The recent Post-implementation Review of Section PS 3410, Government Transfers, provided the Public Sector Accounting Board (PSAB) with insightful information about how the standard was received across Canada. We would like to thank all stakeholders who participated in this process.
After considerable deliberation, we concluded that the standard meets its original public interest objectives. It provides further guidance and increases consistency in accounting for government transfers.
The Post-implementation Review highlighted two main issues:
- the authority to pay; and
- recipient accounting for capital transfers.
Authority to Pay
“Authority to pay” deals with when a government has authorized a transfer payment such that it must accrue a liability. What constitutes authorization is a matter of debate and differs across Canada.
The concept of constructive obligations in Section PS 3200, Liabilities, informs this debate in practice. Constructive obligations indicate when a government might have a recordable obligation, irrespective of legal approvals. This concept informs stakeholders as to future use of resources in a timely manner, which is in the public interest. Providing additional guidance on this issue may be too prescriptive. Professional judgment is being applied on a case-by-case basis and we believe this is appropriate for a principles-based standard.
Recipient Accounting for Capital Transfers
During the development of Section PS 3410, there were two schools of thought on recipient accounting for capital transfers:
- Some believe revenues should be recognized once the related asset has been acquired or built.
- Others believe revenue should be recognized over the useful life of the related asset.
This debate was not resolved after nine years of consultation with constituents. Flexibility was added to the standard to allow for both scenarios. It was designed to allow the terms of each transfer agreement alone or, in addition to a recipient’s own actions and communications, to drive the accounting treatment.
Both scenarios require that the liability definition be met, taking into account the requirements of Section PS 3200, Liabilities. When Section PS 3410 was approved, we recognized that there could be inconsistency in recipient accounting for capital transfers.
Some senior governments wanted to secure their desired treatment for recipient capital transfers. They legislated rules for themselves or for their consolidated organizations that supersede the case-by-case professional judgment of Section PS 3410.
It is unclear whether such legislation was necessary to secure the desired treatment, or whether the same result could have been achieved through the terms of their transfer agreements, recipient actions and communications.
As a result of legislation, some entities are being audited with reference to the PSA Handbook requirements plus these government regulations.
The Search for Comparability
The Post-implementation Review revealed some limited diversity in practice and audit opinions. It also confirmed that some stakeholders still have polarizing views on the issue.
We note that this is a problem Canada shares with the world. Other public sector standard setters also struggle with the treatment of government transfers. They face the same trade-off as we did when developing Section PS 3410. A standard that contains some flexibility on this issue may diminish comparability but can facilitate decision-useful information across the public sector.
We spent a great deal of time considering whether there was a way to improve consistency through an authoritative Guideline. As the standard was written with flexibility in mind, this was difficult to achieve. Eliminating flexibility through a Guideline could result in overriding the standard. Such an action is not consistent with our due process.
In considering whether or not to revisit Section PS 3410 in its entirety, we faced one fundamental question: What has changed since the standard was issued?
Stakeholders remain passionate about their different positions on the matter. Many preparers have come to agreements with their auditors and moved on from these issues. It is unclear to us whether amending the government transfers standard would provide clarity if governments continue to legislate their preferred accounting treatment.
To comply with our due process, we can only change the direction of the standard by re-opening it and making significant amendments.
Ultimately, we are not convinced that a new project, task force, and use of staff resources would result in a markedly different standard than the one currently in place. Nor would it align efforts and resources with the key public interest objectives in our work plan.
Other developments could potentially persuade us to revisit the standard in the future. A new conceptual framework could provide new tools to warrant another look at government transfers. The International Public Sector Accounting Standards Board is currently looking at different approaches to accounting for transfers and related revenues.
While this topic is off our active file agenda for now, it does not rule out the possibility of government transfers being revisited at a future date in light of these potential developments.
Umar Saeed, MAcc, CPA, CA
Principal, Public Sector Accounting
Phone: +1 (416) 204-3462