With the growth and availability of financial instruments, many governments and government organizations use financial instruments to manage their financial exposure such as foreign currency and interest rate risk.
The guidance provided in the PSA Handbook on financial instruments is limited to derivative financial instruments used for hedging of foreign currency items in Section PS 2600, Foreign Currency Translation.
- The CICA Handbook – Accounting provides standards on accounting and reporting of financial instruments in the following Sections:
- Section 1530, Comprehensive Income;
- Section 3855, Financial Instruments ― Recognition and Measurement; and
- Section 3865, Hedges
PSAB issued Public Sector Guideline PSG-6, Including Results of Organizations and Partnerships Applying Fair Value Measurement, to provide guidance for governments in consolidating government organizations (including government business enterprises) that follow the CICA Handbook – Accounting.
Reasons for the Project
The growth in use of financial instruments by governments and the complexity of the transactions gave rise to a need for a public sector accounting standard for recognition, measurement, presentation and disclosure for financial instruments. Users need sufficient and comparable information to understand the extent and nature of financial instruments used by governments and their impacts on governments’ ability to provide services and meet obligations.
Based on the GAAP hierarchy in Section PS 1150, Generally Accepted Accounting Principles, public sector organizations that follow PSA Handbook are encouraged to consult other authoritative sources in areas that PSA Handbook does not address. Depending on a government’s use of financial instruments, applying the private sector standards can result in a significant impact on governments’ financial results. PSAB needs to assess how and to what extent the CICA Handbook – Accounting standards on financial instruments should apply to public sector organizations.
Transactions involving financial instruments are often complex. The variety of financial instrument products is growing and becoming more sophisticated. The challenges in accounting and reporting financial instruments in government financial statements include:
- criteria for recognition and derecognition of financial instruments;
- measurement bases for financial instruments reported in the financial statements (for example, historical cost, market or fair value, lower of cost and market); and
- the extent and timing of reflecting changes in value of financial instruments in annual results (for example, immediate recognition, recognition over time).
The objective is to issue an accounting standard that addresses:
- recognition and derecognition criteria;
- measurement bases and issues; and
- presentation issues and disclosure requirements unique to financial instruments.