Phase 3 PSAB Implementation Newfoundland and Labrador Municipalities

1. Phase 3 PSAB ImplementationNewfoundland and Labrador Municipalities Department of Municipal Affairs September to November 2009

2. Objectives of the Presentation • Help you understand the differences between the old & new F/S. • Help you understand the requirements of the new F/S.

3. PSAB Reporting Model • PSAB – Public Sector Accounting Board • It regulates accounting principles and practices for the public sector. • Prior to 2009, PSAB had separate standards for municipalities using a modified cash basis of accounting. • Beginning January 1, 2009 all governments will use the same financial reporting model which utilizes accrual accounting.

4. PSAB Reporting Model • The move to PSAB by municipalities should be seen as an evolving trend to: • provide greater disclosure of financial information, • meet the needs of a wider range of users, and • facilitate better decision making by users. • PSAB Reporting provides a more comprehensive set of financial statements that places equal emphasis between the annual surplus/deficit and the overall financial health of the municipality.

5. Urgency for PSAB compliance The 2009 financial statements will require comparative figures for 2008. This means: • Municipalities should have started gathering information that they needed for their 2009 financial statements in 2008.

6. If Municipality is Non Compliant… • Municipal auditor must qualify his/her audit opinion. • Could affect financing costs with banks. • Could create public concern over Council’s management practices. • Would affect a Municipality’s receipt and eligibility for Federal and/or Provincial programs, such as the Gas Tax Funding Agreement.

7. Three Phases of the Department’s Action Plan • Phase 1 - January to September 2008 • Established a Steering and Working Committee • Created the TCA Reference Manual • Conducted Training Sessions • Phase 2 - September to December 2008 • Launched the PSAB resource website • Created the TCA Valuation Manual • Created the Phase Two Reference Manual   -Municipal Reporting Entities, Consolidations   -Accruals, Environment Liabilities, etc. • Conducted Training Sessions

8. Three Phases of the Department’s Action Plan continued… Now, we’re here • Phase Three - September to November 2009 • Created a Phase Three Reference Manual   -Financial Statement Presentation & Disclosures   -Financial Planning (Budgets) Reconciliation • Modified and updated the PSAB resource website • Currently offering Phase Three Training Sessions.

9. PSAB Reporting Model Municipalities in many of the other provinces are already complying with PSAB. This would include the provinces of: • B.C., • Alberta, • Saskatchewan, • Ontario, and • Nova Scotia.

10. PSAB Reporting Model There are four statements required by PSAB: • Statement of Financial Position ( Balance Sheet) • Statement of Operations ( Income Statement) • Statement of Change in Net Debt • Statement of Cash Flow

11. There are five major changes in the new PSAB financial statements: • TCA/Amortization • Accrual Accounting • Debt Payments • Reporting Entity • Transfers

12. Old F/S Capital Expenditures are directly expensed. 100% of cost is expenditure of accounting period. PSAB F/S Capital payments are recorded as TCAs. Cost of a TCA is amortized over its useful life. Cost is spread over more then one period. Major Changes in the Financial Statements1. TCA/Amortization

13. Old F/S New Computer Network $40,000 Expense entire $40,000 PSAB F/S New Computer Network $40,000 Record as TCA Determine Useful life - 4 yrs Amortization -$10,000/yr which is a Non–cash expense Major Changes in the Financial Statements1. TCA/Amortization - Example

14. Old F/S Prepared on a modified cash basis. Expenditures were recorded when cash was disbursed. PSAB F/S Prepared on a full accrual basis. Expenses are recorded as incurred. Examples; accrued salaries, accounts payable, environmental liabilities Major Changes in the Financial Statements2. Accruals

15. Old F/S Mr. X earns 2 wks severance pay ($2,000)/year of service He retires after 20 yrs $40,000 is expensed in his year of retirement PSAB F/S Mr. X earns 2 wks severance pay ($2,000)/year of service $2,000 is accrued each year $40,000 liability paid in year of retirement Major Changes in the Financial Statements2. Accruals - Example

16. Old F/S Debt service charges included interest & principal payments This total was expensed. PSAB F/S Debt service charges only include interest Principal payments reduce the liability. Major Changes in the Financial Statements3. Debt Payments

17. Old F/S F/S only report on the activities of the municipality. Each fund is presented separately in the F/S. General Operating Fund Reserves General Capital Fund PSAB F/S F/S include all organizations that are controlled by the municipality. All controlled organizations and government partnerships are consolidated into one set of summary F/S. Consolidated statements are only required for the year end audited financial statements. Major Changes in the Financial Statements4. Reporting Entity

18. Major Changes in the Financial Statements4. Reporting Entity continued… A quick refresher…what do we mean by control….. CONTROL Primary Indicators Secondary Indicators

19. Having the power to govern Power to unilaterally appoint or remove majority of governing members. Have the authority to determine financial & operating policies Does not necessarily mean day-to-day management Major Changes in the Financial Statements4. Reporting Entity continued…. What are the PRIMARY indicators of control… • Expected benefits or risk of loss • Benefits may be financial or non-financial • Most benefits are service oriented • Does risk of loss accrue to the government?

20. Hold a majority of the voting shares Municipal governments don’t often have voting shares Unilateral power to dissolve the organization Access assets Become responsible for its obligations Major Changes in the Financial Statements4. Reporting Entity continued…. PRIMARY indicators of control….. If any one (1) of these indicators exists, the organization is likely controlled and should be consolidated and included in the MRE!

21. Major Changes in the Financial Statements4. Reporting Entity continued…. What about the SECONDARY indicators of control: • Significant input into the appointment of a governing body. • Can appoint or remove key personnel of the organization. • Establish or amend an organization’s mandate or mission. • Can establish borrowing or investment limits.

22. Major Changes in the Financial Statements4. Reporting Entity continued…. SECONDARY indicators of control, cont’d: • Are able to restrict revenue generating capacity. • Can establish or amend organizational policies. • Can approve and make changes to the organization’s budget. Remember to consider the indicators collectively. The more indicators that exist, the more likely control exists!

23. Still not sure? See the Municipal (Consolidated) Reporting Entity Checklist in the Phase 2 Reference Manual or online at the PSAB website. Major Changes in the Financial Statements4. Reporting Entity continued….

24. Major Changes in the Financial Statements4. Reporting Entity continued… Controlled Entities • Core Government • General Op Fund • General Op Reserve • Capital Fund • Etc. Government Partnerships Everything within the red circle is part of the Municipal Reporting Entity (MRE)!

25. Identify controlled entities & gov’t partnerships (GP) Ensure entity F/S will be available on time. Municipal Reporting Entity • Difficulties with entities will create problems for June 30, 2010 deadline • Discuss with your auditor as to the level of assurance required for each entity. Depends on materiality.

26. Old F/S Inter-fund and inter-organizational balances and transactions were recorded. PSAB F/S Transfers to reserves are not expenses and transfers from reserves are not revenues. Inter-fund and inter-organizational balances and transactions are eliminated. Major Changes in the Financial Statements5. Transfers

27. Budgeting “The landscape has remained the same, but the picture is being taken from a different perspective” Daryl Wilson Chair of PSAB February 10, 2003

28. Budgeting • The budget process will not change for municipalities. • Still budgeting on a “cash basis” as in previous years. • Municipalities are still required to prepare a balanced budget in accordance with the Municipalities Act or applicable City’s Act. • A reconciliation between the financial plan and the PSAB budget will have to be disclosed in the notes and/or schedules to the financial statements because of the “budget disconnect”.

29. Budgeting • What is the “Budget Disconnect”? • A Budget Disconnect is the difference between what is budgeted on a cash basis and the operating results reported under PSAB. = Surplus/Deficit Reported Under PSAB Budgeted Cash Surplus/Deficit

30. Budgeting A Budget disconnect results from the fact: • the financial plan is prepared on a cash basis while PSAB is prepared using accrual accounting, • under PSAB, transfers are neither revenues nor expenses, • PSAB only records the interest portion of debt repayments as an expense. The current budget records the entire debt repayment as an expenditure, • the financial plan expenses the entire amount of a capital transaction in an accounting period. PSAB capitalizes and amortizes this same expense over a number of years.

31. Standards of Financial Statement Presentation • Financial Statement Objectives (4) • Qualitative Characteristics of Financial Statements(4) • General Reporting Principles (10)

32. Financial Statement Objectives • Financial Statements should include all the organizations the government controls; i.e. MRE • Financial Statements should report the government’s financial position. • Financial Statements should report changes in the government’s financial position. • Financial Statements should demonstrate if resources were administered in accordance with the budget.

33. Qualitative Characteristics of Financial Statements • Relevance • Reliability • Comparability • Understandability

34. Relevance Financial Statements are relevant when they help users make decisions and provide information that: • has predictive & feedback value; • Predictive value of the Statement of Operations is enhanced if abnormal items are disclosed separately. Information that confirms or corrects previous predictions has feedback value. • Example – A municipality realizes a very large gain from the sale of a tangible capital asset. This would not be a normal recurring source of revenue so predictive value would be improved by disclosure of the abnormal item.

35. Relevance continued… • provides accountability; • Information that helps users assess a government's stewardship of the resources entrusted to it has accountability value. • Enhanced when financial statements compare actual results against financial objectives and targets. • Example - budgets • and is timely. • In order for information to be useful, the decision maker must receive the information before it loses the capacity to influence decisions. • Example – Financial statements issued long after the fiscal period they are reporting on.

36. Reliability Inaccurate, inappropriate or incomplete information, or information that is biased or does not faithfully represent what it purports to represent, will inhibit rather than enhance understanding and decision making by users. Reliable information has the following characteristics: • Representation Faithfulness • Transactions s/b accounted for in a manner that conveys their substance rather than necessarily their legal form. • Example: Capital leases – The legal title to a piece of equipment may remain with the lessor but the lessee has taken on all the risks and benefits of ownership. The lessee therefore accounts for the transaction exactly as if he had borrowed funds and purchased the equipment outright.

37. Reliability continued…. • Completeness • Means providing sufficient information about transactions & balances for a user to understand the government’s finances. • Example: Notes to the F/S • Neutrality • Information should be free from bias, it should be neutral and report economic activity without coloring the image in some particular direction.

38. Reliability continued…. • Conservatism • Used when estimates must be made in conditions of uncertainty. • When uncertainty exists ensure that assets & revenues are not overstated, or liabilities & expenses are not understated. • Verifiability • A transaction is veridical if a knowledgeable and independent observer would concur that it is in agreement with the actual underlying transition with a reasonable degree of precision. • Deals with the measurement of a transaction rather than its appropriateness

39. Qualitative Characteristic trade-off • In practice there is often trade-offs between the qualitative characteristics. • The aim is to achieve an appropriate balance between the characteristics but there is often a trade-off between relevance and reliability. Example: Land is for sale but has to be valued at the lower of historical or net realizable value. Valuing the land at fair market value would be more relevant but historical cost would be more reliable.

40. Comparability • Comparability between governments is enhanced when they follow the same accounting standards. • Consistent application of accounting policies between accounting periods enhances comparability.

41. Understandability For information to be useful it must be understood by others. Understandability can be enhanced in financial Information by ensuring: • Information is presented clearly and simply. • Avoid excessive detail & complex presentation formats which often result in confusion & errors.

42. Chart of Qualitative Characteristics Understandability Conservatism Decision Usefulness Predictive value Verifiability Neutrality Timelines Relevance Reliability Completeness Accountability Representational Faithfulness Comparability Consistency

43. General Reporting Principles • Financial Statements should be clearly identified and are the responsibility of the government. • Notes and Schedules that are integral to the Financial Statements should be clearly identified. • Notes and supporting schedules should not be used as a substitute for proper accounting. • Financial Statements should present the government’s: • Financial position • Results of operations • Change in net debt • Cash flows • Financial Statements should use common terminology & classification of items so the information is understandable.

44. General Reporting Principles continued…. • Financial Statements should include comparatives. • Financial Statements should be issued on a timely basis. • The valuation of assets & liabilities should be applied consistently, and where it is not self evident, it should be disclosed. • Where Financial Statements are subject to audit, the auditor’s report should be appended to the statements. Unaudited statements should be clearly identified. • Financial Statements should present the substance of transactions & events.

45. Statement of Financial Position ( Balance Sheet) Presents a year end snapshot and highlights the following key figures that describe the financial position of the government; • Financial assets (FA) • Liabilities • Net Debt or Net FA Position • Non-Financial Assets (NFA) • Accumulated Surplus

46. Key Figures in the Statement of Financial Position1. Financial Assets (FA) Financial Assets are assets that can be used to pay existing liabilities or finance future operations and are not for consumption in the normal course of business. They represent the resources available to pay existing liabilities or finance future operations. Some examples: • Cash & cash equivalents • Temporary or short-term investments • Amounts Receivable (within 1 year of F/S date) • Inventories for sale

47. Key Figures in the Statement of Financial Position 2. Liabilities Represent present obligations of a government to others arising from past transactions or events. Some examples: • Accounts payable & accrued liabilities: • Trade payables • Accrued salaries & wages • Accrued audit fees • Accrued interest payable • Deferred revenue • Deposits for services & goods which have not been delivered • Prepaid taxes • Tax levies in advance

48. Key Figures in the Statement of Financial Position2. Liabilities continued… More examples which maybe of a more long-term nature: • Liability for the remediation & mitigation of contaminated sites • Obligations under capital leases • Loans from other governments • Borrowings: • Debentures • Bank loans

49. Key Figures in the Statement of Financial Position 2. Liabilities continued…Environmental Liabilities There are three criteria that must be met for an Environmental Liability to be reported, namely; • the contamination must exceed an environmental standard, • the government must be directly responsible or accept responsibility for the site, and • a reasonable estimate of the amount must be able to be made.

50. Environmental Liability Decision Tree