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30 April 2013
Stephenie Fox
IPSASB Technical Director
International Public Sector Accounting Standards Board
Dear Stephenie:
Thank you for the opportunity to comment on the International Public Sector Accounting Standards Board (IPSASB) Conceptual Framework Exposure Draft 2 (CF–ED2), Conceptual Framework for General Purpose Financial Reporting by Public Sector Entities: Elements and Recognition in Financial Statements. I am responding on behalf of the Office of the Auditor General of Canada.
The exposure draft proposes definitions of elements used in general purpose financial statements of governments and other public sector entities, and provides further explanation about these definitions. We are in general agreement with the proposed definitions, but would like to signal our concern about the proposed introduction of deferred inflows and deferred outflows as elements of the framework.
Deferred inflows and outflows are not traditionally elements of a conceptual framework founded on an Asset and Liability model, but are instead based on a Revenue and Expense model. A critical issue with the Revenue and Expense model is the difficulty in developing a solid, objective basis for deferring revenue and expenses. Consequently, on balance our Office prefers a conceptual framework based on the Asset and Liability model because it is logical, defensible, and addresses qualitative characteristics of financial information that are important to users.
We offer the following responses to the specific questions posed to respondents, and trust that you will find these comments helpful. Should you have any questions, please do not hesitate to contact me at(613)995-3708.
Yours sincerely,
Stuart Barr
Assistant Auditor General | Vérificateur général adjoint
Office of the Auditor General of Canada | Bureau du vérificateur général du Canada
C.D. Howe Building, 240 Sparks Street, West Tower | Édifice C.D. Howe, 240, rue Sparks, tour ouest
Ottawa, Canada K1A 0G6
Telephone | Téléphone 613-952-0213 (5450)
Facsimile | Télécopieur 613-948-3076
Specific questions posed by IPSASB:
Question 1Do you agree with the definition of an asset? If not, how would you modify it?
Yes, we agree with the proposed definition of an asset.
Question 2a) Do you agree with the definition of a liability? If not, how would you modify it?
b) Do you agree with the description of non-legal binding obligations? If not, how would you modify it?
a) Yes, we agree with the proposed definition of a liability.
b) Yes, we agree with the description of non-legal binding obligations. Although written at a high level, it is generally consistent with the descriptions of non-legal binding obligations found in other financial reporting frameworks currently used by Canadian public sector entities (PSAS and IFRS).
Question 3Do you agree with the definition of revenue? If not, how would you modify it?
Assuming that deferred inflows and deferred outflows are accepted as financial statement elements in the IPSAS Conceptual Framework (see response to Question #5 below), we agree with the proposed definition of revenue.
For clarity, IPSASB may want to consider specifying in the revenue definition (paragraph 4.1) that the term “inflows” relates to either the inflow of service potential or economic benefits (as it does in the asset definition in paragraph 2.1).
Question 4Do you agree with the definition of expenses? If not, how would you modify it?
Assuming that deferred inflows and deferred outflows are accepted as financial statement elements in the IPSAS Conceptual Framework (see response to Question #5 below), we agree with the proposed definition of expenses.
Similar to our comment made related to the definition of revenue, for clarity, IPSASB may want to consider specifying in the expenses definition (paragraph 4.2) that the term “outflows” relates to either the outflow of service potential or economic benefits (as it does in the liability definition in paragraph 3.1).
Question 5a) Do you agree with the decision to define deferred inflows and deferred outflows as elements? If not, why not?
No, we do not agree with the decision to define deferred inflows and deferred outflows as elements of the financial statements. Deferred inflows and outflows are not traditionally elements of a conceptual framework founded on an Asset and Liability model, but rather one that is based on a Revenue and Expense model.
The Revenue and Expense model focuses on flows of resources that are applicable to a particular period. Consequently, a critical issue with the Revenue and Expense model is the difficulty in developing a solid, objective basis for deferring revenue and expenses. (PSAB Consultation Paper on Measuring Financial Performance in the Public Sector, page 22)
On balance, our Office prefers a conceptual framework based on an Asset and Liability model because it is logical, defensible, and addresses qualitative characteristics of financial information that are important to users. Under the Asset and Liability model, if a change in asset or liability occurs, then it is recognized in the statement of financial performance in the period the change occurs.
Specifically, under the Asset and Liability model, no judgment is required to determine which transactions and events that affect financial position are included or excluded from the financial performance of the reporting entity. No judgment is required to ascertain if an inflow or outflow is appropriately attributable to the current or future periods. All items that represent increases or decreases in the net resources of the entity in the period between financial reporting dates are included and, therefore, part of financial performance. This ensures a level of consistency and comparability by reducing the amount of judgment needed to determine in which period an item should appear. Artificial smoothing of reported results is not possible. (PSAB Consultation Paper on Measuring Financial Performance in the Public Sector, page 18)
Our preference is to have no deferrals recognized in the statement of financial position that do not meet the definition of an asset or liability.
Question 5b) If you agree with the decision to define deferred inflows and deferred outflows as elements, do you agree with the:
i. Decision to restrict those definitions to non-exchange transactions? If not, why not?
ii. Definitions of deferred inflows and deferred outflows? If not, how would you modify them?
Although our preference, expressed in 5a) above, is not to have items that do not meet the definition of assets or liabilities recognized in the statement of financial position, should the proposed model be adopted, we support restricting the use of deferrals to non-exchange transactions (paragraph 5.6). The establishment of tight rules around deferred inflows and outflows is needed to maximize rigour and consistency, and minimize risk of inappropriate usage of these categories.
Question 6aa) Do you agree with the terms net assets and net financial position and the definitions? If not, how would you modify the terms and/or definitions?
Yes, we agree with the term net assets (Assets – Liabilities).
As our preference, expressed in 5a) above, is not to include deferred inflows and outflows as elements of financial statements, we do not agree with the definition of net financial position because it includes deferrals (Assets + Deferred Outflows – (Liabilities + Deferred Inflows) (paragraph 6.1).
IPSASB may also consider distinguishing between financial and non-financial assets on the statement of financial position, and adding a third indicator called “net debt” (or “net financial assets”) (paragraph 6.1). Canadian public sector entities following the Public Sector Accounting Handbook are required to present this indicator on their statement of financial position as it highlights the financial affordability of future government service provision. A net debt position represents a "lien" on the ability of the government to apply financial resources and future revenues to the provision of services.
Question 6bb) Do you agree with the decision to define ownership contributions and ownership distributions as elements? If not, why not?
Yes, we agree with the decision to define ownership contributions and ownership distributions as elements of the financial statements.
Question 6cc) If you agree with the decision to define ownership contributions and ownership distributions as elements, do you agree with the definitions of ownership contributions and ownership distributions? If not, how would you modify them?
The definitions of ownership contributions and ownership distributions are, in our view, appropriate.
Question 6dd) Ownership interests have not been defined in this Conceptual Framework. Do you think they should be?
Although the definitions of ownership contributions and ownership distributions are clear, we feel that the inclusion of a discussion or a definition of what constitutes an ownership interest would help ensure consistent, appropriate interpretation of which transactions will increase/decrease net assets without an effect on an entity’s statement of financial performance (paragraphs 6.3-6.7). This is particularly important in a public service environment where the forms of ownership may not be clearly recognized in the financial statements, as control may exist through means other than share ownership.
Question 7Do you agree with the discussion on recognition? If not, how would you modify it?
We agree that in order to have an element recognized in the financial statements, the uncertainty regarding its existence and measurement must be addressed. We think the discussion is presented at the right level for a Conceptual Framework, recognizing that more detailed guidance may be needed in the standards themselves to help preparers / users assess an acceptable level of uncertainty.