B14A. In entry 2a) the appropriation is being credited for the same amount (due to reversal requirements) and in entry 2b) the $150,000 be charged to the appropriation. The net result is that appropriation will only charged for $50,000, which is the new year overtime. Please note that the credit to the appropriation is so that the new year appropriation is not over-charged when the payment of salaries is made in the new year. Since accrued salaries and wages (which is a payable) has no impact on appropriations, R300 is used. Control accounts are zero filled, since they do not impact on appropriations.

Object Rationale: Entry 2a) is a reversal of entry 1). The payment of $150,000 in overtime is charged to "0105 - Civilian overtime". "6299- Net Increase or Decrease to Other Liability accounts" is used to indicate the reduction of the accrued payable. All RG interface Control Accounts are zero filled (0000), with the exception of I/S Control Accounts, at the object level.

Scenario D - Compensatory leave accruals at year-end

A Department accrues compensatory leave accruals of $50,000 on March 31, 2003. This amount does not need to be reversed out in the new year. The Department cashes out $25,000 of old year compensatory leave in the new year.

Journal Entries

1) Old Year Accrual of $50,000

  

AMT($)

FRA

AUTH

OBJ

DR Salaries and wages

50,000

51311

F125

3461

CR Allowance for time-off in lieu

50,000

21414

F419

7023

FRA Coding Rationale: At the end of the year the Department should recognize the expense of time-off in lieu of payment owed to its employees. As the liability is for future time-off and not a future payment, the credit is to an allowance account rather than accounts payable.

Authority Coding Rationale: This entry does not affect appropriations as no cash payment will result from this transaction hence F codes are used. "F125 - Allowances set up for compensatory leave" and "F419 - Charges to other accruals and allowances" are used.

Object Rationale: "3461 - Allowance for vacation pay and similar employee benefit" and "7023 - Allowance for employee benefits" are used for object codes.

2) Cashing out of old year compensatory leave of $25,000

  

AMT($)

FRA

AUTH

OBJ

DR Allowance for time-off in lieu

25,000

21414

B11A(*)

0105

CR Pay control account

25,000

63XXX

0000

0000

FRA Coding Rationale: In the new year, $25,000 of compensatory leave is cashed out to employees. Since the expense related to the time-off was recognized last year, the debit is to the allowance account. The amount owed is credited to the pay control account.

Authority Coding Rationale: The cashing out of compensatory leave will have an impact on the current year's authorities. In this case, B11A(*) was used however other authorities including B12A or B14A (if the salary costs of an employee are being capitalized) could also be appropriate. Control accounts are zero filled for authority purposes.

Object Rationale: "0105 - Civilian overtime" is used to the cashing out of compensatory leave. Control accounts are zero filled for object purposes.

Note: A department may choose to reverse entry 1) at the beginning of the year if their system cannot process entry 2). In this case, the cashing out of old year compensatory leave in the new year would be debited to expense rather than the allowance. However, the allowance would need to be set up again every month (if significant).

Scenario E - Year-end annual leave accruals

A Department accrues annual leave not taken of $1,000,000 at year-end. In the new year, pays out $25,000 for an employee who leaves the Government.

Journal Entries

1) Old Year Accrual of $1,000,000

  

AMT($)

FRA

AUTH

OBJ

DR Salaries and wages

1,000,000

51311

F121

3461

CR Allowance for vacation pay

1,000,000

21411

F411

7023

FRA Coding Rationale: At the end of the year the Department should recognize the expense of vacation time owed to its employees. As the liability is for future time-off and not a future payment, the credit is to an allowance account rather than accounts payable.

Authority Coding Rationale: This entry does not affect appropriations as no cash payment will result from this transaction hence F codes are used. "F121 - Allowances set up for vacation leave" and "F411 - Changes to allowance for vacation pay" are used.

Object Rationale: "3461 - Allowance for vacation pay and similar employee benefit" and "7023 - Allowance for employee benefits" are used for object codes.

2) Cashing out of vacation pay of $25,000

  

AMT($)

FRA

AUTH

OBJ

DR Allowance for vacation pay

25,000

21411

B11A(*)

0104

CR Pay control account

25,000

63XXX

0000

0000

FRA Coding Rationale: In the new year, $25,000 of vacation pay is cashed out to an employee. Since the expense related to the vacation time owed was recognized last year, the debit is to the allowance account. The amount owed is credited to the pay control account.

Authority Coding Rationale: The cashing out of compensatory leave will have an impact on the current year's authorities. In this case, B11A(*) was used however other authorities including B12A or B14A (if the salary costs of an employee are being capitalized) could also be appropriate. Control accounts are zero filled for authority purposes.

Object Rationale: "0104 - Civilian holiday pay in lieu of leave" is used for the cashing out of vacation leave. Control accounts are zero filled for object purposes.

Scenario F - Year-end accrual of retroactive salary settlements

Collective agreements have been ratified and signed on March 31, and result in a retroactive salary settlement of $500,000 outstanding at year-end. In the new year, pays out the $500,000 in addition to an additional $100,000.

Journal Entries

1) Old Year Accrual of $500,000

  

AMT($)

FRA

AUTH

OBJ

DR Salaries and wages

500,000

51311

B11A(*)

3469/7099

CR Accrued Salaries and Wages

500,000

21112

R300

6299

(See section on Accounts Payable for the entries required for settlement of accounts payable)

FRA Coding Rationale: At the end of the year the Department needs to accrue the retroactive salary settlement by debiting salary expense and crediting accrued salaries.

Authority Coding Rationale: In this example the salaries are charged to the B11A(*) - Program Vote but depending on the department B12A - Operating Vote could be used as well. B14A could be used if the salary costs of a particular employee are being capitalized. Since accrued salaries and wages have no impact on appropriations, R300 is used.

Object Rationale: "6299- Net Increase or Decrease to Other Liability accounts" should be used to indicate the establishment of the accrued payable. Since this is an accrual transaction and economic objects are recorded on an expenditure basis, "7099- Net increase of decrease in other transactions" or "3469-Charges to other liability account" would be used.

2) To reverses the old year accrual and record the payment of the retroactive settlement of $500,000 for old year and $100,000 for new year.

2a) Reverse the old year accrual

 

AMT($)

FRA

AUTH

OBJ

DR Accrued Salaries and Wages

500,000

21112

R300

6299

CR Salaries and wages

500,000

51311

B11A(*)

3469/7099

2b) To record the payment

  

AMT($)

FRA

AUTH

OBJ

DR Salaries and wages

600,000

51311

B11A(*)

0111

CR Payroll Control Account

600,000

63XXX

0000

0000

FRA Coding Rationale: Entry 2a) is a reversal of entry 1. The retroactive salary settlement accrued at year-end is reversed and salaries and wages expense of $100,000 is recorded for the new year. The total of $600,000 is charged to the Payroll Control Account.

Authority Coding Rationale: The salaries expense of $100,000 for the current year were charged to B11A(*). B12A or B14A may also be appropriate. Since accrued salaries and wages (which is a payable) has no impact on appropriations, R300 is used. Control accounts are zero filled, since they do not impact on appropriations.

Object Rationale: The object codes used in entry 2a) are a reversal of those used in entry 1. The debit to the salaries and wages FRA is charged to "0111 - Civilian retroactive - current fiscal year". "6299- Net Increase or Decrease to Other Liability accounts" is used to indicate the reduction of the accrued payable. All RG interface Control Accounts are zero filled (0000), with the exception of I/S Control Accounts, at the object level.

Scenario G - Payment of termination benefits

The accrual of termination benefits is recorded centrally by Treasury Board Secretariat. Departments are not to record accruals, except when there are amounts owing but not yet paid for severance and separation payments to individuals who have been struck off strength by March 31.

Journal Entries

1) Recognition of termination benefits for those employees that the Department knows are struck off strength at March 31.

  

AMT($)

FRA

AUTH

OBJ

DR Salaries and wages

15,000

51311

B11A(*)

3469/ 7099

CR Accrued salaries and wages

15,000

21112

R300

6299

FRA Coding Rationale: The accrual of termination benefits is charged to salary and wages expense and accrued salaries and wages.

Authority Coding Rationale: The expense of $15,000 is charged to B11A(*). B12A may also be appropriate. Since accrued salaries and wages (which is a payable) has no impact on appropriations, R300 is used.

Object Rationale: Since this is an accrual transaction and economic objects are recorded on an expenditure basis, "7099- Net increase of decrease in other transactions" or "3469-Charges to other liability account" would be used. "6299- Net Increase or Decrease to Other Liability accounts" is used to indicate the increase of the accrued payable.

2) Department pays termination benefits of $15,000 from old year and $60,000 from new year.

2a) Reverse the old year overtime accrual

   

AMT($)

FRA

AUTH

OBJ

DR Accrued Salaries and Wages

15,000

21112

R300

6299

CR Salaries and wages

15,000

51311

B11A(*)

3469/ 7099

2b) To record the payment

  

AMT($)

FRA

AUTH

OBJ

DR Salaries and wages

75,000

51311

B11A(*)

0107

CR Payroll Control Account

75,000

63XXX

0000

0000

FRA Coding Rationale: Entry 2a) is the reversal of entry 1. The payment of termination benefits is charged to salary and wages expense. The credit is to the Payroll Control Account.

Authority Coding Rationale: The expense of $75,000 is charged to B11A(*). B12A may also be appropriate. Since accrued salaries and wages (which is a payable) has no impact on appropriations, R300 is used. Control accounts are zero filled, since they do not impact on appropriations.

Object Rationale: Entry 2a) reversed the objects charged in entry 1. The charge to the salaries and wages FRA is charged to "0107 - Civilian severance pay and termination benefits. "6299- Net Increase or Decrease to Other Liability accounts" is used to indicate the decrease of the accrued payable. All RG interface Control Accounts are zero filled (0000), with the exception of I/S Control Accounts, at the object level.

Departmental Financial Statement Presentation and Disclosure Requirements

Salaries will be recorded as expenses in the Department's Statement of Operations. Accrued salaries and wages and related allowances will appear as liabilities in the department's Statement of Financial Position.

7.4 Services Provided Without Charge

Introduction

In some instances government departments provide services to other government departments free of charge. Examples of these services included:

  • accommodation provided by Public Works and Government Services;
  • contributions covering employer's share of employees' insurance premiums and costs paid by Treasury Board;
  • salary and associated costs of legal services provided by Department of Justice;
  • audit services provided by the Office of the Auditor General; etc.

Disclosure requirements will vary depending on whether the Department's financial statements are audited.

Department that DO NOT have Audited Financial Statements

Services provided without charge by other government departments are not recorded as operating expenses. However, departments that do receive services without charge must disclose the nature of these services in note to the financial statements. More specifically, the details would be found in note 2, of TBAS 1.2 "Departmental and Agency Financial Statements". An example of what would be required is as follows:

"Services provided without charge by other government departments are not recorded as operating expenses. The following are the more significant types of services provided without charge: accommodation provided by Public Works and Government Services; contributions covering employer' share of employees' insurance premiums and costs paid by Treasury Board; salary and associated costs of legal services provided by Department of Justice; audit services provided by the Office of the Auditor General; etc.
(Departments are to include estimates of the amounts involved).
"

Departments that have Audited Financial Statements

Services without charge are not to be reflected in the CFMRS Trial Balance sent to the Receiver General. In other words, they are not formally recorded as operating expenses. However, an adjustment is done to the trial balance for financial statement purposes. The amount that represents services without charge is added to operating expenses in the Department's Statement of Operations. Since the amounts for services without charge are included in the Statement of Operations and NOT in the CFMRS Trial Balance, they must be eliminated through the Net Asset position of the Statement of Financial Position. As well note disclosure of the nature of these services is required. An example of what would be required is as follows:

"The following are the more significant types of services provided without charge: accommodation provided by Public Works and Government Services; contributions covering employer' share of employees' insurance premiums and costs paid by Treasury Board; salary and associated costs of legal services provided by Department of Justice; audit services provided by the Office of the Auditor General; etc."

An excerpt from the Statement of Financial Position of Department X will demonstrate the above point.

Net Assets

Net assets, beginning of the year

$160,038

Net operating results

(326,098)

Services provided without charge

25,572

Net cash provided by government

285,110

Net asset, end of year

$144,622

References

  • TBAS 1.2 Departmental and Agency Financial Statements

8.0 Control Accounts

Introduction

Control accounts are akin to a bank account. Since Departments do not have bank accounts, control accounts have been established that function like a bank account in the private sector. The major difference between these control accounts and bank accounts is that control accounts get closed into Net Assets/Liabilities at year end after all other closings have been done. See Net Assets/Liabilities section of the manual for example.

The authority code used for all control accounts is 0000.

At the object level, all RG interface control accounts are zero filled (0000), with the exception of I/S Control Accounts. Please see the Chart of Accounts

The control accounts are as follows:

61DDD Cash Payment Control Accounts
62DDD Cash Deposit Control Accounts
63DDD Payroll Control Accounts
64DDD I.S. Debit Control Accounts
65DDD I.S. Credit Control Accounts
66DDD Cash Payments Control Accounts in U.S. dollars

DDD represents the Department number.

For examples showing control accounts, please see the following sections of the manual:

Cash
Accounts Payable
Respendable versus Non-Respendable Revenue

References

Departmental Financial Statement Presentation and Disclosure Requirements

Since control accounts get closed into Net assets/Liabilities, they are reflected in the Net Assets portion of the statements of the financial statements.

9.0 Other Accounting Policies and Disclosures

9.1 Specified Purpose Accounts

Introduction

Departments and agencies receive, for various reasons, money that must be accounted for separately in the Accounts of Canada. In some cases, the enabling legislation requires that revenues be earmarked, and that related payments and expenditures be charged against such revenues. In other cases, money is received for a specified purpose and is recorded in a SPA for authority purposes but treated like deferred revenue (a liability) for accrual accounting purposes. SPAs are classified either as consolidated SPAs, non-consolidated SPAs or deferred revenue SPAs in the financial statements of the Government of Canada.

  1. Consolidated SPAs are a restricted category of budgetary revenue and expenditures. These SPAs are consolidated as the purpose for which they are established is similar in nature to departmental activities. The consolidation of these accounts implies that the funds received from outside parties do not remain the property of the contributors, and the transactions in the account are essentially government revenues and expenditures. Moneys received are credited to revenue in the year received. The net revenue/deficit balance of these SPAs are reported separately as part of the accumulated deficit (see note 5 of financial statements). Details of consolidated SPAs are presented in section 4 - Consolidated Accounts of the Public Accounts. Consolidated SPAs include: budgetary insurance accounts, fees and levies imposed by statute and earmarked for a special purpose, and court awards that have been specifically earmarked by the court. The principal portion of an endowment is also accounted for as a consolidated SPA. The balances of these accounts appear in Financial Reporting Accounts in the 312XX range. Each consolidated SPA has its own specific authority code.
  2. Non-consolidated SPAs represent a financial obligation of the Government of Canada, either to the parties from whom the funds were received, or in situations where a statutory or a contractual obligation must be recorded. Non-consolidated SPAs appear as liabilities in the accounts of Canada. Details of these SPAs are presented in section 6 - Interest- Bearing Debt of the Public Accounts. The expenditures and revenues of non-consolidated SPAs are recorded as decreases and increases to the liability account and are not recorded as revenues and expenses of the Government of Canada. These SPAs include: deposit and trust accounts; pension, insurance and death benefits accounts; federal-provincial arrangements; and certain cost-sharing and joint project arrangements. The balances of these accounts appear in the Financial Reporting Accounts in the 226XX, 232XX and 2344X accounts. Each non-consolidated SPA has its own specific authority code.
  3. Deferred Revenues SPAs represent an obligation of the Government of Canada to spend funds received for their specified purpose. The expenditures and revenues of the SPA are included in the revenues and expenditures of the Government of Canada once the specified purpose has been completed. These SPAs include: bequests, donations, and gifts received for a specified purpose; pre-payments for unspecified goods and services; the interest earned on endowment funds; and certain cost-sharing and joint project arrangements. Note that up until the 2000-2001 year-end, bequests, donations, gifts, and the interest earned on endowment funds were accounted for as consolidated SPAs. However, starting with fiscal year 2001-2002, the classification of these SPAs has bee changed to Deferred Revenues SPAs to comply with Generally Accepted Accounting Principles. The balances of these accounts appear in the Financial Reporting Account 23451 - Deferred revenues - SPAs. Each deferred revenue SPA has its own specific authority code.

The following types of SPAs will be examined in this section:

  • Prepayments
  • Endowments
  • Restricted Gifts, Bequests, Donations
  • Cost-Sharing and Joint Project Agreements
  • Trust Accounts
  • Deposit Accounts
  • Court Awards

As noted in the section 1.2 Limitations of the Manual, it is not possible to cover all transactions and Scenario s. This is particularly appropriate for some types of SPAs where within each type there is a wide range of possible situations. One or two Scenario s will be presented for each type of SPA listed below.

References

9.1.1 Prepayments

Introduction

Authorities Perspective (Policy on Specified Purpose Accounts):

When a department receives money from parties external to the Government in advance of goods or services being provided, the funds must be recorded as deferred revenue. However for government reporting purposes, the deferred revenue may either be credited to a regular deferred revenue account or a specified purpose account (SPA) depending on whether the goods or services to be provided are specified. Where the goods or services to be provided are specified, the money received is credited to a deferred revenue account and a non-tax revenue authority (see section 4.2 of the Manual for guidance). Where the goods or services to be provided are unspecified, the moneys received are also credited to a deferred revenue account (but specific to SPAs) and the authority credited is a SPA authority.

The distinction between specified and unspecified goods and services is important for spending authority. Where a department has the authority to re-spend revenues, the following differences exist:

  • for specified goods and services, the amount received is re-spendable when cash is received;
  • for unspecified goods and services, the amount received is re-spendable only when the goods or services are provided. Hence the authority to spend the revenue has been deferred until it is earned.

Amounts equivalent to the cost of the goods or services will be transferred from the SPA to revenue as goods or services are provided, just as if payment had been made at the time, as per section 6(a) and (b) of the Policy on Specified Purpose Accounts.

References

Scenario A

Department enters in an agreement with a 3rd party to provide goods and services of an unspecified nature and amount. The 3rd party is required to make the payment of $10,000 in advance. The Department has the authority to respend revenue.

Journal Entries

1) Third Party gives Department $10,000 in advance of service being received.

  

AMT($)

FRA

AUTH

OBJ

DR Cash in Hands of Depts awaiting deposits to RG

10,000

11125

R300

5299

CR Deferred revenues - SPAs

10,000

23451

N/P(*)

6081/6099

(See section on Cash for the other cash related ledger entries)

FRA Coding Rationale: Since cash for unspecified goods/services has been received but services are yet to be performed, a liability must be set up in the form of a deferred revenue account. The Department must indicate an increase in their cash holdings by debiting Cash in Hands of Depts. awaiting deposit to RG.

Authority Coding Rationale: When non-tax receipts for unspecified goods/services are received by the department prior to the Department providing the goods or services, the entire amount of the receipts should be recorded as an authority under "Other Specified Purpose Accounts". N/P(*), either a statutory on non statutory authority could be appropriate depending on the situation. Either of the following statutory authorities may be appropriate depending on the circumstances - N3xx or N5xx. If a non-statutory authority is required, any one of the following may be appropriate depending on the situation: P3xx, P5xx, P7xx or P8xx. Since, there is no impact on the authority side for cash, R300 should be used.

Object Rationale: To record the net impact on the SPA a department could use object "6081 -Deposit received" or object "6099-Net Increases or Decreases in Other SPAs" depending on whether detailed object information is desired. To record the net impact on cash accounts "5299 - Net Increase or Decrease in Cash Accounts should be used.

2) Goods/ services worth $5,000 are provided by the department and recognized as revenue

  

AMT($)

FRA

AUTH

OBJ

DR Deferred Revenues - SPAs

5,750

23451

N/P(*)

6086\6099

CR Revenue

5,000

4231X

D/E(**)

4XXX

CR GST Payable

350

21134

R300

6299

CR PST Payable

400

21151

R300

6299

(Assumption: Sale takes place in Ontario. See section on Sale Tax for rules on sale tax with respect to sales in other provinces.)

The entries for the settlement of GST payable can be found in the section related to Sales Tax Section.

See Accounts Payable Section for entries related to the settlement of PST Payable.

FRA Coding Rationale: As good/services are provided, the liability "Deferred revenue - SPA" would be reduced and the equivalent amount would be credited to the appropriate revenue account (excluding the GST and PST). The GST and PST are charged directly to the SPA for the portion of expenditures incurred by the SPA, therefore $5,750 (1.15 x $5,000) is recorded. The GST and PST would be accrued as a payable since the amount owing has not been paid.

Authority Coding Rationale: As goods/services are provided the liability account is charged for their costs. N/P(*), the same authority code used to set up the liability account would be used in this transaction. D/E(**) as the goods/services are provided the revenue should be charged to any one of the applicable codes depending on the situation, either D211 to D213 (if a statutory authority) or E211 to E213 (if a non-statutory authority). GST payable and PST payable do not affect authorities, therefore R300 is used.

Object Rationale: The object code to use for revenue depends on the goods or services being provided. To record the net impact on the SPA, object "6086 - Payments made in accordance with authorities" or "6099-Net Increases or Decreases in Other SPAs" could be used depending on whether detailed object information is desired. "6299- Net Increase or Decrease to Other Liability accounts" should be used to indicate the establishment of the GST payable and PST Payable and accounts payable.

See Scenario A Journal entry 2

3) Once the goods are provided the Department has authority to respend the revenue.

  

AMT($)

FRA

AUTH

OBJ

DR Revenue

5,000

4231X

D218/E218

4888

CR Revenue

5,000

4231X

B13A

4888

FRA Coding Rationale: There is no affect on accruals here. This is strictly an authority transaction. To ensure that the FRAs are not affected the same FRA is debited and credited for the same amount.

Authority Coding Rationale: In order to indicate that the department can respend the revenue it receives, the revenue is credited to "B13A - Revenue credited to the vote". The debit side of the entry is coded to D218/E218 (depending whether the situation calls for statutory or non-statutory authority). It should be noted that these codes (D218/E218) have no affect on appropriations or authorities.

Object Rationale: There is no impact on objects. Therefore the same code for the same amount is used to indicate this. In this case "4888-Re-allocation from non-budgetary funds and accounts" is used.

Departmental Financial Statement Presentation and Disclosure Requirements

Amounts recorded in the Deferred revenue account - SPAs that are outstanding at year-end will be recorded under the heading Liabilities in the Department's Statement of Financial Position.

9.1.2 Endowments

Introduction

Authorities Perspective (Policy on Specified Purpose Accounts):

Endowments to the Crown are funds acquired by donation or bequest subject to the following conditions:

  1. a formal agreement exists between the donor and the department responsible for the administration of the endowment fund;
  2. the agreement outlines the mechanisms governing the administration of the fund and the terms of interest payments;
  3. the agreement specifies that only interest income may be spent for the specified purpose and that the capital must be maintained intact.

Accrual Accounting Perspective:

Endowment contributions will never be available to a department to use towards its expenses. Therefore the amount of the endowment should be recognized as an increase in net assets\net liabilities.

With respect to the interest income derived from the endowment, the portion of interest is earmarked for a specific purpose for future periods should be recorded as deferred revenue (liability) and recognized as revenue in the same period as related expenditures are made (see Scenario A). PS 3100.11.

References

Scenario A - Endowment is set up and all interest income is earmarked.

J. Doe gives a Department an endowment of $500,000, specifying that all the interest earned is to be spent for the maintenance of a particular heritage building. This year the fund earned 5%.

Journal Entries

1) J Doe gives Department endowment of $500,000

  

AMT($)

FRA

AUTH

OBJ

DR Cash in Hands of Depts awaiting deposits to RG

500,000

11125

R300

5299

CR Donations and bequests to endowment accounts

500,000

42624

L/M*

8290

(See section on Cash for the other cash related ledger entries)

FRA Coding Rationale: The principal amount of the endowment is credited to a special category of revenue and the cash in the hands of the department is increased by an equivalent amount.

Authority Coding Rationale: L/M*, any endowment funds received by a Department are credited to the appropriate authority code specific to the endowment, either an "L" code for statutory accounts or an "M" code for non-statutory accounts.

Object Rationale: To record the net impact on Cash Accounts, 5299 would be used. To record the receipt of endowment funds "8290 - Other receipts" would be used.

2) End of year closing of FRA 42624

  

AMT($)

FRA

AUTH

OBJ

DR Donations and bequests to endowment accounts

500,000

42624

XXXX*

XXXX*

CR Endowment accounts

500,000

31224

XXXX*

XXXX*

FRA Coding Rationale: At year-end, FRA 42624 is closed to a restricted net asset account FRA 31224.

Authority Coding Rationale: XXXX*, the authority codes depend on how each department's system closes and rolls-over. These codes do not roll-over for CFMRS purposes.

Object Rationale: XXXX*, the object codes depend on how each department's system closes and rolls-over. These codes do not roll-over for CFMRS purposes.

3) Endowment earns interest at a rate 5% per annum - entry must be done by inter-departmental entries and settled via inter-departmental settlement (IS) entries.

3a) Creditor side entry by department.

  

AMT($)

FRA

AUTH

OBJ

DR Other receivables from O.G.D.s

25,000

11242

R300

5399

CR Deferred Revenue - SPAs

25,000

23451

N6/P4*

6099/6082

3a) Debtor side entry by Department of Finance.

  

AMT($)

FRA

AUTH

OBJ

DR Interest on other non-budgetary accounts

25,000

52242

A701

3114

CR Other payables to O.G.D.s

25,000

21132

R300

6299

FRA Coding Rationale: Interest earned of $25,000 (5% x $500,000) on the endowment is a public debt charge (interest expense). Earnings from the endowment go into a deferred revenue account. However, as the authority for the interest on public debt is under the Department of Finance, the entries must be recorded as O.G.D. receivables\payables until they are settled via the IS process.

Authority Coding Rationale: As interest is earned on the endowment, it will be charged against "A701-Interest on unmatured debt" by the Department of Finance. The earnings of the endowment will be credited to the specific authority code established for the interest portion of the endowment. For statutory accounts, the code is in the N61x range and for non-statutory accounts the code is in the P41x range. The authority code is different than the code used to record the endowment principal due to the different accounting treatment required for the principal and interest portions of the endowment. As the IS receivable and payable do not affect authorities, "R300 - Total amounts of all other assets and of all other liabilities" is used.

Object Rationale: "3114 - Interest on SPAs/Interest on Other Liabilities" is used to reflect the interest charge on the endowment fund. "6099-Net Increases or Decreases in Other SPAs" or "6082 - Interest received" would be used to reflect interest earned on the endowment. "5399 - Net increase or decrease in accounts receivable" and "6299 -Net increase or decrease in other liability" would be used for the IS accounts.

4a) Interest earned on the endowment is spent for specified purpose as per the agreement.

  

AMT($)

FRA

AUTH

OBJ

DR Operating Expenses

25,000

51321

N6/P4*

04xx

CR Accounts Payable

25,000

21111

R300

6299

FRA Coding Rationale: The expenses are charged to the operating expenses FRA.

Authority Coding Rationale: The expense is charged to the authority code that was used to record the interest on the endowment account. There is no impact on authorities for the accounts payable so the code to be used would be "R300 - All other assets and liabilities".

Object Rationale: The appropriate object code would be used depending on the nature of the expenses. "6299 -Net increase or decrease in other liability" would be used for the accounts payable.

4b) The equivalent amount of expenses are drawn down and recognized as revenue.

  

AMT($)

FRA

AUTH

OBJ

DR Deferred Revenue - SPAs

25,000

23451

F450

6099/6089

CR Interest on endowments

25,000

42724

F259

4888

FRA Coding Rationale: Externally restricted inflows are recognized as revenue in the period in which the resources are used for the purpose or purposes specified. Since $25,000 of interest on the endowment fund has been used, this amount is recorded as revenue. The charges to deferred revenue are equivalent to the amount of expenses incurred to satisfy the specified purpose.

Authority Coding Rationale: This is strictly an accrual transaction. There is no impact on authorities/appropriations since the authority was charged when the operating expenses were recorded.

Object Rationale: "6099 - Net Increases or Decreases in Other SPAs" or "6089 -Other adjustments" would be used on the debit side of the transaction. "4888 Reallocation from non-budgetary funds and accounts" would be used to reflect the reallocation of the deferred revenue to revenue.

Departmental Financial Statement Presentation and Disclosure Requirements

Endowments will be disclosed on the Department's Statement of Financial Position under the heading Net Assets (Liabilities) as a restricted asset. The nature, amounts and terms of the endowments should be disclosed in the notes to the financial statements. Interest earned but not yet spent for a specified purpose will be recorded as deferred revenue and reported under the heading Liabilities in the Department's Statement of Financial Position.

9.1.3 Restricted Gifts, Bequests, Donations

Introduction

Authorities Perspective: Policy on Specified Purpose Accounts

Gifts, bequests and donations to the Crown may be made with or without conditions.

  1. Any amounts received for a specified purpose, as unconditional or general gifts, bequests or donations must be spent in accordance with mandate of the organization.

Any amounts received as conditional contributions where object of expenditure is clearand specific are to be used only for the stated purpose. If the amount cannot be spent for specific purpose, the money is to be returned to the donor.

Accrual Accounting Perspective:

Donations are treated differently depending on whether they are restricted donations or unrestricted donations.

Restricted Contributions:

If the external parties specify how the resources are to be used, those inflows are restricted in nature. For example, a third party donates money conditional on it being spent on medical research. This would constitute an external restriction since the asset is restricted by agreement with the external party.

Restricted contributions for the purchase of capital assets that will be amortized should be deferred and recognized as revenue on the same basis as the amortization expense relate to the acquired capital assets (CICA 4410.33). However, if the contribution does not specify that the funds are to be spent on a capital asset, then the contribution would be recognized as revenue when spent regardless of the fact that some of the expenditures may relate to the purchase of a capital asset.

Contributions used for the purpose of purchasing capital assets that fall below the Department's capital asset threshold would be reported as a liability and recognized as revenue in the period in which the expense is recognized. This is construed to be using the resources used for the purpose specified (PS 3100.11).

Unrestricted Contributions:

Unrestricted contributions (i.e. cash) should be recognized as revenue in the current period (CICA 4410.47). See Section 6.2 - Unrestricted Gifts, Donation and Bequests for guidance on accounting for unrestricted contributions.

References

Scenario A - Donation for specified purpose (unconditional or conditional)

An individual gives a department $200,000 to be spent on scientific research (specified purpose) which is in line with the Department's mandate.

Journal Entries

To record donation of $200,000

  

AMT($)

FRA

AUTH

OBJ

DR Cash in Hands of Depts awaiting deposits to RG

200,000

11125

R300

5299

CR Deferred Revenue -SPAs

200,000

23451

N6/P4*

6099/6081

(See section on Cash for the other cash related ledger entries)

FRA Coding Rationale: Since cash has been received but the specified purpose has not been carried out, the donation must be credited to deferred revenues. The Department must indicate an increase in their cash holdings by debiting Cash in the Hands of Depts awaiting deposits to RG.

Authority Coding Rationale: N6/P4*, the donation will be credited to the authority code established for the specific SPA. For statutory accounts, the authority code is in the N6xx range and for non-statutory accounts the authority code is in the P4xx range. Since there is no impact on the authority side for cash, R300 should be used.

Object Rationale: To record the net impact on Cash Accounts, 5299 would be used. To record the net impact on the SPA "6099-Net Increases or Decreases in Other SPAs" or "6081 - Deposits received" would be used.

2) To record costs incurred for specified purpose - assume $50,000 spent.

  

AMT($)

FRA

AUTH

OBJ

DR Operating expenses

50,000

51321

N6/P4

0430

DR GST Refundable Advance Account

3,500

13392

G111

8171

CR Accounts Payable

53,500

21111

R300

6299

See the Accounts Payable section of the manual to see related entries required for the settlement of the accounts payable. See the GST/HST section of the manual to see related entries required for the settlement of the GST.

FRA Coding Rationale: The expenses are charged to operating expenses FRA.

Authority Coding Rationale: The expense is charged to the original authority which was used to record the SPA in entry 1. Since GST is not to be charged to a departmental appropriation, it is set up as an advance under a special authority, G111. There is no impact on authorities for the accounts payable so the code to be used would be "R300-All other assets and liabilities"

Object Rationale: "0430 - Scientific services, excluding consultants" is used as scientific research was the specified purpose of the donation. "8171 - Payment of GST on purchases" would be used for the GST component. "6299 - Net increase or decrease in other liability" would be used for accounts payable.

3) To recognize revenue from SPA and draw down deferred revenue.

  

AMT($)

FRA

AUTH

OBJ

DR Deferred Revenue - SPAs

50,000

23451

F450

6099/6089

CR Donations and bequests

50,000

42725

F259

4888

FRA Coding Rationale: Externally restricted inflows are recognized as revenue in the period in which the resources are used for the purpose or purposes specified. Since $50,000 of the donation has been used, this amount is recorded as revenue. The charges to deferred revenue are equivalent to the amount of expenses incurred to satisfy the specified purpose.

Authority Coding Rationale: This is strictly an accrual transaction. There is no impact on authorities/appropriations since the authority was charged when the operating expenses were recorded.

Object Rationale: To record the net impact on the SPA "6099-Net Increases or Decreases in Other SPAs" or "6089 - Other adjustments" would be used. " To reflect incoming revenue in the period "4888-Re-allocation from non-budgetary funds and accounts" would be used.

Scenario B - Restricted Contribution for purchase of tangible capital asset greater than Departmental capital asset threshold (assume threshold is $10,000).

In year 1, a third party gives a department $21,000 and specifies that it is to be used for the purchase of a truck. The vehicle is not purchased until year 2 and has a useful life of 7 years with no residual value.

Journal Entries

1) To record the receipt of the cash ($21,000) in year 1.

  

AMT($)

FRA

AUTH

OBJ

DR Cash in the hands of the Depts awaiting deposit to RG

21,000

11125

R300

5299

CR Deferred Revenue -SPAs

21,000

23451

N6/P4*

6099/6081

FRA coding rationale: Since the money donated is to be used for a specified purpose, this qualifies as a restricted contribution. Since the requirement to buy a truck has not been met, the cash received must be recorded as deferred revenue. The Department must indicate an increase in their cash holdings by debiting "Cash in the Hands of Depts awaiting deposits to RG".

Authority coding rationale: Same as entry 1 in Scenario B.

Object coding rationale: Same as entry 1 in Scenario B.

2) To record the purchase of the truck in year 2.

  

AMT($)

FRA

AUTH

OBJ

DR Vehicle

21,000

16133

N6/P4

1261

DR GST Refundable Advance

1,470

13392

G111

8171

CR Accounts Payable

22,470

21111

R300

6299

(See Accounts Payable section for entries related to the settlement of Accounts Payable)
(See Sales Tax section for entries related to the settlement of GST)

FRA coding rationale: The department must capitalize the acquisition of the vehicle on their books since it exceeds the capital asset threshold of $10,000. At this point the Department is being charged GST on the vehicle, and must pay it to the vendor. However, as the Department will eventually recover this amount from Canada Customs and Revenue Agency (CCRA) it should be recorded as an asset in "13392 GST/HST Refundable advance accounts". The associated amount owed of $22,470 but not yet paid must be recorded in the form of a payable.

Authority coding rationale: At this point the vehicle is being purchased with money that is held in the SPA. Therefore, the authority code used to record the SPA is charged the cost of the vehicle. Since GST is not to be charged to a departmental appropriation, it is set up as an advance under a special authority, G111. Since accounts payable does not affect appropriations, the R300 authority code is used.

Object coding rationale: The acquisition of a vehicle will affect the economic objects at this point. In this case 1261 is used in this example since the purchase was motor vehicle. "6299- Net Increase or Decrease to Other Liability accounts" is used to establish the amount owing. The GST must be reflected by using, "8171-Payment of GST on purchases".

3) Periodic amortization expense for the capital asset

  

AMT($)

FRA

AUTH

OBJ

DR Amortization expense

3,000

51433

F111

3451

CR Accumulated amortization-Mach. & Equip.

3,000

16233

F311

7061/7099

FRA Coding Rationale: The yearly amortization expense of $3,000 is calculated as follows ($21,000/7years). See Section on Tangible Capital Assets for additional coding rationale.

Authority Coding Rationale: See Section on Tangible Capital Assets for coding rationale.

Object Rationale: See Section on Tangible Capital Assets for coding rationale.

4) Periodic adjustment to move the equivalent of the resources consumed (amortization) from the Deferred Revenue account

  

AMT($)

FRA

AUTH

OBJ

DR Deferred Revenue - SPAs

3,000

23451

F450

6099/6089

CR Donations and bequests

 

3,000

42725

F259

FRA coding rationale: Restricted contributions for the purchase of capital assets that will be amortized should be deferred and recognized as revenue on the same basis as the amortization expense related to the acquired capital assets, therefore $3,000 is brought into revenue.

Authority coding rationale: This is strictly an accrual transaction. There is no impact on authorities/appropriations since the authority was charged when the truck was purchased.

Object coding rationale: To record the net impact on the SPA "6099-Net Increases or Decreases in Other SPAs" or "6089- Other adjustments" would be used. " To reflect incoming revenue in the period "4888-Re-allocation from non-budgetary funds and accounts" would be used.

Note: If the donation only specified that the funds were to be used towards some endeavour (e.g. agricultural research) and the department used the funds to purchase an asset, the revenue would be recognized entirely in the year the asset was purchased. Under GAAP, the deferral and recognition of revenue over the life of the asset is only required when the donor specifies that a capital asset is to be purchased with the funds.

Scenario C - Restricted Contribution for the purchase of land

A third party donates $11,000 to a Department. The individual specifies that the money be used for the purchase of land.

Journal Entries

1) To record the receipt of $11,000.

  

AMT($)

FRA

AUTH

OBJ

DR Cash in Hands of Depts awaiting deposit to RG

11,000

11125

R300

5299

CR Deferred Revenue - SPAs

11,000

23451

N6/P4*

6099/6081

FRA coding rationale: Since the money donated us to be used for a specified purpose that has not yet been performed, the cash received must be recorded as a deferred revenue.

Authority coding rationale: same as entry #1 in Scenario B.

Object coding rationale: same as entry #1 in Scenario B.

2) Once the land is purchased the contribution is no longer restricted.

2a) Record the purchase of land.

  

AMT($)

FRA

AUTH

OBJ

DR Land

11,000

16111

N6/P4

1301

CR Accounts Payable

11,000

21111

R300

6299

FRA coding rationale: The purchase of land is recorded as an asset and the corresponding amount is set up as a payable for the amount owing.

Authority coding rationale: Authorities are charged when there is an acquisition of goods and services. The authority code used to record the donation (N6xx or P4xx) is charged directly for the purchase of the land. Since accounts payable does not affect appropriations, R300 is used.

Object coding rationale: At this point land has been acquired, therefore 1301 would be used. "6299- Net Increase or Decrease to Other Liability accounts" should be used to indicate the establishment of the accounts payable.

2b) Condition of contribution is satisfied therefore liability is reduced and revenue is recorded.

  

AMT($)

FRA

AUTH

OBJ

DR Deferred revenue - SPAs

11,000

23451

F450

6099/6089

CR Donations and bequests

11,000

42725

F259

4888

FRA coding rationale: Once the land is purchased the contribution is no longer considered restricted. Therefore, the liability is reduced and there is a corresponding increase to the revenue account.

Authority coding rationale: There is no impact on authorities/appropriations since the authority was charged when the land was purchased. F codes will be used in order to assist in departmental reconciliations. "F450- Other non-appropriated amounts added to or deducted from liability balances" would be used for the deferred revenue amount. "F259- Other revenue not being credited to appropriations or other authorities at the same time" should be used for the revenue amount.

Object coding rationale: To record the net impact on the SPA "6099-Net Increases or Decreases in Other SPAs" or "6089 - Other adjustments" would be used. " To reflect incoming revenue in the period "4888-Re-allocation from non-budgetary funds and accounts" would be used.

Scenario D - Contribution is for purchase of an asset less than departmental capital asset threshold. (assume departmental threshold is $10,000).

A third party donates $5,000 to a Department. The individual specifies that the money be used for the purchase of research equipment.

Journal Entries

1) To record the receipt of the cash ($5,000) in year 1.

  

AMT($)

FRA

AUTH

OBJ

DR Cash in the hands of the Depts awaiting deposit to RG

5,000

11125

R300

5299

CR Deferred Revenue - SPAs

5,000

23451

N6/P4*

6099/6081

FRA coding rationale: Since the requirement to buy the research equipment has not been met, the cash received must be recorded as deferred revenue. The Department must indicate an increase in their cash holdings by debiting Cash in the Hands of Depts awaiting deposits to RG.

Authority coding rationale: same as entry #1 in Scenario B.

Object coding rationale: same as entry #1 in Scenario B.

2) To record the purchase of the research equipment and recognize revenue as resources are used for the purpose specified.

2a) To record the purchase of the research equipment in year 2.

  

AMT($)

FRA

AUTH

OBJ

DR Operating Expense

5,000

51321

N6/P4

1261

DR GST Refundable Advance

350

13392

G111

8171

CR Accounts Payable

5,350

21111

R300

6299

(See Accounts Payable section for entries related to the settlement of Accounts Payable)
(See Sales Tax section for entries related to the settlement of GST)

FRA coding rationale: Since the amount of the purchase is less than the department's capital asset threshold, the cost of the equipment will be charged to an operating expense. At this point the Department is being charged GST on the research equipment, and must pay it to the vendor. However, as the Department will eventually recover this amount from Canada Customs and Revenue Agency (CCRA) it should be recorded as an asset in "13392 GST/HST Refundable advance accounts". The associated amount owed of $5,350 but not yet paid must be recorded in the form of a payable.

Authority coding rationale: Since accounts payable does not affect appropriations, the R300 authority code is used. At this point the research equipment is being purchased with money that is held in the deposit account. Therefore, the authority used to record the donation is charged the cost of the research equipment. Since GST is not to be charged to a departmental appropriation, it is set up as an advance under a special authority, G111.

Object coding rationale: The acquisition of research equipment will affect the economic objects at this point. In this case 1261 is used in this example since the purchase was research equipment. "6299- Net Increase or Decrease to Other Liability accounts" is used to establish the amount owing. Since GST/HST is payable to the, the GST must be reflected by using, "8171-Payment of GST on purchases".

2b) To move the equivalent of the resources consumed from the Deferred Revenue account into revenue

  

AMT($)

FRA

AUTH

OBJ

DR Deferred Revenue - SPAs

5,000

23451

F450

6099/6089

CR Donations and bequests

5,000

42725

F259

4888

FRA coding rationale: Contributions used for the purpose of purchasing capital assets that fall below the Department's capital asset threshold would be reported as a liability and recognized as revenue in the period in which the expenses are incurred for the purpose specified. Therefore $5,000 is brought into revenue.

Authority coding rationale: This is strictly an accrual transaction. There is no impact on authorities/appropriations since the authority was charged when the equipment was purchased. F codes will be used in order to assist in departmental reconciliations. "F450- Other non-appropriated amounts added to or deducted from liability balances" would be used for the deferred revenue amount. "F259- Other revenue not being credited to appropriations or other authorities at the same time" should be used for the revenue amount.

Object coding rationale: To record the net impact on the SPA "6099-Net Increases or Decreases in Other SPAs" or "6089- Other adjustments" would be used. To reflect incoming revenue in the period "4888-Re-allocation from non-budgetary funds and accounts" would be used.

Departmental Financial Statement Presentation and Disclosure Requirements

Restricted gifts, bequests and donations not yet spent for a specified purpose will be recorded as deferred revenue and reported under the heading Liabilities in the Department's Statement of Financial Position.

Financial statements should disclose in the notes or schedules:

  1. a general description of the nature and source of any external restrictions;
  2. the amounts of externally restricted inflows by major source; and
  3. the amounts of, and changes in, the deferred revenue balance attributable to each major category of external restrictions;

9.1.4 Cost-Sharing and Joint Project Agreements

Introduction

Authorities Perspective: Policy on Specified Purpose Accounts

Cost-sharing agreements are arrangements whereby the parties involved agree to share specified costs but not to participate directly in or assign staff to a common undertaking.

Joint project agreements are arrangements whereby the parties involved agree to participate jointly in the actual carrying out of a project. This would involve the sharing of resources, the purchase of goods and services, the hiring of personnel, and so on.

A specified purpose account is required under a cost-sharing or joint project agreement only when funds are received in advance from the external parties to the agreement. Funds received from outside parties for the purposes of cost-sharing or joint project agreements must never be used to reimburse departmental expenditures; expenditures shall be charged directly to the account.

It is the responsibility of departments to ensure that their use of specified purpose accounts complies with the Policy on Specified Purpose Accounts.

Accrual Accounting Perspective:

There are two alternatives for accounting for the funds advanced under a cost-sharing or joint project agreement. The accounting treatment selected depends upon whether the funds received from the outside party are an advance to cover future expenses that belong to the outside party or are a contribution towards expenses to be incurred by the department.

Where the funds received are considered an advance to cover the outside party's future expenses, the specified purpose account would represent a liability of the department. Any expenses funded from the SPA would not be recorded in the accounts of Canada but would simply represent a reduction in the SPA. No revenues would be recorded in this Scenario. See Scenario A for the accounting entries. An example of this Scenario is where a department arranges missions overseas and invites third parties to participate but they must pay their own travel expenses. The third party advances funds to the department to pay the expenses on its behalf. It would be inappropriate for the department to recognize these funds as revenue and expenses as it has simply acted as a facilitator in this case.

Where the funds received are considered a contribution towards expenses to be incurred by the department, the funds would be recorded as deferred revenue. Expenses would be recorded in the accounts of Canada (but under the authority of the SPA) and revenue would be recorded to reduce the balance of the deferred revenue account. Scenario B presents an example of this type of agreement.

Departments should review the cost-sharing and joint project agreements to determine which accounting treatment best reflects the substance of the arrangement with the external party. In addition to the above, departments should consider the appropriateness of excluding or including the activities funded by these agreements from their financial statements. Under Scenario A, the receipts and disbursements related to the SPA accounts will not be recorded as revenues and expenses in the income statement. If SPA funds are used to pay for a significant amount of employee salaries or other internal costs, excluding these expenses reduces the usefulness of the income statement in conveying of the department's activities in the year.

References

Scenario A

A Department enters into a cost sharing agreement 60/40 - (60% of costs to be charged to the Department and 40% to the outside party) with an outside party. The agreement calls for the outside party to advance the Department $100,000 to cover its share of expenses to be incurred under a scientific research project. The funds will cover the costs of hiring an external consultant and purchasing research equipment. This money is deposited in a SPA.

Consulting fees of $10,000 are incurred. The equipment purchased, cost $40,000 in total and has a useful life of 5 years and will have no residual value. The agreement specifies that the asset is to remain the property of the department at the end of the project.

Journal Entries

1) A private-sector company gives the Department $100,000 as their contribution to a cost sharing agreement.

  

AMT($)

FRA

AUTH

OBJ

DR Cash in Hands of Depts awaiting deposits to RG

100,000

11125

R300

5299

CR Other SPA accounts (liability)

100,000

23441

N/P(*)

6081/6099

(See section on Cash for the cash related ledger entries)

FRA Coding Rationale: Since cash has been received but services are yet to be performed, a liability must be set up under "Other Specified Purpose Accounts". The Department must indicate an increase in their cash holdings by debiting "Cash in Hands of Depts. awaiting deposit to RG".

Authority Coding Rationale: The funds received should be recorded as an authority under "Other Specified Purpose Accounts". N/P(*) either a statutory or non-statutory authority could be appropriate depending on the situation. Any one of the following statutory authorities may be used - N3xx or N5xx, or, if a non-statutory authority is required, any one of the following would be appropriate depending on the situation - P3xx, P5xx, P7xx or P8xx. Since there is no impact on the authority side for cash, R300 is used.

Object Rationale: To record the net impact on the SPA a department could use object "6081 -Deposit received" or object "6099-Net Increases or Decreases in Other SPAs" depending on whether detailed object information is desired. To record the net impact on cash accounts "5299 - Net Increase or Decrease in Cash Accounts should be used.

2) As part of the cost-sharing agreement, the Department shares 60/40 with the outside party in all expenses incurred for the research project. $10,000 in consulting fees are incurred and the SPA is drawn down.

2a) $10,000 in consulting fees are incurred.

 

AMT($)

FRA

AUTH

OBJ

DR Operating expenses

6,000

51321

B11A(**)

04xx

DR Other SPA accounts (liability)

4,280

23441

N/P(*)

6086/6099

DR GST/HST Refundable advance account

420

13392

G111

8171

CR Accounts payable

10,700

21111

R300

6299

See Accounts Payable section for journal entries regarding settlement of accounts payable.

See Sales Tax section for journal entries regarding the settlement of the GST/HST Refundable advance accounts.

Note: whether or not GST is charged to the SPA account will depend upon the terms of the agreement with the outside party. If GST is not to be charged, the SPA account would only be charged $4,000 while the GST refundable advance account would be charged $700.

FRA Coding Rationale: Since the expense was incurred as part of a cost-sharing agreement, the Department would only record its share of the expense (60% of $10,000). The remaining share of the expense (40%) plus applicable taxes would be charged directly to the SPA liability account. The department would only charge its share of the GST to the refundable advance account as the outside party would pay its own taxes. The cost of the operating expenses plus 7% GST ($10,000+700) would be accrued as an accounts payable in the period since expenses were incurred but not yet paid.

Authority Coding Rationale: Authorities are charged when there is an acquisition of goods or services. Since consulting services have been acquired, an appropriation or other source of funding must be charged. Only $6,000 should be charged to the Departmental appropriation. B11A(**), in this example, the departmental portion of the acquisition of consulting services would be charged to either a B11A - Program Vote, or B12A Operating Vote.The $4,000 operating expenses not being funded from departmental appropriations is charged to the SPA. N/P(*), any one of the following statutory authorities can be used depending on the situation - N3xx or N5xx,or, if a non-statutory authority is required, any one of the following can be used depending on the situation: P3xx, P5xx, P7xx or P8xx). Since GST is not to be charged to a departmental appropriation, authority G111 is used. Accounts payable does not impact appropriation, therefore, R300 is used.

Object Rationale: Since the consulting services were acquired at this point, the appropriate object must be used which in this case would be 04xx. "6086 - Payments made in accordance with authorities" or "6099 - Increases or decreases in other SPA" could be used for the expense charged to the SPA depending on whether detailed object information is desired. Since there has been an acquisition of services on which GST/HST is payable, the related GST must be reflected by using, "8171-Payment of GST on purchases". "6299- Net Increase or Decrease to Other Liability accounts" should be used to indicate the establishment of accounts payable.

Alternate entries: If a department's system cannot accommodate the above entry, an alternate entry which charges 100% of the expense to the Government with a subsequent reallocation to the SPA can also be performed.

First entry:

  

AMT($)

FRA

AUTH

OBJ

DR Operating expenses

10,000

51321

B11A/B12A

04xx

DR GST/HST Refundable advance account

700

13392

G111

8171

CR Accounts payable

10,700

21111

R300

6299

Second entry:

  

AMT($)

FRA

AUTH

OBJ

DR Other SPA accounts (liability)

4,280

23441

N/Pxxx

6086/6099

CR GST/HST Refundable advance account

280

13392

G111

8171

CR Operating expenses

4,000

51321

B11A B12A

04xx

3) As part of the cost-sharing agreement, an invoice of $40,000 is paid for an item considered a capital asset.

  

AMT($)

FRA

AUTH

OBJ

DR Machinery and equipment

24,000

16121

B14A(**)

12xx

DR Other SPA accounts (liability)

17,120

23441

N/P(*)

6086/6099

DR GST/HST Refundable advance account

1,680

13392

G111

8171

CR Accounts payable

42,800

21111

R300

6299

See Accounts Payable section for journal entries regarding settlement of accounts payable.

See Sales Tax section for journal entries regarding the settlement of the GST/HST Refundable advance accounts.

Note: whether or not GST is charged to the SPA account will depend upon the terms of the agreement with the outside party. If GST is not to be charged, the SPA account would only be charged $16,000 while the GST refundable advance account would be charged $2,800.

As with the previous transaction, if the department's system cannot accommodate the proposed entry an alternate two-part entry can be performed.

FRA Coding Rationale: The asset acquired is machinery and equipment, thus FRA "16121" would be used. The cost recorded would only be the government's share (60% of $40,000). The SPA liability would be charged the remaining cost of the asset (40% of $40,000) plus GST on this balance. GST on the government's share of the purchase (7% of $24,000) would be charged to the refundable advance account. The cost of the capital asset plus 7% GST ($40,000+$2,800) would be accrued as an accounts payable in the period since expenses were incurred but not yet paid

Authority Coding Rationale: Authorities are charged when there is an acquisition of goods or services. Since a capital asset has been acquired, an appropriation or other source of funding must be charged. Only $24,000 should be charged to the Departmental appropriation.

B14A (**) is used in this example, the departmental portion of the acquisition of the asset may also have been charged to either B14A - Capital vote, B11A - Program Vote, or B12A Operating Vote, as applicable. The $16,000 (plus GST) not being funded from departmental appropriations is charged to the SPA. In this case, N/P(*), either of the following Statutory votes can be used depending on the situation - N3xx or N5xx,or, if a non-statutory vote is required, any one of the following can be used depending on the situation: P3xx, P5xx, P7xx or P8xx. Since GST is not to be charged to a departmental appropriation, authority G111 is used. Accounts payable does not impact an appropriation, therefore, R300 is used.

Object Rationale: Since a capital asset was acquired at this point the appropriate economic object must be used. In this Scenario , machinery and equipment were acquired, in which case a 12xx code would be used. Since GST is applicable on the acquisition of an asset, the related GST must be reflected using "8171-Payment of GST on purchases". To record the net impact on the SPA, "6086 - Payment made in accordance with authorities" or "6099 - Increases or decreases in other SPAs" would be used depending on whether detailed object information was desired. "6299- Net Increase or Decrease to Other Liability accounts" should be used to indicate the establishment of the accounts payable.

4) Periodic amortization expense for the capital asset

  

AMT($)

FRA

AUTH

OBJ

DR Amortization expense

4,800

51421

F111

3451

CR Accumulated amortization-Mach. & Equip.

4,800

16221

F311

7061/7099

FRA Coding Rationale: The periodic amortization expense of $4,800 is calculated as follows ($24,000/5years) It should be noted that the amortization expense is calculated on the cost incurred by the department for the purchase of the asset. See Section on Tangible Capital Assets for additional coding rationale.

Authority Coding Rationale: See Section on Tangible Capital Assets for coding rationale.

Object Rationale: See Section on Tangible Capital Assets for coding rationale.

Note: At the end of the project, the department is allowed to keep the asset under the terms of the agreement. The department may choose to record the external party's share of the fair value of the asset as a donated asset (at the end of the agreement term). See section 6.2 for accounting entries related to donated assets.

Scenario B

A department has planned a research project with an estimated cost of $500,000. It enters into an agreement with an outside party which calls for the latter to perform the equivalent of $50,000 of research at its own facilities and expense and to contribute $100,000 towards any direct expenses incurred by the department on the research project. The agreement does not specify which costs are to be paid out of the funds. The outside party will share in the results of the research.

In this case, the $100,000 provided by the outside party is towards the department's expenses under the research project. Hence it would be preferable for the department to reflect the $100,000 received as deferred revenue and record the expenses in their accounts. As the expenses are incurred, revenue would be recorded and the deferred revenue account reduced. The accounting for the transactions would be identical to those performed in section 9.1.3 for donations and bequests. The only the exception is that the revenue account used would be FRA 42734 Revenue from cost-sharing and joint-project agreements instead of 42725 Donations and bequest revenue.

Departmental Financial Statement Presentation and Disclosure Requirements

Amounts recorded under cost-sharing agreements will be recorded under the heading Liabilities in the Department's Statement of Financial Position. The agreements will either be reflected as liabilities or deferred revenues depending on the accounting treatment selected.

In the notes to the Departmental financial statements, a description of cost-sharing arrangement is to be disclosed.

9.1.5 Trust Accounts

Introduction

Authorities Perspective (Policy on Specified Purpose Accounts):

Trust accounts are established to record the deposit of money in the Consolidated Revenue Fund, or the receipt of securities, when these funds must be administered by the Government of Canada according to specific terms and conditions of a trust agreement or legislation establishing a fiduciary relationship. The funds remain the property of the beneficiary and consequently represent a financial obligation of the Government of Canada.

Transactions recorded in a trust account are limited as follows:

  • The receipts and credits will consist of cash and securities received from outside parties or of benefits (and interest, if applicable) payable to beneficiaries directly by the government;
  • Charges and payments are limited to the balance in the account and may only be made to or on behalf of the beneficiary, in accordance with the terms and conditions of the trust agreement. When authorized by the legislation or the trust agreement, administrative fees can be also charged to the account.

Accrual Accounting Perspective:

Notwithstanding PSAB 1300.33, Departments will record trusts as a liability. This is in compliance with section 21 of the FAA.

Government financial statements should disclose, in a note or schedule, a description of trusts under administration by a government or government organization, and a summary of trust balances.

References

Scenario A - Trust Account is set up and payments are made.

Department administers funds on behalf of an incapacitated individual. A trust account is established to hold $100,000. Any interest earned is accumulated in the trust account. Monthly payments of $500 are made on behalf of the individual for his care.

Journal Entries

1) A trust account is established to hold $100,000 for J. Doe.

  

AMT($)

FRA

AUTH

OBJ

DR Cash in Hands of Depts awaiting deposits to RG

100,000

11125

R300

5299

CR Other Trusts (liability)

100,000

23223

N5/P5*

6081/6099

(See section on Cash for the other cash related ledger entries)

FRA Coding Rationale: The principal amount of the trust is credited to a liability account. The Department indicates an increase in its cash holdings by debiting "Cash in Hands of Depts. awaiting deposit to RG".

Authority Coding Rationale: N5/P5*, the trust funds in this case are credited to the authority specific to the trust. Either N5xx - Other trust funds set up under various acts" for trusts that are established by legislation (statutory) or P5xx - Other trusts and endowments for trusts that are established by a trust agreement (non-statutory).

Object Rationale: To record the net impact on Cash Accounts, 5299 would be used. To record the impact on the SPA "6081-Deposits received" would be used or "6099 -Net Increases or Decreases in Other SPAs" would be used if there is no requirement for detailed object reporting.

2) Trust fund earns interest at a rate 6% per annum - entry must be done by inter-departmental entries and settled via inter-departmental settlement (IS) entries.

3a) Creditor side entry by department.

  

AMT($)

FRA

AUTH

OBJ

DR Other receivables from O.G.D.s

6,000

11242

R300

5399

CR Other Trusts (liability)

6,000

23223

N5/P5

6082/6099

3a) Debtor side entry by Department of Finance.

  

AMT($)

FRA

AUTH

OBJ

DR Interest on other non-budgetary accounts

6,000

52242

A701

3114

CR Other payables to O.G.D.s

6,000

21132

R300

6299

FRA Coding Rationale: Interest earned of $6,000 (6% x $100,000) on the trust is a public debt charge (interest expense). Earnings on the trust increase the liability account. However, as the authority for the interest on public debt is under the Department of Finance, the entries must be recorded as O.G.D. receivables\payables until they are settled via the IS process.

Authority Coding Rationale: As interest is earned on the trust, it will be charged against "A701-Interest on unmatured debt" by the Department of Finance. The earnings of the trust will be credited to the same authority as when the trust was established.

Object Rationale: "3114 - Interest on SPAs/Interest on Other Liabilities" is used to reflect interest charges on the trust fund. To record the net impact on the SPA "6082 - Interest received" would be used or "6099-Net Increases or Decreases in Other SPAs" would be used if there is no requirement for detailed object reporting. "5399 - Net increase or decrease in accounts receivable" and "6299 -Net increase or decrease in other liability" would be used for the IS accounts.

3) Money is spent for specified purposes stated in the trust agreement. $500 is spent to meet the individual's expenses for the month.

  

AMT($)

FRA

AUTH

OBJ

DR Other Trusts (liability)

500

23223

N5/P5

6086/6099

CR Accounts Payable

500

21111

R300

6299

FRA Coding Rationale: Any money spent out of the trust is debited from the trust account and the corresponding amount is set up as a payable for the amount owing.

Authority Coding Rationale: Any money spent out of the trust is charged to the same authority code used to set up the trust. Since accounts payable does not impact appropriations, R300 is used.

Object Rationale: To record the net impact on the SPA "6086 - Payments made in accordance with authorities" would be used or "6099-Net Increases or Decreases in Other SPAs" would be used if there is no requirement for detailed object reporting. "6299- Net Increase or Decrease to Other Liability accounts" should be used to indicate the establishment of the accounts payable.

Alternate entry: If a department's system cannot handle the above entry, they can perform the entry in two steps:

First entry:

  

AMT($)

FRA

AUTH

OBJ

DR Operating expense

500

51321

B11A/B12A

0499

CR Accounts Payable

500

21111

R300

6299

Second entry:

  

AMT($)

FRA

AUTH

OBJ

DR Other Trusts (liability)

500

23223

N5/P5

6086/6099

CR Operating expense

500

51321

B11A/B12A

0499

Rationale: the net of these two entries results in the same entry as 3).

Departmental Financial Statement Presentation and Disclosure Requirements

Amounts recorded in trusts accounts will be recorded under the heading Liabilities in the Department's Statement of Financial Position.

In the notes to the Departmental financial statements, a description of trusts under administration by the departments, and a summary of trust balances is to be disclosed in accordance with PSA 1300.36.

9.1.6 Deposit Accounts

Introduction

Authorities Perspective: Policy on Specified Purpose Accounts

These accounts are used to record the deposit of money belonging to third parties or the receipt of securities when guarantees are required from outside parties to ensure compliance of the depositor in accordance with a contract or an agreement. For example, contractor securities to ensure satisfactory performance of work (see Scenario A).

Accrual Accounting Perspective:

The concept of a deposit account for a specified purpose is in substance a liability from an accrual accounting perspective. That is, money received from a third party, that is due back to the third party pending the compliance of the third, is recorded as a liability.

References

Scenario A - Contractor Security Deposit

A contractor makes a security deposit for $50,000 which is required to ensure that the work performed is satisfactory.

Journal Entries

1) To record the receipt of the security deposit.

  

AMT($)

FRA

AUTH

OBJ

DR Cash in the hand of the Depts awaiting deposit to RG

50,000

11125

R300

5299

CR Contractor security deposits - cash

50,000

23232

P371

6081/6099

FRA coding rationale: Since cash has been received but the contractor has yet to perform his duties, a liability is to be set up under "Deposit and Trust Accounts/Contractor security deposits - cash, cheques". The Department indicates an increase in its cash holdings by debiting "Cash in Hands of Depts. awaiting deposit to RG".

Authority coding rationale: Contractor security deposits received by PWGSC are credited to P371 - Contractor Security Deposits. All other deposit accounts are found in the P3xx authority grouping.

Object coding rationale: To record the net impact on Cash Accounts, 5299 would be used. To record the net impact on the SPA "6081 - Deposits received" or "6099-Net Increases or Decreases in Other SPAs" would be used depending on whether detailed object information was desired.

2) Contractor satisfies all necessary requirements and deposit is returned

 

AMT($)

FRA

AUTH

OBJ

DR Contractor security deposits - cash

50,000

23232

P371

6085/6099

CR Accounts Payable

50,000

21111

R300

6299

(See section on Accounts Payable for entries related to the settlement of accounts payable)

FRA Coding Rationale: Since the contractor has satisfied all the necessary requirements, the liability is reduced and a payable is set up for the amount owing.

Authority Coding Rationale: P371 is debited directly for the amount to be paid back to the contractor. Since accounts payable does not affect appropriations, R300 is used.

Object Rationale: To record the net impact on the SPA "6085- Refunds" or "6099-Net Increases or Decreases in Other SPAs" would be used depending on whether detailed object information is desired. "6299- Net Increase or Decrease to Other Liability accounts" should be used to indicate the establishment of the accounts payable.

Departmental Financial Statement Presentation and Disclosure Requirements

Amounts recorded in deposit accounts would be reported under the heading Liabilities in the Department's Statement of Financial Position.

9.1.7 Court Awards

Introduction

Authorities Perspective: Policy on Specified Purpose Accounts

Where an award is made to the Crown and it has been stipulated by the court that the moneys are to be used for specific purposes, the funds are credited to a specified purpose account and paid out for the specified purposes.

These funds are considered to be internally restricted assets and are considered consolidated SPAs for financial reporting purposes.

Accrual Accounting Perspective:

Since the legislation is to be respected, the amount of the court award is not a true liability but is more an earmarking of the Net Assets/Liabilities (restricted equity). There are a series of special revenue and expense accounts that will get closed separately at year-end into a relevant equity account. With respect to court awards, the funds will flow through a specific revenue account (FRA 42635), payments will flow out of specific expense account (FRA 51635) and will subsequently get closed out to the related restricted net asset/liability account (FRA 31235) at year end. (see Net Asset/Liabilities section of the manual for examples of how these revenues and expenses are closed into restricted net assets/liabilities).

References

Scenario A - A company is fined and money goes into SPA

The courts have found a company guilty of destroying a fish habitat. They have fined the company $100,000 under a section of a statute (act). The section of the act specifies that the money received from these fines should be earmarked to reinstate the fish habitat. DFO is responsible for the restoration.

Journal Entries

1) An SPA for the court award is set up.

  

AMT($)

FRA

AUTH

OBJ

DR Cash in Hands of Depts awaiting deposits to RG

100,000

11125

R300

5299

CR Fines and other Levies

100,000

42635

L222

8220

(See section on Cash for the cash related ledger entries)

FRA Coding Rationale: The department shall credit the court award to a special category of revenue and the cash in the hands of the department is increased by an equivalent amount.

Authority Coding Rationale: The funds are credited to "L222- Fish Habitat Restoration account". Departments will be responsible for identifying the specific authority in their departmental systems. Since there is no impact on the authority side for cash, R300 is used.

Object Rationale: In this case, funds are coming into the department because of court awards, therefore, "8220-Receipts/ Earmarked Fees and Levies" is used. To record the net impact on Cash Accounts, 5299 would be used.

2) $50,000 in expenses are incurred for the fish habitat.

  

AMT($)

FRA

AUTH

OBJ

DR Payments from earmarked fines other levies

50,000

51635

L222

8225

CR Accounts payable

50,000

21111

R300

6299

See Accounts Payable section for journal entries regarding settlement of accounts payable.

FRA Coding Rationale: As payments are made for the purpose of the restoration of the habitat the money is charged to the special category of expenses related to the earmarked revenues. An account payable is established to record the amount owing for the expenses that have been incurred but not yet paid.

Authority Coding Rationale: The appropriation the fines were credited to, would be the same appropriation that the expenses are charged against, L222. Accounts payable does not impact appropriations, therefore, R300 is used.

Object Rationale: Funds used to satisfy the requirements of restoration should be charged to "8225-Payments/ Earmarked Fees and Levies". "6299-Net Increase or Decrease to Other Liability accounts" should be used to indicate the establishment of accounts payable.

Departmental Financial Statement Presentation and Disclosure Requirements

Court awards shall be disclosed on the Department's Statement of Financial Position under the heading Net Assets (Liabilities) as a restricted asset. The nature, amounts and terms of the court awards should be disclosed in the notes to the financial statements.

9.2 Foreign Currency Transactions

Introduction

The Government of Canada's accounting policies are generally consistent with the recommendations of the CICA HB, where applicable. However, there is an exception with respect to the recognition of exchange gains and losses on long-term foreign currency denominated monetary items. The CICA recommends the deferral and amortization of such gains and losses while the Government accounting policy is to include these in net income for the current period.

Foreign Currency Transactions

Once foreign currency purchases, sales, inventories, fixed assets or other non-monetary items obtained through foreign currency transactions, have been translated and recorded, any subsequent changes in the exchange rate will not affect those recorded amounts. CICA 1650.13

Each asset, liability, revenue or expense arising from a foreign currency transaction should be translated into Canadian dollars by the rate of exchange in effect at the transaction date. For example, the transaction date would be the date a department would establish a payable on their books as result of purchases made in foreign currencies.

Departments will record transactions at the exchange rate in effect on the transaction day. This rate could vary with the rate in effect on the date the department requisitions the RG for payment. Therefore, on the date of requisition, the departments need to record an exchange gain or loss to reflect the differences in exchange rates.

Restatement at Year-end

As at March 31, all monetary items denominated in a foreign currency shall be adjusted to reflect the exchange rate in effect at the balance sheet date. Monetary items can be defined as money and claims to money.

For example, when the department purchases or sells goods or services on credit with settlement to be in a foreign currency, this will give rise to a payable or receivable in that foreign currency. The receivable or payable should be re-measured at the equivalent amount of Canadian dollars that would be collected or paid as at March 31.

Non-monetary items are not restated at March 31, but are recorded and maintained at historical exchange rates (the exchange rate in effect at the transaction date).

Exchange Gains and Losses

Exchange gains or losses arising on translation or settlement of a foreign currency denominated monetary item should be included in the determination of net income for the current period.

References

  • CICA 1650

Scenario A - Foreign Currency Transactions - Loss

Department has purchased goods from a U.S firm for $50,000 USD. The exchange rate in effect when goods are received is $1.45. A week later the department requisitions the RG for payment. The rate in effect at requisition date is $1.47.

Journal Entries

1) Department records purchase of goods at time of receipt

  

AMT($)

FRA

AUTH

OBJ

DR Operating Expense

72,500

51321

B11A/B12A*

1xxx

CR Accounts Payable

72,500

21111

R300

6299

Note: There are further entries required to discharge the accounts payable. Please refer to the Accounts Payable section.

FRA coding rationale: Once the operating expenses have been incurred, the Department must record the expenses in Canadian dollars at the exchange rate in effect at the time the goods are received. The amount would be recorded at $72,500 CDN ($50,000 USD x1.45). A payable must be set up to record the amount owing for the corresponding amount.

Authority coding rationale: B11A/B12A* Depending on the department's vote structure the department would charge the cost of the expenses to either the Program vote - B11A or the Operating Vote- B12A.

Object coding rationale: The objects are affected when the transaction is made. Depending on the nature of the good, the appropriate code would be used. "6299-Net Increase or Decrease to Other Liability Accounts" is used to establish an account payable for the amount owing.

2) Department requisitions Receiver General (RG) for payment.

  

AMT($)

FRA

AUTH

OBJ

DR Accounts Payable

72,500

21111

R300

6299

DR Loss on foreign exchange

1,000

51711

B11A/B12A*

3216

CR Payments in Transit

73,500

11134

R300

5299

FRA coding rationale: Since the payment is being requisitioned, the accounts payable is reversed at the original amount for which it was established. The Payment in Transit account would reflect the payment requisitioned at the rate in effect at requisition date, $73,500 CDN ($50,000 x 1.47). The difference results in a loss of $1,000 ($73,500-$72,500). The control account should not be charged until PWGSC has confirmed that the payment has been made.

Authority coding rationale: The loss would be charged to the departmental appropriation used to record the purchase. There is no impact on appropriations with respect to Accounts Payable and payments in Transit, therefore R300 is used.

Object coding rationale: "3216 - Loss on foreign currency transaction" would be used to track these types of losses. "6299-Net Increase or Decrease to Other Liability Accounts" are used to indicate a settlement of accounts payable. To record the net impact on Cash Accounts, 5299 would be used.

3) The Receiver General (RG) notifies the department that the payment is made at which time the Department will make the following entry:

  

AMT($)

FRA

AUTH

OBJ

DR Payments in Transit

73,500

11134

R300

5299

CR Payment Control Account - U.S. dollars

73,500

66DDD

0000

0000

DDD - Department number

FRA coding rationale: Once the payment is made, Payments in Transit is reversed and the Payment Control account - U.S dollars is credited to reflect that the RG has made the payment.

Authority coding rationale: Neither of these accounts impacts appropriations. The authority code is 0000 for the "Payment Control Account -U.S. dollars" and "R300-All other assets and liabilities" for Payments in Transit.

Object coding rationale: To record the net impact on Cash Accounts, 5299 would be used. All RG interface Control Accounts are zero filled (0000), with the exception of I/S Control Accounts, at the object level.

Scenario B - Foreign Currency Transactions - Gain

Assume the same situation exists in Scenario A except that the rate in effect at requisition date is 1.43.

Journal Entries

1) Department records purchase of goods at time of receipt

Same as Scenario A, Journal entry 1

2) Department requisitions Receiver General (RG) for payment.

  

AMT($)

FRA

AUTH

OBJ

DR Accounts Payable

72,500

21111

R300

6299

CR Gain on foreign exchange

1,000

42733

B11A/B12A*

4892

CR Payments in Transit

71,500

11134

R300

5299

FRA coding rationale: Since the payment is being requisitioned, the accounts payable is reversed at the original amount at which it was established. The Payment in Transit account would reflect payments requisitioned at the rate in effect at requisition date $71,500 CDN ($50,000 x 1.43). The difference results in a gain of $1,000 ($72,500-$71,500). The control account should not be charged until PWGSC has confirmed that the payment has been made.

Authority coding rationale: The gain would be recorded against the departmental appropriation that was used to record the purchase. There is no effect on appropriations with respect to Accounts Payable and payments in Transit, therefore R300 is used.

Object coding rationale: "6299-Net Increase or Decrease to Other Liability Accounts" are used to indicate a settlement of accounts payable. To record the net impact on Cash Accounts, 5299 would be used. "4892-Gain on re-evaluation of foreign currency assets and liabilities" would be the object used to reflect gains related to foreign exchange transactions.

3) The Receiver General (RG) notifies the department that the payment is made at which time the Department will make the following entry:

  

AMT($)

FRA

AUTH

OBJ

DR Payments in Transit

71,500

11134

R300

5299

CR Payment Control Account- U.S. dollars

71,500

66DDD*

0000

0000

DDD* - Department number

FRA coding rationale: Same as Scenario A, Journal entry 3

Authority coding rationale: Same as Scenario A, Journal entry 3

Object coding rationale: Same as Scenario A, Journal entry 3

Scenario C - Year-end Restatement

Department has purchased goods from a U.S firm for $50,000 USD. The exchange rate used to record the payable on the books was $1.45 (the transaction date). The payable was recorded at $72,500($50,000 x 1.45). The amount has not been settled by year-end.

The same department also sold goods to a U.S firm for $100,000 USD. The exchange rate used to record the receivable on the books was $1.48 (the transaction date). The receivable was recorded at $148,000 ($100,000 x 1.48). The amount has not been settled by year-end.

As at March 31, the exchange rate in place is $1.50

Journal Entries

1) Restatement of monetary liabilities at year-end.

  

AMT($)

FRA

AUTH

OBJ

DR Accounts Payable

72,500

21111

R300

6299

DR Loss on Foreign exchange re-valuations at y/e

2,500

51712

A126

3216

CR Accounts Payable

75,000

21111

R300

6299

(See section on Accounts Payable for the entries required for settlement of accounts payable)

FRA Coding Rationale: The payable was originally recorded on the books at $72,500. This amount must restated to reflect the exchange rate in effect at the balance sheet date. The $72,500 would be removed from the books by crediting this amount. The payable is now recorded at the exchange rate present at a year-end $75,000 (50,000 x1.50). The difference in rates results in a loss of 2,500 ($75,000-72,500)

Authority Coding Rationale: Since accounts payable has no impact on appropriations, R300 is used. Losses for year-end restatement are charged to a statutory authority. Consequently, "A126-Losses on foreign exchange" would be used.

Object Rationale: "6299- Net Increase or Decrease to Other Liability accounts" should be used to indicate the establishment of the accrued payable. "3216 - Loss on foreign currency transaction" would be used to track these types of losses.

2) Restatement of monetary assets at year-end.

  

AMT($)

FRA

AUTH

OBJ

DR Accounts Receivable

150,000

11221

R300

5399

CR Gain on Foreign exchange re-valuations at y/e

2,000

42732

D343

4892

CR Accounts Receivable

148,000

11221

R300

5399

(See section on Accounts Receivable for the entries required for settlement of accounts receivable)

FRA Coding Rationale: The receivable was originally recorded on the books at $148,000. This amount must restated to reflect the exchange rate in effect at the balance sheet date. The $148,000 would be removed from the books by crediting this amount. The receivable is now recorded at the exchange rate present at a year-end $150,000 (100,000 x1.50). The difference in rates results in a gain of $2,000 ($150,000-$148,000).

Authority Coding Rationale: Since accounts receivable has no impact on appropriations, R300 is used. Gains related to foreign exchange transactions would be recorded against a statutory non-tax revenue authority, "D343-Gains on foreign exchange at year-end".

Object Rationale: "5399-Net Change to Accounts Receivable" should be used to indicate the establishment of the accounts receivable". 4892-Gain on re-evaluation of foreign currency assets and liabilities" would be the object used to reflect gains related to foreign exchange transactions.

Departmental Financial Statement and Presentation Disclosure Requirements

The departments Statement of Operations would include any transaction gains or losses in the calculation of net operating results.

9.3 Sales Tax

Introduction

GST/HST

All GST and HST revenues are to be recorded in the Accounts of Canada on an accrual basis.

GST/HST on Sales

Departments must keep the GST and HST charged to their customers on an accrual basis in liability accounts, until the amounts are transferred to Canada Customs & Revenue Agency (CCRA).

Legislation requires that each department and subdivision thereof, designated as a reporting entity for GST and HST purposes, must submit to CCRA monthly returns of GST charged. The GST charged is transferred to CCRA in the same period as the return is filed, using an Interdepartmental Settlement.

GST/HST on Purchases

Departments shall record all GST and HST payable on purchases from external parties, including purchases made on behalf of other departments, to the asset account entitled GST Refundable Advance Account (RAA).

Departments shall transfer these amounts to CCRA on the last working day of March so that CCRA can prepare the Tax Remission Order to authorize them to deduct these amounts from the GST Tax Revenue accounts at year-end.

Provincial Sales Tax

Provincial sales taxes are calculated in various ways, depending on the province, where the sale takes place. If the sale is made in New Brunswick, Nova Scotia, or Newfoundland, the PST is included with the GST and included in the Harmonized Sales Tax (HST). The HST is calculated at 15% of the sales price and this whole amount is payable to CCRA. In PEI and provinces west of Quebec (except Alberta where there is no PST), the PST payable is calculated as a percentage of the sales price (in Ontario it is 8%). It is payable to the provincial government in accordance with applicable provincial government requirements for reporting and remitting provincial sales taxes. In Quebec, the QST is calculated as a percentage on the total of the sales price plus the GST. The QST is payable to the Quebec government. It should be noted that the Federal Government charges PST but does not pay PST.

References

Scenario A - Department sells goods

1) Department has delivered information products to an outside party for $500

  

AMT($)

FRA

AUTH

OBJ

DR Accounts receivable

575

11221

R300

5399

CR GST/HST payable to CCRA

35

21134

R300

6299

CR PST payable (excluding HST)

40

21151

R300

6299

CR Sales of goods and information products

500

42315

D/E(*)

4546

Note: Entries required when the accounts receivable is paid are covered in the Accounts Receivable section of this manual.

FRA Coding rationale: Once the goods have been provided, the revenue should be recorded in the Department's books, as well as the relevant GST and PST that is payable on the revenue. Assuming this transaction takes place in Ontario, the PST payable is calculated as 8% of the sale price and is a payable to the Ontario Government in accordance with the applicable provincial government requirements for reporting and remitting provincial sales taxes. The GST payable is calculated as 7% of the sales price and is payable to Canada Customs and Revenue Agency. A receivable must be set up to record the amount to be received (which includes the GST and PST) by the outside party. Where an invoice has not been issued, an accrued receivable for an estimated amount should be set up using FRA 11223 and ignoring the GST and PST payable. This accrual can be reversed in the next period before the invoice is issued.

Authority code rationale: Since there are no impacts on the authorities for payables and receivables "R300- All other assets and liabilities" is used.

D/E(*) With respect to revenue, depending on the nature of the revenue any of the following applicable codes could be used:

 

Statutory Non-Tax Revenue

Non Statutory Non-Tax Revenue

Non-Respendable Revenue

D221 to D223

E221 to E223

Object coding rationale: To record the object for GST payable and PST payable "6299-Net Increase or Decrease to Other Liability Accounts" would be used. "5399 - Net Change to Accounts Receivable" is used to establish an accounts receivable. At this point the revenue is earned, therefore the object is affected. "4546-Sales of information products" would be used in this particular Scenario. However, depending on the nature of the good or service provided, the appropriate non-tax revenue object (45xx or 48xx) would be used.

2) Invoice paid in full

  

AMT($)

FRA

AUTH

OBJ

DR Cash in Hands of Depts awaiting deposit to RG

575

11125

R300

5299

CRAccounts receivable

575

11221

R300

5399

(Further entries related to cash can be found in the Cash Section of the manual.)

FRA coding rationale: When departments receive payment for the above sales the full amount of the payment including the GST/HST shall increase the Department's "Cash in hands of Depts. (awaiting deposit to RG)" holdings. At this point the outside party has paid the department thereby reversing the accounts receivable

Authority coding rationale: There is no impact on appropriations with respect to the settlement of the accounts receivable, therefore R300 is used.

Object coding rationale: To record the net impact on Cash Accounts, 5299 would be used. To indicate the net impact on accounts receivable "5399-Net Change to Accounts Receivable" is used.

3) Monthly - GST/ HST transferred by departments to CCRA

  

AMT($)

FRA

AUTH

OBJ

DR GST/HST Payable to CCRA

35

21134

R300

6299

CR IS Credit Control Account

35

65DDD*

0000

9122

DDD* - Department Number of department submitting sales tax.

FRA coding rationale: Every month the department will transfer the GST/HST to CCRA, this will result in the reversal of the GST/HST payable. The payment to CCRA is made through the departments IS credit control account. In the month that the sale is to be reported (previous month's sales) on the return to CCRA, the GST/HST payable will be transferred by departments to CCRA by Interdepartmental Settlement in that same month.

Authority coding rationale: There is no impact on appropriations for the GST/HST Payable to CCRA, therefore, R300 is used. All RG Interface Control Accounts are zero-filled.

Object coding rationale: For GST/HST payable "6299-Net Increase or Decrease to Other Liability Accounts" would be used. Since this an IS payment to CCRA (tax revenue only) 9122 is used.

4) Department requisitions RG for payment of PST Payable.

 

AMT($)

FRA

AUTH

OBJ

DR PST Payable (excluding HST)

40

21151

R300

6299

CR Payments in Transit

40

11134

R300

5299

(For further entries required to settle the Payments in Transit see the Accounts Payable section of the manual.)

FRA coding rationale: PST is paid in accordance with the applicable provincial government requirements for reporting and remitting provincial sales taxes. Since the payment is being requisitioned, the payable is reversed and the Payment in Transit account would reflect these payments requisitioned but not yet paid. The control account should not be charged until PWGSC has confirmed that the payment has been made.

Authority coding rationale: Neither of the accounts impacts appropriations, so both sides of the entry must therefore be coded to R300-Total amounts of all other assets and liabilities.

Object coding rationale: "6299-Net Increase or Decrease to Other Liability Accounts" is used to indicate a settlement of the PST payable. To record the net impact on Cash Accounts, 5299 would be used.

Scenario B - Department purchases goods

1) To record the purchase and receipt of a vehicle.

  

AMT($)

FRA

AUTH

OBJ

DR Vehicle

24,000

16133

B14A(*)

1261

DR GST Refundable Advance Accounts

1,680

13392

G111

8171

CR Accounts payable

25,680

21111

R300

6299

FRA coding rationale: The Department must capitalize this asset as a debit to the capital asset (vehicle), since the cost is above the $10,000 threshold. Departments are to record the GST or HST due to the suppliers at the same time as the related goods or services are recorded to the departmental accounting system. The GST/HST due will be recorded in the Refundable Advance Account. The full amount of the invoice will be recorded as an account payable. To further clarify, the Department is being charged GST on the vehicle, and must pay it to the vendor. However, as the Department will eventually recover this amount from Canada Customs and Revenue Agency (CCRA) they should record it as an asset in "13392 GST/HST Refundable advance accounts". Since the Department has not paid for the vehicle, a liability must be recorded for the amount owing. It should be noted that the Federal Government does not pay Provincial Sales Tax (PST) on goods and services that it purchases.

Authority coding rationale: (*) In this example it is assumed this purchase would be charged to the capital vote. However, depending on the department and the asset purchased, the following authority codes could be used: B11A - Program Vote, B12A Operating Vote, or A131 Spending of amounts equivalent to proceeds from disposal of surplus Crown assets. Since GST is not to be charged to a departmental appropriation, it is set up as an advance under a special authority, G111. There is no impact on authorities for the accounts payable so the code to be used would be "R300-All other assets and liabilities"

Object coding rationale: Economic object 1261 is used in this example since the purchase was a motor vehicle. The appropriate economic object is used depending on the nature of the purchase. Since there is GST/HST payable, the GST must be reflected by using, "8171-Payment of GST on purchases". "6299-Net Increase or Decrease to Other Liability Accounts" is used to establish the payable for the amount owing.

2) Department pays the full amount including GST/HST by requisitioning Receiver General (RG) for payment.

  

AMT($)

FRA

AUTH

OBJ

DR Accounts Payable

25,680

21111

R300

6299

CR Payments in Transit

25,680

11134

R300

5299

(For further entries required to settle the Payments in Transit see the Accounts Payable section of the manual.)

FRA coding rationale: Since the payment is being requisitioned, the payable is reversed and the Payment in Transit account would reflect these payments requisitioned but not yet paid. The control account should not be charged until PWGSC has confirmed that the payment has been made.

Authority coding rationale: Neither of the accounts impacts appropriations so both sides of the entry must therefore be coded to "R300-Total amounts of all other assets and liabilities".

Object coding rationale: "6299-Net Increase or Decrease to Other Liability Accounts" is used to indicate a settlement of accounts payable. To record the net impact on Cash Accounts, 5299 would be used.

3) At March 31 of each year GST/ HST transferred by departments to CCRA

  

AMT($)

FRA

AUTH

OBJ

DR IS Debit Control Account

1,680

64DDD*

0000

9122

CR GST/HST Refundable Advance Account

1,680

13392

G111

8171

DDD* - Department Number of department submitting sales tax.

FRA coding rationale: The department must remove the balance in the GST/HST Refundable Advance Account. This is done through a credit to the GST RAA and a corresponding debit to the IS Debit Control Account. Departments are to transfer these amounts to CCRA on the last working day of March so that CCRA can prepare the Tax Remission Order to authorize them to deduct these amounts from the GST Tax Revenue accounts at year-end.

Authority coding rationale: There is no impact on appropriations with respect to the receipt of cash and accounts receivable, R300 is used. Now that GST is being transferred to CCRA the appropriation G111 must be credited.

Object coding rationale: Since this an IS payment to CCRA (tax revenue only) 9122 is used. , "8171-Payment of GST on purchases" is credited since the GST is transferring to CCRA.

Departmental Financial Statement and Presentation Disclosure Requirements

Any GST/HST payable not transferred to CCRA will be recorded as a payable under the liabilities section of the Department's Statement of Financial Position. This will also be the case for PST payable not yet paid to the relevant Provincial Government.

Any amounts outstanding in the GST RAA will be recorded as an advance under the Financial Assets section of the Department's Statement of Financial Position.

9.4 Contingencies

Introduction

A contingency is an existing condition or situation involving uncertainty as to possible gain or loss to an organization that will ultimately be resolved when one or more future events occur or fail to occur. Resolution of the uncertainty may confirm the acquisition of an asset or the reduction of a liability or the loss or impairment of an asset or the incurrence of a liability.

Departments and agencies might have contingent liabilities as a result of activities, such as: guarantees of the indebtedness of others; claims and pending or threatened litigation; arrangements with international organizations; and insurance programs.

The uncertainty relating to the future event, which determines the outcome of a contingency, can be expressed by a range of probabilities. The probability of the occurrence or non-occurrence of the event establishes the appropriate accounting treatment.

  1. A contingent liability is accrued and recognized as an actual liability in the financial statements if the occurrence/non-occurrence of the future event(s) is likely and the amount of settlement can be reasonably estimated.
  2. A contingent liability is disclosed in the notes to the financial statements if the occurrence of the future event(s) is unlikely, not determinable or, if determinable and likely, can not be reasonably estimated.

Departments and agencies are not to recognize a provision on likely and estimable contingencies. Treasury Board Secretariat will record a central provision based on the information reported on plates I-11 and I-12 by departments and agencies. TBS will review the possibility of devolving these accruals to departments and agencies in the future. Departments will only set up a liability once the criteria of the PAYE policy has been met.

Contingent Gains: Contingent gains should not be accrued in financial statements as this accounting treatment could result in the recognition of revenue which might never be realized. Nevertheless, disclosure of the existence of a contingent gain which is considered likely to be realized provides useful information and would, therefore, be included in the financial statements.

Departmental Financial Statement and Presentation Disclosure Requirements

Departments and agencies will disclose information in their financial statements to describe their contingencies at the end of the accounting period. Disclosure will also be made that no provision for loss is recognized in their financial statements but appears only in the Government of Canada consolidated financial statements.

Refer to Treasury Board Accounting Standard 3.6 - Contingent Liabilities for guidance on the recommended note disclosure for financial statements.

References

  • CICA 3290
  • PS 1500.69 -.72
  • TBAS 1.2 Departmental and Agency Financial Statements
  • TBAS 3.6 Contingent Liabilities

9.5 Commitments

Introduction

Financial commitments, as defined for financial statement purposes, are obligations to outside organizations or individuals that will become liabilities if and when the terms of contracts, agreements or legislation are met. (PS 1500.65)

A commitment is the stage between the establishment of an agreement between parties (whether that be signing a contract or passing legislation) and the fulfilment of the requirements of the agreement by one or more parties, creating an obligation to perform on the part of the remaining party or parties.

The most common example of a commitment is contracting for goods or services. Once the contract between the department and the supplier has been signed, there is a commitment on the part of the department to perform its part of the contract, which, generally, is pay the supplier. The commitment exists until the supplier has performed their part of the contract, (i.e., delivered goods or services of a specified nature and/or quality, etc). Once goods or services are received, a commitment ceases to exist and the department has an obligation or liability to pay the supplier.

There may be a fair amount of financial system activity in accounting for commitments. This activity is primarily for budget control and to ensure that overspending does not occur. None of the entries involve financial statement classifications (asset, liability, expense, revenue or equity) and so should not be termed journal entries but rather memo entries.

Although committed amounts do not appear on the face of the financial statements, it is necessary to properly present the appropriate information for disclosure in the notes. The sample transactions below expand some of the accounting concepts related to this area.

References

  • PS 1500.65 -68

Scenario A - Department enters into a commitment to purchase vehicles

Management in a department decides on February 28, 2003 that it is necessary to purchase 5 vehicles to carry out program delivery requirements. The department enters into a contract with an outside party for the purchase of 5 vehicles on March 15, 2003. The vehicles are delivered on April 21, 2003.

Journal Entries

1) February 28, 2003

No journal entry is required. No note disclosure is required.

There is no commitment at this point. Management has only decided they need the vehicles but have not entered into an agreement.

2) March 15, 2003

No journal entry is required. Note disclosure is required.

The department has entered into an agreement to purchase the vehicles, and has committed funds to acquire these goods. Since the vehicles have not been received, no liability exists to pay for these goods. As a result, no journal entry is required, but note disclosure regarding the nature and amount of the commitment is required on the year end financial statements.

3) April 21, 2003 - record the liability (purchase and receipt of vehicles)

 

AMT($)

FRA

AUTH

OBJ

DR Vehicles

100,000

16233

B14A*

1261

DR GST/HST Refundable Advance Account

7,000

13392

G111

8171

CR Accounts Payable

107,000

21111

R300

6299

For entries related to the settlement of the GST Refundable Advance Account please see the Sales Tax section of the manual.

FRA coding rationale: The department must capitalize these assets as a debit to the capital asset (vehicle), since it falls above the $10,000 threshold. At this point the department is being charged GST on the vehicle, and must pay it to the vendor. However, as the department will eventually recover this amount from Canada Customs and Revenue Agency (CCRA) they should record it as an asset in "13392 GST/HST Refundable advance accounts". Since the department has not paid for the vehicle, a liability must be recorded for the amount owing.

Authority coding rationale: B14A* In this example it is assumed this purchase would be charged to the capital vote. However, depending on the department and the asset purchased, the following authority codes could be used: B11A - Program Vote, B12A Operating Vote, or A131 Spending of amounts equivalent to proceeds from disposal of surplus Crown assets. Since GST is not to be charged to a departmental appropriation, it is set up as an advance under a special authority, G111. There is no impact on authorities for Accounts Payable so "R300-All other assets and liabilities" is used.

Object coding rationale: Economic object 1261 is used in this example since the purchase was a motor vehicle. The appropriate economic object is used depending on the nature of the purchase. Since there is GST/HST payable, the GST must be reflected by using, "8171-Payment of GST on purchases". "6299-Net Increase or Decrease to Other Liability Accounts" is used to establish the accrual of the amount owing.

Departmental Financial Statement Presentation and Disclosure Requirements

Financial statements should disclose information to describe a government's material financial commitments at the end of the accounting period. (PS 1500.66)

Financial statements should provide information in notes or schedules to describe a government's financial commitments that are material in relation to its financial condition or future operations. Such information is useful for understanding and assessing future revenue requirements. (PS 1500.67)

One type of financial commitment relates to the purchase of goods and services to be provided as set out in existing contracts, agreements or legislation. This includes commitments for lease agreements and tangible capital asset acquisitions. In some circumstances, tangible capital asset acquisitions involve large undertakings. In those circumstances, the costs of existing commitments would be accompanied by the estimated total cost of the project. (PS 1500.68)

Departments and agencies currently prepare information on contractual commitments for inclusion in the Public Accounts. Note disclosure for contractual commitments should be similar to that presented in the Government's financial statements. However, for the purpose of a department or agency's financial statements, the reporting threshold for commitments should be based on the department or agency's level of materiality.

9.6 Environmental Liabilities

At this time, environmental costs will not be recognised in the departmental books of account.

References

  • Transitional Protocol and Accounting Requirements
  • TBAS 1.2 Departmental and Agency Financial Statements
  • Policy On Accounting For Costs And Liabilities Related To Contaminated Sites

9.7 Non-Monetary Exchanges

Non-monetary exchanges are exchanges of non-monetary assets, liabilities or services for other non-monetary assets, liabilities or services with little or no monetary consideration involved. In general, if the fair value of the monetary consideration is less than 10% of the estimated fair value of the total consideration given up or received, the transaction would be considered non-monetary. With respect to accrual accounting there are a few different Scenario s with respect to the exchange of non-monetary assets with parties external to the Government of Canada.

  1. Assets or services that are exchanged that are dissimilar in nature: Accounting for exchange of non-monetary assets/services should be based on the fair value of the asset/service given up. The fair value of the asset/services received should only be used if it is clearly more evident than the fair value of the assets/services given up. Any gains or losses on the exchange should be recognised immediately. If the fair value of either asset/service is not reasonably determinable the book value of the asset/service given up is usually used as the basis for recording the non-monetary exchange.
  2. Assets or services that are exchanged that are similar in nature (involving no monetary consideration): Similar non-monetary assets/services are those of the same general type, that perform the same function, or are employed in the same line of business. The asset/service acquired should be recorded at book value of the asset/service given up with no gain or loss recognized.
  3. Assets or services that are exchanged that are similar in nature (involving partial monetary consideration): When exchanges described in ii) above involve a partial monetary consideration, the carrying value of the asset or service given up would be adjusted by the amount of monetary consideration. The party paying the monetary consideration would record the non-monetary asset/service received at the carrying value of the asset/service given up plus the monetary consideration paid. The entity receiving the monetary consideration would record the non-monetary asset/service received at the carrying value of the non-monetary asset or service given up less the amount of monetary consideration received, unless the non-monetary consideration exceeds the carrying value. In this case, a gain would be recorded for the amount of such excess (CICA 3830.10).

    Note: transactions between a Department and an outside party that are above $100,000 are to be treated as though they are monetary, i.e. charged to an appropriation. Those below $100,000 would strictly be an accrual transaction in that they do not affect appropriations (F codes should be used). However, where a non-monetary transaction involves a cash component, the amount paid must be charged to an appropriation.

Any exchange of assets between a department and another entity that is part of the Government reporting entity must be performed at the net book value of the asset. The amounts transferred between departments should be gross, that is the cost of the asset and the accumulated depreciation. No gain or loss may be recorded in the exchange.

References

Scenario A - Exchange of Dissimilar assets/services (for an amount less than $100,000)

Department exchanges research equipment plus cash for a service (consulting services) with an outside party. The research equipment has a net book value of $42,000 (cost $64,000 less $22,000 accumulated depreciation). The fair market value of the research equipment is $49,000. In addition to the research equipment the Department must pay an additional $17,000 cash for the consulting services.

Journal Entries

1) To record the exchange of dissimilar assets for services for under $100,000.

  

AMT($)

FRA

AUTH

OBJ

DR Operating Expense

49,000

51321

F159

0491

DR Operating Expense

17,000

51321

B11A/B12A

0491

DR Accumulated Depreciation - equipment

22,000

16229

F351

4843

CR Equipment

64,000

16129

F351

4843

CR Gain on Disposal of Equipment

7,000

42411

F351

4843

CR Accounts Payable

17,000

21111

R300

6299

FRA coding rationale: The consulting service is recorded at the fair value of the item(s) given up (equipment) plus the cash $66,000 ($49,000 + $17,000). The equipment and related accumulated amortization would be removed from the books, and the cash that will be paid out will be set up as a payable to reflect the amount owing. Since this is an exchange of dissimilar items, a gain or loss must be recognized immediately, which would be the difference between the fair value and book value of the equipment $7,000 = ($49,000 - ($64,000-$22,000)).

Authority coding rationale: Since the fair value of the transaction is less than $100,000, the appropriations are not affected for the non-monetary portion of the transaction. Therefore it is necessary to use codes that will show a nil effect on appropriations, i.e. F codes. The monetary portion of the transaction, the $17,000 paid, would be charged to an operating authority code, either B11A or B12A. There is no impact on the authority side for the accounts payable but the system requires that a code be used, in this case it would be "R300- All other assets and liabilities"

Object coding rationale: With respect to economic objects the exchange reflects the acquisition of the service and the disposition of the asset. "0491- Management consulting" is used to reflect the receipt of the services. "4843-Sales of surplus Crown assets to outside parties" is used to reflect the net value of the disposal and the proceeds received for the asset. "6299-Net Increase or Decrease to Other Liability Accounts" is used establish an accounts payable.

Scenario B - Exchange of Similar assets - no monetary consideration - (transaction is greater than $100,000)

Department arranges to exchange with an outside party research equipment (ABC) with a fair value $160,000 and a book value of $135,000 (cost $150,000 less accumulated depreciation $15,000) for the XYZ model - research equipment with a fair value of $170,000.

Journal Entries

1) To record the exchange of similar assets with no monetary consideration.

  

AMT($)

FRA

AUTH

OBJ

DR Equipment(XYZ)

135,000

16129

(*)

1249

DR Accumulated Depreciation-equipment (ABC)

15,000

16229

D321

4843

CR Equipment (ABC)

150,000

16129

D321

4843

FRA coding rationale: The equipment (XYZ) would be recorded at net book value of equipment (ABC) $135,000 ($150,000 - $15,000) i.e. the book value of the asset given up. The equipment (ABC) and related accumulated amortization (ABC) would be removed from the books.

Authority coding rationale: Since the fair value of the transaction is greater than $100,000 the equipment (XYZ) would be charged to the same appropriation as if the transaction was monetary. (*) In this example it is assumed this purchase would be charged to the capital vote B14A. However, depending on the department and the asset purchased, the following authority codes could be used: B11A - Program Vote, B12A Operating Vote, and A131 Spending of amounts equivalent to proceeds from disposal of surplus Crown assets. "D321- Proceeds from disposal of crown assets" is used for the remaining debits and credits to reflect the net proceeds received by the Department.

Object coding rationale: With respect to economic objects the exchange reflects the acquisition of an asset and the disposition of the asset. "1249- Other equipment and parts" would be used to reflect the receipt of the equipment (XYZ). "4843-Sales of surplus Crown assets to outside parties" is used to reflect the disposal and proceeds received for the asset given up -equipment (ABC).

Scenario C - Exchange of Similar assets - with partial monetary consideration- (transaction is greater than $100,000)

Department arranges to exchange with an outside party research equipment (ABC) with a fair value $160,000 and a book value of $135,000 (cost $150,000 less accumulated depreciation $15,000) for the XYZ model - research equipment with a fair value of $170,000. Department pays $10,000 in cash in addition to the ABC -research equipment exchanged.

Journal Entries

1) To record the exchange of similar assets with partial monetary consideration.

  

AMT($)

FRA

AUTH

OBJ

DR Equipment(XYZ)

145,000

16129

(*)

1249

DR Accumulated Depreciation

15,000

16229

D321

  

  - equipment (ABC)

           

CR Equipment (ABC)

150,000

16129

D321

4843

CR Accounts Payable

10,000

21111

R300

6299

See the Accounts payable section for journal entries used to settle this payable.

FRA coding rationale: The equipment (XYZ) would be recorded at net book value of equipment (ABC) plus the additional cash requirement $145,000 ($150,000 -$15,000+ $10,000). The equipment (ABC) and related accumulated amortization (ABC) would be removed from the books, and $10,000 owing would be recorded as a payable.

Authority coding rationale: Since the fair value of the transaction is greater than $100,000 the equipment (XYZ) would be charged to an appropriation as if the transaction was monetary. (*) In this example it is assumed this purchase would be charged to the capital vote B14A. However, depending on the department and the asset purchased, the following authority codes could be used: B11A - Program Vote, B12A Operating Vote, and A131 Spending of amounts equivalent to proceeds from disposal of surplus Crown assets. "D321- Proceeds from disposal of crown assets" is used for the remaining debits and credits to reflect proceeds received by the Department. There is no impact on the authority side for the accounts payable but the system requires that a code be used, in this case it would be "R300- All other assets and liabilities"

Object coding rationale: With respect to economic objects the exchange reflects the acquisition of an asset and the disposition of the asset. "1249- Other equipment and parts" is used to reflect the purchase of the equipment (XYZ). "4843-Sales of surplus Crown assets to outside parties" reflects the net disposal value and proceeds received for the asset given up - equipment (ABC). "6299-Net Increase or Decrease to Other Liability Accounts" is used establish an accounts payable.

Departmental Financial Statement Presentation and Disclosure Requirements

None

9.8 Transfers *

Introduction

For appropriation purposes, transfers that are grants, contributions or repayable contributions are charged to either a Grants and Contribution vote or a Program Expenditures vote.

For accrual accounting purposes, it is necessary to differentiate among grants and contributions and repayable contributions.

Grants and contributions are transfers of money and/or goods or services from the government to an individual, an organization or another government for which the federal government does not:

  • receive any goods or services directly in return;
  • expect to be repaid; or
  • expect a financial return;

Repayable contributions are those transfers whereby the recipient is expected to repay the amount or the government expects to receive a financial return. The terms may specify a calendar date or dates for repayment, or may describe the particular time(s) or circumstances(s) that will determine repayment. (PS 3050.07)

Repayable contributions are further classified as unconditionally repayable and conditionally repayable. They require separate treatment for recording and reporting under accrual accounting.

  • Unconditionally repayable contributions (URCs) are contributions that must be repaid without qualification. The contribution agreement contains specific repayment terms that set out the time and amount of payment(s) due. URCs are in substance loans receivables.
  • Conditionally repayable contributions (CRCs) are contributions, all or part of which are repayable, if conditions specified in the contribution agreement come into being.

Advance payments of all transfers shall be recorded as a financial asset until such time as the expense recognition criteria have been met.

All transfers of goods and/or services shall be recorded at the fair value of the asset or service given up.

For the accounting treatment of the following types of transfers see the following sections of the manual:

1. Grants and Contributions- see Grants and Contribution section under the Expenses section of the manual

2. Repayable Contributions

  1. Unconditional Repayable Contributions - See Loans Receivable Section
  2. Conditional Repayable Contributions - See Conditional Repayable Contributions Section.

References

9.8.1 Conditional Repayable Contributions

Authorities Perspective:

A contribution is a conditional transfer payment to an individual or organization for a specified purpose pursuant to a contribution agreement that is subject to being accounted for and audited (Transfer Payment Policy). Furthermore, a contribution, which includes repayable contributions can be conditional or unconditional depending on the requirement to repay.

For appropriation purposes repayable contributions are charged to either a Grants and Contribution vote or a Program Expenditures vote.

Accrual Accounting Perspective:

Conditionally repayable contributions (CRCs) are contributions, all or part of which are repayable, if conditions specified in the contribution agreement come into being, e.g. certain level of sales.

CRCs are distinct from unconditionally repayable contributions (URCs). The latter contains specific repayment terms that set out the time and amount of payment(s) due. These are in substance loans. See Loans Receivable Section of the manual.

CRCs shall be accounted for in accordance with PS 3410. They shall be recognizedas anexpense in the department's Statement of Operations in the period that the events giving rise to the transfer occurred, as long as:

  1. the transfer is authorized;
  2. eligibility criteria, if any, have been met by the recipient; and,
  3. a reasonable estimate of the amount can be made

Contingent Recoveries

Conditionally repayable contributions (CRCs) are contingencies that may qualify as contingent recoveries.

A contingency is defined as an existing condition or situation involving uncertainty as to possible gain or loss to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur. Contingent recoveries are claims or rights to receive assets when existence is uncertain but may become valid eventually.

Contingent recoveries are not accrued in financial statements. Nevertheless, disclosure of the existence of a contingent recovery which is considered likely to be realized provides useful information and would, therefore, be included in a note to the financial statements.

When the existence of a contingent recovery, which has not been accrued, is disclosed in a note to the financial statements, the following information should be included:

  1. The nature of the contingency; and
  2. An estimate of the amount of the contingent recovery... or a statement that such an estimate cannot be made.

Once it is certain that full or partial repayment is required, departments will set up a receivable and reduce the transfer expenses of the current period. Appropriate valuation allowances would be recorded.

References

Scenario A - Conditional Repayable Contributions.

Department makes a contribution of $500,000 to a company involved in innovative research and development projects (the contribution is for capital assistance) and is repayable if conditions specified in the contribution agreement come into being. Conditions are likely to be met and a portion of the money is paid back.

Journal Entries

1) To record disbursement of $500,000 CRC to a company

  

AMT($)

FRA

AUTH

OBJ

DR Transfer Payment Expense

500 000

511XX

B15A(*)

2185

CR Accounts Payable

500,000

21111

R300

6299

(See section on Accounts Payable for the entries required for settlement of accounts payable)

FRA Coding Rationale: Conditional repayable contributions are recorded as an expense since there is no assurance that any portion of the disbursement will be returned. An accounts payable is set up for the corresponding amount owing to the company.

Authority Coding Rationale: In this example the CRC is charged to the B15A(*) - Grant and Contribution vote but depending on the department B11A - Program Vote could be used as well. Since accounts payable has no impact on appropriations, R300 is used.

Object Rationale: In this example transfer payments to industry for research and development were made for conditionally - recoverable payments for capital assistance, therefore 2185 is used. However depending on who the recipient of the CRC is the appropriate object would be used. "6299- Net Increase or Decrease to Other Liability accounts" should be used to indicate the establishment of the accounts payable.

Scenario B - Conditions of Repayment Likely to be Met.

1) Conditions of the repayment likely to be met, therefore note disclosure of contingent recovery is required.

No Journal Entry required. Only note disclosure of contingent recovery

"The Department makes contributions to industry involved in innovative research and development projects that are repayable if conditions specified in the contribution agreement come into being. Based on the likelihood of those conditions being met, a contingent recovery of $100,000 has been estimated to be realized in the future".

Scenario C - Conditions of Repayment ARE Met.

1) Conditions are met and a portion of the transfer ($100,000) is to be repaid.

  

AMT($)

FRA

AUTH

OBJ

  

DR Accounts Receivable for refunds of program expenses

100,000

11231

R300

5399

  

CR Transfer Payment Expense

100,000

511XX

E500

4731

(See section on Accounts Receivable for the entries required for settlement of accounts receivable.)

FRA Coding Rationale: Once it is certain that full or partial repayment is required, departments will set up a receivable and reduce the transfer expenses of the current period.

Authority Coding Rationale: Since accounts receivable has no impact on appropriations, R300 is used. E500 is used to record revenue from this source for authority purposes.

Object Rationale: To indicate the net impact on accounts receivable"5399-Net Change to Accounts Receivable" is used. "4731- Repayment of Recoverable Items/ Contribution recoveries" is used to capture the revenue associated with the repayment of this conditional repayment.

Please note: In the event the Department feels there is a possibility of the company not paying the receivable an appropriate allowance would be set up. See Accounts Receivable Section.

Departmental Financial Statement Presentation and Disclosure Requirements

Conditional repayable contributions will be recorded as expenses in the Department's Statement of Operations.

When the existence of a contingent recovery, which has not been accrued, is disclosed in a note to the financial statements, the following information should be included:

  1. The nature of the contingency; and
  2. An estimate of the amount of the contingent recovery... or a statement that such an estimate cannot be made.

When conditions are met such that contingent recoveries will be realized, these receivables will be recorded under the heading Financial Assets in the Department's Statement of Financial Position.

9.9 Funds Administered by Departments on Behalf of OGDs

Introduction

This is an administrative arrangement whereby one department provides payment requisition functions or deposit functions on behalf of another department. The department providing the deposit functions on behalf of the other department is called the SPENDING DEPARTMENT.

It should be noted that this is different from a cost sharing arrangement or a group purchasing arrangement.

The correct use of the Internal/External (I/E) code is not self-evident for all transactions described in this section of the manual. Therefore, this section includes specific direction on the mandatory use of the code. This code is important for consolidations that are done at a government-wide level by the Receiver General.

References

Scenario A

One Department requests that another government department requisition payments on its behalf for goods and/or services. It was estimated that for the current year that this activity would be $100,000. The funding department advanced this amount to the spending department. Periodically an accounting for the use of the funds is provided to the funding department from the spending department. For purposes of this Scenario , $40,000 was spent by the spending department with an additional $15,000 accrued at year-end.

Note: the numbering of the entries indicates the time sequence of their performance (i.e. entry 1a would occur before entry 1b).

Journal Entries

FUNDING DEPARTMENT

1a) To record the amount of funds transferred to the Spending Department.

  AMT($)FRAAUTHOBJI/E
DR OGD Suspense Adv. 100,000 11244 B11A/B12A 5399 I
CR IS Credit Control Acct 100,000 65DDD 0000 9XXX I

DDD - Funding Department's department number
XXX - Spending Department's department number

FRA Coding Rationale: The Funding Department is giving the Spending Department $100,000 as an advance. The expectation is that the funds will be spent by the spending department for the acquisition of goods and services on behalf of the funding department. In the event the funds are not spent they must be returned, therefore the amount is recorded as an interdepartmental receivable. The IS control account is credited for the amount paid to the Spending Department.

Authority Coding Rationale: As required, the appropriation is charged at the point the transfer is made as an advance to the spending department. Since the funds are to be used for goods and services on the Funding Department's behalf, either B11A or B12A could be used depending on the Department's vote structure. The IS Control Accounts have no impact on an appropriation so the authority code must be zero-filled.

Object Coding Rationale: To indicate the net impact on accounts receivable "5399-Net Change to Accounts Receivable" is used. 9XXX is used for interdepartmental settlements and would be used to identify the Spending Department.

Internal/External Coding Rationale: All transactions through SPS/IS are considered to be Internal, therefore an I is used.

2b) Spending Department provides information to the Funding Department regarding particulars of expenses incurred. The Funding Department prepares an Internal Journal Voucher (JV) to record these transactions against the applicable account(s). In this case, to is assumed that the entire $40,000 was for operating expenses.
  AMT($)FRAAUTHOBJI/E
DR Operating Expenses 40,000 51321 B11A/B12A 0xxx/1xxx I/E
CR OGD Suspense Adv. 40,000 11244

B11A/B12A

5399 I/E

FRA Coding Rationale: The Funding Department must record the cost of the goods and services on their books. They will debit operating expenses for $40,000. Of the $100,000 given to the Spending Department $40,000 has been spent on goods and services so the advance must be reduced by that amount.

Authority Coding Rationale: Since the appropriation was originally charged when the advance was made to the funding department (in Scenario A Journal Entry 1), no new charge is required to the appropriation at this point. To ensure there is no impact on the appropriations, the same authority code is used on the debit and credit side of the entry.

Object Coding Rationale: To indicate the net impact on accounts receivable "5399-Net Change to Accounts Receivable" is used. Depending the nature of the good or service acquired, the appropriate object of expenditure code would be used. The object starting with 0 is for a service and an object starting with a 1 is for a good.

External or Internal Rationale: The code to use will depend upon whether the original transaction for the goods and services by the Spending Department was internal or external.

Alternate Entries: The above entry can alternatively be recorded in two entries.

3b) Funding Department is notified by Spending Department of $15,000 of year-end accruals.

  

AMT($)

FRA

AUTH

OBJ

I/E

DR

Operating Expenses

15,000

51321

B11A/B12A

0xxx/1xxx

I/E

CR

OGD Suspense Adv.

15,000

11244

B11A/B12A

5399

I/E

FRA Coding Rationale: Same as entry 2b.

Authority Coding Rationale: Same as entry 2b.

Object Coding Rationale: Same as entry 2b.

External or Internal Rationale: Same as entry 2b.

4b) The Funding Department is informed by the Spending Department to create an accounts receivable - OGD.

  

AMT($)

FRA

AUTH

OBJ

I/E

DR

Accts Rec-OGD

45,000

11242

R300

5399

I

CR

OGD Suspense Adv.

45,000

11244

B11A/B12A

5399

I

FRA Coding Rationale: The unspent balance in the OGD Suspense Advance account is recorded as an accounts receivable OGD.

Authority Coding Rationale: As only a portion of the appropriation ($55,000) was used in the year, the remaining $45,000 ($100,000-$40,000- $15,000) that was not spent by the Spending Department must be reduced from the Funding Department's appropriation as it cannot be legitimately charged to the appropriation during that year. Either B11A or B12A could be used depending on the Department's vote structure. R300 is used on the debit side, as this will have no impact on the appropriations.

Object Coding Rationale: To ensure there is no impact the objects the "5399-Net Change to Accounts Receivable" is debited and credited for the same amount.

External or Internal Rationale: This is an internal transaction and would be coded I.

5) In the new year, spending department returns unused portion to the funding department through an IS.

  

AMT($)

FRA

AUTH

OBJ

I/E

DR

IS Debit Control Acct

45,000

64DDD

0000

9XXX

I

CR

Accts Rec. -OGD

45,000

11242

R300

5399

I

DDD - Funding Department's department number
XXX- Spending Department's department number

FRA Coding Rationale: Since the unspent funds are to be returned to the Funding Department, the funding department would record the receipt of these funds in the new year. The Funding Department would record the receipt by debiting the IS debit control account and crediting the accounts receivable - OGD account.

Authority Coding Rationale: The IS Control Accounts have no impact on an appropriation so the authority code must be zero-filled. Accounts receivable has no impact on appropriations; therefore R300 is used.

Object Coding Rationale: To indicate the net impact on accounts receivable "5399-Net Change to Accounts Receivable" is used. 9XXX is used for interdepartmental settlements and would be used to identify the Spending Department.

Journal Entries (cont'd)

SPENDING DEPARTMENT

1b) To record the advance received from the Funding Department
  AMT($)FRAAUTHOBJI/E
DR IS Debit Control Acct 100,000 64DDD 0000 9XXX I
CR OGD Suspense Acct 100,000 21621 B410 3718 I
DDD - Spending Department's department number
XXX - Funding Department's department number
FRA Coding Rationale: The Spending Department has received $100,000 from the Funding Department. The expectation is that the funds will be spent for the acquisition of goods and services. In the event they are not spent, they will be returned. Therefore, the amount is recorded in a payable suspense account. The IS control account is debited for the amount received by the Funding Department.
Authority Coding Rationale: "B410- Authorities transferred from OGD Suspense" is used to ensure that the money appropriated for the Funding Department's goods and services is included in an OGD suspense account and is segregated from the Spending Department's normal operating or program vote. The IS Control Accounts have no impact on an appropriation so the authority code must be zero-filled.
Object Coding Rationale: "3718- Suspense account (credit) - OGD" is used to indicate the impact on the OGD suspense account. 9XXX is used for interdepartmental settlements to identify the Funding Department in this case.
External/Internal Rationale: All transactions through SPS/IS are considered to be Internal, therefore an I is used.
2a) Spending Department spends $40,000 for goods and services on behalf of the Funding Department.
  AMT($)FRAAUTHOBJI/E
DR OGD Suspense Acct 40,000 21621 B410 3422/3718 I/E
CR Accts Payable 40,000 21132/21111 R300 6299 I/E
Please see section on Accounts Payable to see entries required for the settlement of the accounts payable.
FRA Coding Rationale: When the Spending Department purchases the goods and services on behalf of the Funding Department the amount is charged to OGD Suspense (which is a payable). A corresponding credit is made to external accounts payable or other payables to OGD, depending upon whether the goods were acquired internally or externally.
Authority Coding Rationale: The charges to the appropriation for the goods and services will be made to the OGD suspense account-B410. This ensures that the Spending Department's operating or program appropriations are not impacted.
Object Coding Rationale: "6299-Net Increase or Decrease to Other Liability Accounts" are used to indicate the net impact on accounts payable. Since there is no impact on the Funding Department's objects, "3422-Suspense Account (debit) - OGD" is used. The use of 3422 for debit entries and 3718 for credit entries will provide a department with greater ability to track the activity in the OGD Suspense Account. Both accounts roll up under standard object 12. However, a department may also choose to use "3718 - Suspense Account (credit) - OGD" as it did in entry 1.
External/Internal Rationale: If the purchase is acquired internally an I is used. If the purchase is acquired from an outside party, an E is used.
Alternate Entries
The above entry can alternatiely be recorded in two entries
First Entry AMT($)FRAAUTHOBJI/E
DROperating expenses40,00051321B4100xxx/1xxxI/E
CRAccts Payable40,00021132/21111R3006299I/E
Rationale: The credit side of the entry is the same as that presented above. The debit side of the entry differs in that the expenses are charged to the appropriate FRA and object code rather than to the OGD suspense advance account.
  AMT($)FRAAUTHOBJI/E
DROGD Suspense Acct40,00021621B4103422/3718I/E
CROperating Expenses40,00051321B4100xxx/1xxxI/E
Rationale: The debt side of the entry is the same as that presented in entry 2) above. The credit entry reverses the operating expenses recorded in the previous entry. Note that the I/E code used must be the same as that used in the first entry.
3a) Spending Department identifies $15,000 of amounts to be accrued at year-end.
  AMT($)FRAAUTHOBJI/E
DROGD Suspense Acct15,00021621B4103422/3718I/E
CRAccrued Liabilities15,00021113R3006299I/E
FRA Coding Rationale: The accrual of $15,000 in expenses incurred but not yet billed is recorded in the accrued liabilities FRA.
Authority Coding Rationale: Same as entry 2a.
Object Coding Rationale: Same as entry 2a.
External/Internal Rationale: Same as entry 2a.
Alternate Entry: The two-part entry described in entry 2 may also be used here.
4a) As at March 31, when Spending Department has processed all expenses and accruals pertaining to the arrangement (Journal Entries 2 and 3), an internal J.V. is recorded to reverse the appropriation for the unused portion of the money advance by the funding department and an OGD payable is created.
  AMT($)FRAAUTHOBJI/E
DROGD Suspense Acct45,00021621B4103422/3718I
CRAccounts Payable45,00021132R3006299I
FRA Coding Rationale: The unspent balance in the OGD Suspense Account is recorded as an accounts payable OGD.
Authority Coding Rationale: As only a portion of the suspense account ($55,000) was used in the year, the remainder $45,000 ($100,000-$40,000-$15,000) that was not spent by the Spending Department must be reversed from the B410 appropriation. There is no authority to maintain this suspense account at year-end; thus at year-end, there should be a nil balance in B410. R300 is used on the credit side as this will have no impact on the appropriations.
Object Coding Rationale: "6299-Net Increase or Decrease to Other Liability Accounts" is credited for the accounts payable. "3422 - Suspense account (debit) -OGD" or "3718 - Suspense account (credit) - OGD" is used for the OGD Suspense account. This ensures that the net effect by year-end on standard object 12 is zero.
External or Internal Rationale: This is an internal transaction and would be coded I.

5) In the new year, spending department returns unused portion to the funding department through an IS.

  AMT($)FRAAUTHOBJI/E
DRAccts Payable-OGD45,00021132R3006299I
CRIS Credit Control Acct45,00065DDD00009XXXI
DDD - Spending Department's department number
XXX- Funding Department's department number
FRA Coding Rationale: Since the unspent funds are to be returned to the Funding Department, the spending department would record the payment of these funds in the new year. The Spending Department would record the payment by crediting the IS credit control account and debiting the Accounts Payable-OGD account.
Authority Coding Rationale: The IS Control Accounts have no impact on an appropriation so the authority code must be zero-filled. To indicate the net impact on accounts payable R300 is used.
Object Coding Rationale: To indicate the net impact on accounts payable " 6299-Net Increase or Decrease to Other Liability Accounts" is used. 9XXX is used for interdepartmental settlements and would be used to identify the Funding Department.

10.0 Financial Statements

An illustrative set of financial statements and accompanying notes that Departments are required to produce annually are found in TBAS 1.2 Departmental and Agency Financial Statements. It is important to understand that these statements require professional judgement in their preparation and therefore cannot be produced by simply activating a command in a software package. The Statement of Financial Position and the Statement of Operations are largely mathematical and well suited for automation, but the Notes to the Financial Statements are mostly text based, and must be written by personnel who understand the department's financial statements.

Reference

  • TBAS 1.2 Departmental and Agency Financial Statements

Lexicon

Accrual basis of accounting: recognizes the effect of transactions and events in the period in which the transactions and events occur, regardless of whether there has been a receipt or payment of cash or its equivalent. Accrual accounting encompasses deferrals that occur when a cash receipt or payment occurs prior to the criteria for recognition of revenue or expense being satisfied. (CICA 1000.46)

Amortization: the allocation of the historical cost of a capital asset over its useful life. Commonly referred to as depreciation.

Appropriation: any authority of Parliament to pay money out of the Consolidated Revenue Fund. (FAA - definitions)

Asset: An economic resource controlled by a government as a result of past transactions or events and from which future economic benefits may be obtained.

Assets have three essential characteristics:

  1. they embody a future benefit that involves a capacity, singly, or in combination with other assets to provide future net cash flows, or to provide goods and services;
  2. the government can control access to the benefit; and
  3. the transaction or event giving rise to the government's right to, or control of, the benefit has already occurred. (PS 3150.04)

Bargain purchase option: a provision allowing the lessee, at its option, to purchase the leased property for a price which is sufficiently lower than the expected fair value of the property, at the date the option becomes exercisable, that exercise of the option appears, at the inception of the lease, to be reasonably assured. (CICA 3065.03)

Bargain renewal option: a provision allowing the lessee, at its option, to renew the lease for a rental which is sufficiently lower than the expected fair rental of the property, at the date the option becomes exercisable, that exercise of the option appears, at the inception of the lease, to be reasonably assured. "Fair rental" means the going rate for rental of equivalent property under similar terms and conditions. (CICA 3065.03)

Betterment or Improvement: The cost incurred to enhance the service potential of a capital asset is a betterment. Service potential may be enhanced when there is an increase in the previously assessed service capacity, associated operating costs are lowered, the useful life is extended, or the quality of output is improved. The cost incurred in the maintenance of the service potential of a capital asset is a repair, not a betterment. If a cost has the attributes of both a repair and a betterment, the portion considered to be a betterment is included in the cost of the capital asset. (CICA 4430.15)

Capital Asset: comprising property, plant and equipment and intangible properties, are identifiable assets that meet all of the following criteria:

  1. are held for use in the production or supply of goods and services, for rental to others, for administrative purposes or for the development, construction, maintenance or repair of other capital assets;
  2. have been acquired, constructed or developed with the intention of being used on a continuing basis; and
  3. are not intended for sale in the ordinary course of business. (CICA 3060.04)

Capital lease: a lease that, from the point of view of the lessee, transfers substantially all the benefits and risks incident to ownership of property to the lessee. (CICA 3065.03)

Completed contract method: a method of accounting that recognizes revenue only when the sale of goods or the rendering of services under a contract is completed or substantially completed. (CICA 3400.04)

Contingency: the result of existing conditions or situations involving uncertainty that will ultimately be resolved when one or more future events occur or fail to occur. Resolution of the uncertainty may confirm the acquisition of an asset or the reduction of a liability or the loss or impairment of an asset or the incurrence of a liability. Contingencies result from such matters as pending or threatened litigation, guarantees of the indebtedness of others, indemnities and provisions related to insurance programs. They also include grants or contributions that are recoverable if certain future events occur or fail to occur. (PS 1500.69)

Contingent liability: a potential liability which may become an actual liability if one or more future events occur or fail to occur.

Contract: an agreement between two or more parties that has clear economic consequences that the parties have little, if any, discretion to avoid, usually because the agreement is enforceable at law. Contracts, and thus financial instruments, may take a variety of forms and need not be in writing. (CICA 3860.06)

Contractual commitment: A contractual commitment represents a legal obligation to outside organizations or individuals as a result of a contract. The nature of Government activities requires negotiation of contracts that are significant in relation to its current financial position or that will materially affect the level of future expenditures. In the case of contractual commitments to international organizations, some will result in future budgetary expenditures while others will result in non-budgetary payments. (Public Accounts of Canada, 1999)

Deferred Revenue: A local government may receive amounts before the transactions or events occur that give rise to the revenues. Those amounts should not be included in revenue, but would be considered a deferred revenue until the local government discharges the obligations that led to the collection of the funds. For example, depending on the underlying agreements or legislation, some development charges and other contributions may be deferred revenues. (PS 1800.40)

Depreciation: see Amortization

Designated assets: assets that have been formally designated by the government to indicate the government's intention to use those assets for a specific purpose. (PS 3100.04)

Executory Costs: costs related to the operation of the leased property (e.g., insurance, maintenance cost and property taxes). (CICA 3065.03)

Expenditure: Expenditures are the cost of goods and services acquired in the period whether or not payment has been made or invoices received and include transfer payments due where no value is received directly in return. (PS 1500.88)

Expense: Expenses are the cost of resources consumed in and identifiable with the operations of the accounting period. (PS 1500.93)

External restrictions: External restrictions are stipulations imposed by an agreement with an external party, or through legislation of another government, that specify the purpose or purposes for which resources are to be used. (PS 3100.04)

Extraordinary item: items which result from transactions or events that have all of the following characteristics:

  1. they are not expected to occur frequently over several years;
  2. they do not typify the normal business activities of the entity; and
  3. they do not depend primarily on decisions or determinations by management or owners. (CICA 3480.02)

Fair value: the amount of the consideration that would be agreed upon in an arm's length transaction between knowledgeable, willing parties who are under no compulsion to act. (PS 2510.04)

Government's (lessee) rate for incremental borrowing the interest rate that, at the inception of the lease, the government would have incurred to borrow, over a similar term and with similar security for the borrowing, the funds necessary to purchase the leased property. (PS Handbook Appendix A - Glossary)

Interest rate implicit in the lease: the discount rate that, at the inception of the lease, causes the aggregate present value of:

  1. the minimum lease payments, from the standpoint of the lessor, excluding that portion of the payments representing executory costs to be paid by the lessor and any profit on such costs; and
  2. the unguaranteed residual value accruing to the benefit of the lessor to be equal to the fair value of the leased property to the lessor at the inception of the lease. (CICA 3065.03)

Internally restricted entities: Internally restricted entities are separate legal entities, within the government reporting entity, created by the government's own legislation. This legislation establishes an accountability relationship with parties external to the government reporting entity to use the entity's assets or net assets as specified while that legislation is in effect. Such legislation stipulates, either explicitly or implicitly through the terms of the legislation, that:

  1. the entity's revenues, which are derived principally from identified parties external to the government reporting entity in exchange for specified goods or services, can only be used to provide those goods and services; and
  2. the government cannot use the assets or net assets of the entity for a purpose other than providing the goods and services for which the resources were received. (PS 3100.04)

Lease term: the fixed non-cancellable period of the lease plus:

  1. all periods covered by bargain renewal options;
  2. all periods for which failure to renew would impose on the lessee a penalty sufficiently large that renewal appears, at the inception of the lease, reasonably assured;
  3. all periods covered by ordinary renewal options during which the lessee has undertaken to guarantee the lessor's debt related to the leased property;
  4. all periods covered by ordinary renewal options preceding the date on which a bargain purchase option is exercisable; and
  5. all periods representing renewals or extensions of the lease at the lessor's option;
  6. provided that the lease term does not extend beyond the date a bargain purchase option becomes exercisable. (CICA 3065.03)

Liability: Liabilities are financial obligations to outside organizations and individuals as a result of transactions and events on or before the accounting date. They are the result of contracts, agreements and legislation in force at the accounting date that require the government to repay borrowings or to pay for goods and services acquired or provided prior to the accounting date. They also include transfer payments due even where no value is received directly in return. (PS 1500.39)

Loan Guarantees: a contingent liability of the government. The generally accepted accounting principles for contingent liabilities are, therefore, appropriate for loan guarantees. The key accounting principles for contingent liabilities are disclosure of contingent liabilities in the notes to the financial statements and recognition of liabilities when it is determined that losses are likely. (PS 3310.04)

Loan guarantees are a significant tool that governments use to achieve policy objectives. Loan guarantees may be used, for example, to allow organizations to obtain lower cost financing, to support regional development or to give economic assistance to certain industries or to individuals who meet specific criteria. Federal, provincial, territorial and local governments may extend loan guarantees to individuals, organizations and other governments, under programs that apply to a large number of borrowers operating in similar circumstances, or on an individual "ad hoc" basis. (PS 3310.01)

Net Assets and Liabilities: the difference between total assets and liabilities. When the total assets exceed total liabilities, the resulting amount represents Net Assets. When total liabilities exceed total assets, the resulting amount represents Net Liabilities.

Operating lease: a lease in which the lessor does not transfer substantially all the benefits and risks incident to ownership of property. (CICA 3065.03)

Percentage of completion method: a method of accounting that recognizes revenue proportionately with the degree of completion of goods or services under a contract. (CICA 3400.05)

Public Money: all money belonging to Canada received or collected by the Receiver General or any other public officer in his official capacity or any person authorized to receive or collect such money, and includes:

  1. duties and revenues of Canada,
  2. money borrowed by Canada or received through the issue or sale of securities,
  3. money received or collected for or on behalf of Canada, and
  4. all money that is paid to or received or collected by a public officer under or pursuant to any Act, trust, treaty, undertaking or contract, and is to be disbursed for a purpose specified in or pursuant to that Act, trust, treaty, undertaking or contract;

(FAA - definitions)

Residual value: the estimated net realizable value of a tangible capital asset at the end of its useful life to a government. (PS 3150.04)

Salvage value: Salvage value is the estimated net realizable value of a capital asset at the end of its life. Salvage value is normally negligible. (CICA 3060.15)

Service potential: the output or service capacity of a tangible capital asset, and is normally determined by reference to attributes such as physical output capacity, quality of output, associated operating costs, and useful life. (PS 3150.04)

Tangible capital assets: non-financial assets having physical substance that are acquired, constructed or developed and:

  1. are held for use in the production or supply of goods and services;
  2. have useful lives extending beyond an accounting period and are intended to be used on a continuing basis; and
  3. are not intended for sale in the ordinary course of operations. (PS 3150.04)

Useful life: the estimate of either the period over which a tangible capital asset is expected to be used by a government, or the number of production or similar units that can be obtained from the tangible capital asset by a government. The life of a tangible capital asset may extend beyond the useful life of a tangible capital asset to a government. The life of a tangible capital asset, other than land, is finite, and is normally the shortest of the physical, technological, commercial, and legal life. (PS 3150.04)

List of Acronyms

BFSBank Facilities System
SSBSystème de services bancaires
CCRACanada Customs and Revenue Agency
ADRCAgence des douanes et du revenu du Canada
CICACanadian Institute of Chartered Accountants
ICCAInstitut canadien des Comptables Agréés
CIPRECCanadian Institute of Public Real Estate Companies
ICCIPInstitut canadien des compagnies immobilières publiques
CRCredit
CtCrédit
CRFConsolidated Revenue Fund
DFAITDepartment of Foreign Affairs and International Trade
MAECIMinistère des Affaires étrangères et du Commerce international
DNDDepartment of National Defence
MNDMinistère de la défense nationale
DRDebit
DtDébit
FAAFinancial Administration Act
LGFPLoi sur la gestion des finances publiques
FISFinancial Information Strategy
SIFStratégie d'information financière
FRAFinancial Reporting Account
CRFComptes de rapports financiers
GAAPGenerally Accepted Accounting Principles
PCGRLes principes comptables généralement reconnus
GSTGoods and Services Tax
TPSTaxe sur les produits et services
HSTHarmonized Sales Tax
TVHla taxe de vente harmonisée
PAIMPublic Accounts Instruction Manual
MPCPManuel de procédures des Comptes publics
PAYEPayables at Year End
CAFECréditeurs à la fin de l'exercice
PSPublic Sector
SPSecteur public
PWGSCPublic Works Government Services Canada
TPSGCTravaux publics et Services gouvernementaux Canada
RGReceiver General
RGReceveur général
SPASpecified Purpose Account
CFDCompte à fins déterminées
SPSStandard Payment System
SNPSystème normalisé des paiements
TBATo Be Announced
ACà communiquer
TBASTreasury Board Accounting Standards
NCCTNormes comptables du Conseil du Trésor
TBSTreasury Board Secretariat
SCTSecrétariat du Conseil du Trésor

Index

Not Available

© His Majesty the King in right of Canada, represented by the President of the Treasury Board, 2017,
ISBN: 978-0-660-09726-8