Public Sector Accounting Standards (PSAS) update Keeping ... Seminar - April 2014.pdf · Public Sector Accounting Standards (PSAS) update Keeping current Financial Management Institute

Public Sector Accounting Standards (PSAS) updateKeeping current

Financial Management Institute Seminar – Victoria, BCApril 29, 2014

© Deloitte LLP and affiliated entities.

Speakers

Public Sector Accounting Standards (PSAS) update – Keeping current1

Speaker Contact informationShirley Wolff, CAPartner, Assurance & Advisory

[email protected] +1 604-640-3022

Henry StochPartner, Sustainability & Climate Change Risk Services

[email protected] +1 604-640-3393


Agenda

• What’s new and upcoming within Public Sector Accounting Standards• Preparing for implementation of PS 3260 Liability for

contaminated sites• Latest developments on financial instruments• Understanding the implications of the related party

transactions project• Update on the revenue statement of principles• Latest developments on government transfers• Questions and answers



Important caveats

This seminar does not provide official Deloitte interpretive accounting guidance.

Check with your advisor before taking any action.



What’s new and upcoming within Public Sector Accounting Standards



What’s new and upcoming within Public Sector Accounting Standards

2014Project Q1 Q2 Q3 Q4Asset Retirement Obligations SOP

Assets ED

Concepts Underlying Financial Performance

CP

Impairment of Non-Financial Assets

Not-for-Profit Organizations (Joint Review)

PSA Handbook Terminology* ED HB

Related Party Transactions ED HB

Restructurings ED

Revenue

SOP – Statement of Principles; ED – Exposure Draft, HB – Handbook Release, CP –Consultation Paper


PSAB Active projects as of April 26, 2014

Source: http://www.frascanada.ca/standards-for-public-sector-entities/projects/active/item56215.aspx* Includes ‘amendments to introduction’ re-exposure draft


Preparing for implementation of PS 3260 Liability for contaminated sites



Preparing for implementation of PS 3260 Liability for contaminated sites

Standard:• Defines which activities

are included in the remediation liability

• Establishes when to recognize and how to measure the liability

• Provides financial statement presentation and disclosure requirements


Account

Report

Liability associated with remediation of

contaminated sites

What exactly is PS 3260 Liability for contaminated sites?


What activities normally trigger a liability for remediation?• All/part of an operation of the government/government organization that

is no longer in productive use (e.g., abandoned works yard)• All/part of an operation outside the government reporting entity which

is no longer in productive use for which the government takes responsibility (e.g., an abandoned gas station)

• Changes to environmental standards relating to all/part of operation that is no longer in productive use (e.g., new regulations requiring the destruction of chemicals)

• An unexpected event resulting in contamination (e.g., accidental toxic chemical spills)


Preparing for implementation of PS 3260 Liability for contaminated sites (cont’d)



What is contamination and what does not fall under the scope of a ‘contaminated site’ under the standard?


What is contamination?• PS 3260 defines contamination as:‘…contamination is the introduction into air, soil, water or sediment of a chemical, organic or radioactive material or live organism that exceeds an environmental standard. A contaminated site is a site at which substances occur in concentrations that exceed the maximum acceptable amounts under an environmental standard…’

Section does not apply to:• Airborne contamination or contaminants in earth’s atmosphere (Unless introduced to

soil, water bodies or sediment)• Costs for acquisition or betterment of tangible capital assets• Liabilities associated with retirement of a long-lived tangible asset in productive use• Liabilities associated with disposal or sale of long-lived tangible capital assets• Liabilities for closure and post-closure care of a solid waste landfill when the site stops

accepting waste



When should the liability be recognized?


Environmental standard exists

Contamination exceeds standard

Responsible or accepts responsibility

Future economic benefits will be

given up

Reasonable estimate



What is meant by an environmental standard?• Set out in the form of a statute, regulation, by-law, order, permit,

contract or agreement


Legally enforceable Binding Compliance is mandatory

• Should not take into account proposed changes in legislation that may create a standard

• May be both quantitative and qualitativeHow to determine if the standard is exceeded?• Need to assemble and review ALL available information

Historical information

Currentinformation



How and when is an entity responsible for the remediation?• The standard contemplates 3 situations, therefore all 3 must be

considered when completing your assessment


Direct responsibility Accepts responsibility Uncertain responsibilityLegal obligation from:• Agreement/contract• Legislation of another

government• Government’s own legislation

Timing of settlement does not provide relief of

responsibility/obligation.

Through government’s own actions or promises.• Need to still meet definition

of liability • Cannot be based on intention

or policy only

• If there is a commitment to remediation (i.e., a plan) and this has been communicated to those affected• Plan identifies location and target level of reduction• Time frame for implementation has been identified• Details of the plan create a reasonable expectation that the promise (i.e. intention) can be relied upon

Intention

Due to certain circumstances:• Uncertainty as to whether the

government may be responsible

May have a liability, contingent liability, or no liability –> dependent on likelihood of future event.



How do we measure the liability once determined it exists?


Directly attributable costs

Post-remediation costs

Cost of tangible capital assets

• Payroll and benefits• Equipment and facilities• Materials • Legal and other professional

• Integral part of remediation strategy– E.g., Treatment of effluent from

a contaminated site

• To the extent the asset has no alternative use

• If there is an alternative use, only portion related to remediation included in liability

.

Liability

Expected net recoveries

• Recognized if recognition criterion in Section PS 1000 Financial statement concepts met

• Recognized when amount can be reliably estimated and it is likely

Carrying amount of

liability reviewed at

each financial reporting date


Preparing for implementation of PS 3260 Liability for contaminated sites (cont’d)Example


An entity that produces coal, also produces ‘coal ash’ as a by-product; this was being dumped in the soil on land that is being leased from the Crown. Assume a standard exists whereby the entity is responsible for remediating the contamination to the land. The entity purchases a machine that extracts groundwater with a system that extracts and isolates the contaminant. Would the cost of the machine be considered a tangible capital asset, or part of the cost of remediation? • If the machine has no alternative future use (i.e., other than remediation), the

primary purpose is mitigation of the environmental damage, and therefore it would be included in the estimate of the liability and reported as an expense. [Adapted from Section PS 3260 Example 6]


Preparing for implementation of PS 3260 Liability for contaminated sites (cont’d)Example


An entity has remediation activities that take place over a period of time and estimates of cost will only become known as each stage is completed. However, the remediation activities are similar to another sort of remediation activity with which the government has experience. Should the government recognize the entire liability?• Yes, when a government can estimate the cost of all stages of remediation on

the basis of experience with similar contaminations, the government can use its experience as the basis of its estimate. [Adapted from Section PS 3260.49]



How to prepare for adoption


Develop team Implement processDevelop process Provide training

• Integrated team• Include individuals from

various functions including:– Accountants– Environmental

Professionals– Legal Counsel

• Ensure that all factors are considered such as environmental risks, accounting requirements and legal obligations.

Ensure process is reproducible.

• Process should be risk-based process for identifying liabilities.

• Process should encompass requirements from identification to disclosure.

• Process should include documentation of all assumptions and support for all estimates.

• Approvals and sign offs are obtained and incorporated into the process.

• Team members should have sufficient and appropriate training in area of expertise.

• In addition, team members should speak a common and well understood language.

• Implement reporting tools.• Implement and conduct

reviews of sites.• Record and disclose

resulting liabilities.

Ensure team members communicate regularly and communications are well understood by all.


Latest developments on financial instruments



Latest developments on financial instruments

* This was deferred from April 1, 2015 to April 1, 2016 as per an amendment approved by PSAB in December 2013.


Section PS 2601Foreign currency translation

Section PS 1201Financial statement presentation

Effective fiscal years beginning on or after

April 1, 2016* (Earlier adoption

permitted)

Section PS 3450 Financial instruments

(“PS 3450”)

Governments + government organizations (that did not apply the CPA Canada Handbook prior to the CPA Canada PSA Handbook)

Section PS 3041Portfolio investments


Latest developments on financial instruments (cont’d)

Transition• Transition to Section PS 3450 will be a prospective transition.


Will the different adoption dates pose an added challenge for governments transitioning?

Government organizations* GovernmentsAdoption date Years beginning on or after

April 1, 2012Years beginning on or after April 1, 2016

Application Prospective ProspectiveEarlier application Permitted Permitted* Assuming organization applied CPA Canada Handbook previously


It depends – To the extent that a government consolidates government organizations in its financial statements and the government adopts Section PS 3450,

additional challenges may be faced.


Transition


For example:• Government ABC (“ABC”) consolidates government organization XYZ (“XYZ”) in its financial

statements; both entities have March 31 year-ends. As required by Section PS 3450, XYZ adopted Section PS 3450 as of April 1, 2012.

• It is now the year-end March 31, 2017 and ABC must adopt Section PS 3450. The following information is known about XYZ:

Government Organization XYZ (in thousands)

2017 2016

Accumulated remeasurement gains and losses, end of year 1,900 900

Portfolio Investments 15,000 14,000Fair

value

What will ABC record in its financial statements as at March 31, 2017 and March 31, 2016?



Transition• As stated in PS 3450.099, ‘Recognition, derecognition and measurement policies

followed in financial statements for periods prior to the effective date of this Section are not reversed and, therefore, those financial statements are not restated…’

• Meaning that for the year-end March 31, 2016, the amounts reported should be in accordance with PSA pre adoption of Section PS 3450 (i.e., PS 3040), which would mandate recognition of portfolio investments using the cost method.

• Currently as noted on the previous slide, XYZ has recorded its investments at fair value in accordance with Section PS 3450, which also means that unrealized gains/losses of the fair value investments have been recognized in the ‘Statement of Remeasurement Gains and Losses’.

• If ABC were to simply consolidate the statements of XYZ as shown on the previous slide, this would be inappropriate as both the ending fiscal 2016 and opening fiscal 2017 statements have amounts reported in the ‘Statement of Remeasurement Gains and Losses’, when these should be nil. Therefore reversals would have to occur upon consolidation and the related investments would have to be recorded at cost in fiscal 2016.



Understanding the implications of the related party transactions project



Understanding the implications of the related party transactions project

• Responses from the June 2013 re-exposure draft and the proposed standard were reviewed at PSAB’s December 2013 meeting. A re-exposure draft was issued in April 2014 with the comment period ending on September 15, 2014.

• New exposure draft proposes two new standards:– Related party disclosures– Inter-entity transactions

• New standards would be effective for fiscal years beginning on or after April 1, 2017 (Earlier application is permitted).

• New standards would be applied prospectively (i.e. restatement of assets or liabilities is not required when the related party transaction occurred prior to the date of adoption and disclosures are not required for the comparative figures)



Understanding the implications of the related party transactions project (cont’d)

Related entities and Disclosures


• Ability of key management personnel (or a close family member of such an individual) to ultimately participate in decision making process of the entity does not mean they can control decisions.

• Concern was that this would result in an increase in the number of related parties and would create a significant administrative exercise for senior governments.

• Suggested that only entities that are under control or shared control by member of key management personnel (or close family) would result in a related party.

Respondent issues

Clarifies that entities are related when:• Member of key management personnel (or close family member) controls or

shares control of another entity.Proposes that this is also an exercise of judgement, meaning consideration of the degree of influence the individual has in determining the on-going financial and operating decisions of that entity.

Re-exposure draft

Disclosure requirements:• Only if related party transactions have/could have a material effect on the

financial statements• Excludes key management personnel routine compensation• Includes:

• Nature of transactions• Types and amounts of transactions• Bases of measurement• Outstanding balances and related terms and conditions• Contractual obligations and contingent liabilities



Measurement guidance


Options proposed in the exposure draft limit the relevance of the standard.• Additional guidance should

be provided to determine when a) carrying amount, b) consideration paid/received or c) fair value is the appropriate measurement base for transactions.

• Consistency with Section 3840 in Part II of the CPA Canada Handbook should be achieved for measurement.

• Inconsistencies between definition and application of ‘exchange amount’.

Measurement at carrying value, unless:

Carrying amount

Fair value

Exchange amount

a) Transactions in the normal course of operations and equivalent to arm’s length.

√

b) Assets and liabilities transferred for consideration approximating fair value

√

c) Assets and liabilities transferred for no/nominal consideration;

√ (provider &

recipient)

√ (recipient)

d) Allocated costs and recoveries

√

e) Unallocated costs (recipient) √ √

Respondent issues Re-exposure draft



Transactions undertaken as part of operations


Given that the new standard provides relief for transactions that are considered to be part of ‘the normal course of operations’ respondents requested clarification on what types of transactions would fall under this category.Respondents requested additional context, as it is common in the public sector for related party transactions to take place that would not similarly take place between unrelated parties.

Re-introduce the term ‘in the normal course of operations’.

Terms and conditions that are similar to

those with unrelated parties

Respondent issues Re-exposure draft


Update on the revenue statement of principles (“SOP”)



Due date

1. Statement of principles (“SOP”)

Enhance consistency of revenue recognition and measurement

Exchange transactions Unilateral (Non-exchange) transactions

Definition of revenue Recognition Measurement Presentation &

disclosure

Why is it required?

What is the focus of SOP?

Sections

What are the main features?

February 3, 2014

Distinct and separate

performance obligations

Revenue recognized as performance obligation is

satisfied

Performance obligations are distinguishing

features

Performance obligations are

enforceable promises

Revenue recognized

when authority + past event =

claim

Revenue statement of principles



Why is a revenue standard required?

Public sector entities receive many types of revenues

No overarching standard

addressing revenue exists in

PSA Handbook

Single framework with accompanying

principles more valuable than

individual revenue standards

Enhance relevance, reliability and comparability

Revenue statement of principles (cont’d)





PS 3100 Restricted assets and revenue

PS 3450 Financial instruments

PS 3410 Government transfers

PS 3510 Tax revenue

Proposed Framework

Applicable: Generally all forms of revenue

Reporting of contributions

Reporting of appropriations

Compatible with Sections:

Scope of the proposed framework




Approach of the proposalAims to align recognition and measurement principles based on entity’s right to revenue.

Category ExamplesPresent or proposed primary source of GAAP

Unilateral (Non-exchange)

Taxes Tax revenue, Section PS 3510

Fines, penalties

Scope of these proposals

Logging and mineral rights

Fees that do not give rise to performance obligations

Exchange Sales of servicesFees and user charges giving rise to performance obligationsA license to use intangible assets/intellectual propertySale of goods or property (Other than financial instruments)

Interest, dividends, gains and losses when derecognizingfinancial instruments

Financial instruments, Section PS 3450

Inflows subject to an external restriction Restricted assets and revenues, Section PS 3100

Government transfers Government transfers, Section PS 3410

Contributions, other than appropriations and government transfers Under development

Source: Revenue SOP (paragraph 0.021).



Exchange transactions are ‘transactions where goods or services are provided for consideration. These transactions create performance obligations for a public sector entity arising directly from a payment or promise of consideration by a payor.’ [SOP]


Enforceable promises

Provide goods or services

As a result of an exchange transaction

Performance obligations

Contract

Terms of Service

Regulations

Applicable Legislation


Unilateral revenues ‘increase the economic resources of a public sector entity without a direct transfer of economic resources to the payor. The right to the economic resources is attributable to legislation grounded on a constitutional authority, or delegated constitutional authority, and an event entitling the public sector entity to recognize revenue.’ [SOP]



Right to economic resources

Past event

Authority

Delegated constitutional

authority

Constitutional authority

OR

Legislation

Note:• Does not necessarily

entitle resource provider to any specific public service or benefit.

• Revenue recognition cannot be tied to satisfaction of performance obligations.


Recognition – Exchange transactions‘A unique aspect… is that the rate or fee charged for a service may not ensure the recovery of the costs of providing the service. Public sector entities often set fees or rates based on matters other than profit maximization or recovery of costs.’ [SOP.056]



• Should occur from perspective of the payor

• Not all expectations of the payor are performance obligations; only those that are enforceable promises

• Must have essential characteristics of liability to be enforceable promises

• Generally, each distinct good or service = Separate performance obligation

Identifying the performance obligation

1.

• Occurs when performance obligations are met

• This occurs when the payor has control over the benefits associated with good/services Control = Unilateral and present right to obtain benefits

• Goods and services are assets (Even if momentarily) when received or used

Determining when to recognize revenue

2.

• Performance obligations satisfied at a point in time

• Performance obligations satisfied over time (Including measuring progress towards satisfaction)

• Combining contracts• Modifications• Repurchase agreements and

put options• Unearned revenues

Other considerations

3.


• Legislation, grounded on:– Constitutional authority, or– Delegated constitutional authority.*

*Recognized practice supported by precedents established in a court may allow authority prior to formal approval by legislation.

• Must have authority and must be able to identify event that gives right to revenue.

• Right is based on unconditional right to revenue regardless of when cash is received.

Recognition – Unilateral Transactions

Identify eventAuthority

• Proposed standard provides examples of recognition associated with fines and penalties.



Source Situation Revenue recognition event(s)Fine arising from violation of a law or by-law

Legislation that enables issuance of summons

Earlier of:• Guilty plea entered (Party possibly pays fine)• Date to contest summons expires• Court imposes a fee

Penalty associated with enforcement of a legislated requirement

Legislation that does not require that a summons be issued

An enforceable claim exists in accordance with provisions of the legislation

Source: Revenue SOP (paragraph 0.114).

1. 2.


Refers to credit risk No reduction in gross revenue amount

Collectibility

Significant amount of timebetween revenue recognition

date and collection date

Enhances comparability when transactions reflect the cost of financing (Even whenembedded)

Time value of money

Assessment made once performance obligationis satisfied or authority + past event occurs

To use the present valuemeasurement techniqueas per Section PS 1000

Entities need to assess whether they obtain controlof goods or servicescontributed

Fair value of non-cashconsideration is accountedfor when recording transactions

Related party transaction measurement would be unaffected

Non-cash transactions



Measurement



Presentation and disclosure requirements


Disaggregate revenues into

categories

Information about estimation

uncertainty

Outline accounting

policies being applied to revenue

Inform readers of significant

judgments being used

Identify and explain continuing

obligations




Next steps

1. 2. 3. 4.

PSAB to prepare Exposure Draft (“ED”)

ED revised or standard published

Comments to be provided

ED issued for commenting


Latest developments on government transfers



• PSAB has recently struck a committee to conduct a post-implementation review of Government Transfers standard

• Public sector accounting discussion group was formed by PSAB in 2013 and has discussed Government Transfers in context of specific scenarios.

Latest developments on government transfers



Public sector accounting discussion group


• Established by PSAB• Discussion forum only• Addresses issues arising on application of the PSA Handbook

• Expects to meet three times a year• First meeting: September 2013

What is the group?

• Chair• 10 individuals with a range of backgrounds, includes: preparers, users and

auditors of entities that report under the PSA Handbook

What is its composition?

• Support PSAB by enabling discussion in a public setting that results from the application of the PSA Handbook

What is its purpose?

What meetings have occurred to date?


Summary of a specific issue discussed at September 2013 meeting

PS 3410 – Whether a liability arises due to stipulations associated with a government transfer that requires the acquisition and use of tangible capital assets.• Group discussed 2 situations that could be encountered when a transferor imposes a

stipulation on a recipient of a grant intended to fund capital expenditures. 1 – Government organization receives annual funding to cover its capital expenditures.

Funding is approved through legislation that stipulates annual amount is granted for entity’s capital expenditures. Once authorized, the funding is distributed.Response: Specific stipulations are absent so no liability would be recorded.

2 – Same scenario as 1, however, the legislation stipulates that capital assets acquired or constructed with the funding must be used by entity to deliver its services throughout their respective useful lives.

Response: Services provided are inherent to the organization’s mandate (some members), definition of a liability not considered to be met.

• No specific examples were cited where a liability would be discharged over an asset’s service life.

Public sector accounting discussion group (cont’d)Government transfers



Questions and answers


Documents

Public Sector Accounting Standards (PSAS) update Keeping ... Seminar - April 2014.pdf · Public Sector Accounting Standards (PSAS) update Keeping current Financial Management Institute