UNDERSTANDING CANADIAN PUBLIC
SECTOR FINANCIAL STATEMENTS
www.bcauditor.com
June 2014
Who Will Find this Guide Helpful 3
What a Set of Public Sector
Financial Statements Includes
5
The Statement of Financial Position 9
The Statement of Operations 14
The Statement of Remeasurement Gains and Losses 19
The Statement of Cash Flow 23
The Statement of Change in Net Debt 26
Financial Statement Note Disclosures 29
The Importance of the Financial
Statement Discussion and Analysis
33
The Importance of the Independent
Auditor’s Report
35
Appendix A:
Why the public sector has different
accounting standards than the private sector
39
Appendix B:
How the standard-setting process in Canada
results in high-quality public sector
accounting standards
41
TABLE OF CONTENTS
WHO WILL FIND THIS GUIDE HELPFUL
All Canadian public sector entities – federal, provincial
and local governments, as well as most organizations controlled by them – prepare
nancial statements. e majority of those statements are prepared according to public
sector accounting standards adopted across Canada.
Public sector nancial statements are read and used by a broad group of readers such
as elected legislators and councillors, board members, credit rating agencies, and other
interested members of the public. As a result, public sector nancial statements must
meet the needs of a broad range of users.
e purpose of this guide is to help all these readers – and specically those who are
not familiar with public sector nancial statements – improve their ability to review
and interpret government nancial reports. e guide describes the unique aspects
of nancial performance and accountability that one can nd when the nancial
statements are prepared in accordance with the CPA Canada Public Sector Accounting
(PSA) Handbook. Aer reading this guide you should have a general understanding of
the following:
What is included in a set of public sector nancial statements;
e key measures of public sector nancial position and performance;
Why reading the notes to the nancial statements is important;
How nancial statement discussion and analysis from management supplements
the audited nancial statements; and
Why the independent auditor’s report should be read before using the nancial
statements.
You may nd it useful to have this guidance at hand when reviewing a set of public
sector nancial statements.
We have also provided in each section questions you should consider asking when
reviewing a set of nancial statements. is does not include all possible questions but
provides a starting point for questions to ask.
Why does the public
sector have dierent
accounting standards than
the private sector? To nd
out, see Appendix A.
How has the standard-
seing process in Canada
resulted in high-quality
public sector accounting
standards? To nd out, see
Appendix B.
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Understanding Canadian Public Sector Financial Statements
3
SCOPE OF THE GUIDE
is guide describes the nancial statements of public sector entities that prepare their
nancial statements using the CPA Canada Public Sector Accounting Handbook issued by
the Public Sector Accounting Board.
e guide does not cover the nancial reporting requirements of: government business
enterprises,
1
organizations that have opted to apply the standards applicable for
business enterprises, or government not-for-prot organizations that have opted to
follow the not-for-prot standards set out in the Public Sector Accounting Handbook.
is guide reects Canadian public sector accounting standards at the date of
publication; however, accounting standards change frequently. e guidance provided
here is a basic summary of Canadian public sector nancial reporting and should not
be relied on as accounting advice.
1 The Public Sector Accounting Handbook directs government business enterprises to adopt the accounting
standards for publicly accountable enterprises in Part I of the CPA Canada Public Sector Handbook –
Accounting (2014). The standards contained in Part 1 are the International Financial Reporting Standards
(IFRS) set globally by the International Federation of Accountants.
WHO WILL FIND THIS GUIDE HELPFUL
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Understanding Canadian Public Sector Financial Statements
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Canada’s public sector accounting standards aim to ensure
that a public entity’s nancial statements:
account for the full nature and extent of the nancial aairs and resources that
the entity controls;
show the entity’s nancial position at the end of the scal period, so the entity’s
ability to nance its activities and provide future services can be evaluated;
describe the entity’s change in nancial position during the scal period; and
demonstrate the entity’s accountability for the management of the resources,
obligations and nancial aairs for which it is responsible.
is means that nancial statements should provide readers with a clear understanding
of the assets, liabilities, revenues and expenses of the entity in question. Public sector
nancial statements are prepared using the accrual basis of accounting. is method
records transactions and their eect when they occur, which is oen in a dierent
period than when the associated cash exchanges to sele the transaction.
FIVE SEPARATE STATEMENTS MAKE
UP A FULL SET OF FINANCIAL
STATEMENTS
e ve separate nancial statements, shown in Exhibit 1, are described briey below
and in more detail in the pages that follow.
1. Statement of Financial Position – is is the overarching
statement that summarizes an entity’s nancial position at a point in time. Changes
in the nancial position of the entity are summarized in the following four
statements.
2. Statement of Operations – is statement explains the change in
the overall nancial position of the entity during the accounting period except for
those changes reported separately in the Statement of Remeasurement Gains and
Losses.
3. Statement of Remeasurement Gains and Losses
is statement explains the change in the overall nancial position of the entity
during the accounting period due to remeasurements related to unrealized gains
and losses on specic nancial assets and liabilities recorded at fair value, and
unrealized foreign exchange gains and losses.
2
4. Statement of Cash Flow – is statement explains the change in
cash and cash equivalents from the prior year and provides important information
about the entity’s ability to generate cash to meet its cash requirements.
5. Statement of Change in Net Debt – is statement reconciles
the change in net debt for the current and prior year. Net debt is a nancial
performance measure unique to public sector nancial reporting and is explained in
the next section.
2 Governments are not required to present this statement until fiscal periods beginning on or after April
1, 2016. Some government organizations are now required to report remeasurement gains and losses;
however, as many do not have such transactions to report this statement is often not included.
WHAT A SET OF PUBLIC SECTOR
FINANCIAL STATEMENTS INCLUDES
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Understanding Canadian Public Sector Financial Statements
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Exhibit 1: How the Statement of Financial Position links to the other financial statements
Note: these are simplified statements for illustration and do not include all the categories required by the public sector accounting standards.
WHAT A SET OF PUBLIC SECTOR
FINANCIAL STATEMENTS INCLUDES
PUBLIC SECTOR ENTITY
Statement of Financial Position
- As at March 31, 2014
2014 2013
Financial Assets
Cash and cash equivalents XXX XXX
Accounts receivable XXX XXX
Total Financial Assets XXX XXX
Liabilities
Accounts payable and acrued
liabilities
XXX XXX
Debt XXX XXX
Total Liabilities XXX XXX
Net nancial assets (debt) XXX XXX
Non-Financial Assets
Tangible capital assets XXX XXX
Inventories of supplies XXX XXX
Total Non-nancial Assets XXX XXX
Accumulated surplus (decit) XXX XXX
Accumulated surplus (decit)
is comprised of:
Accumulated operating surplus
(decit)
XXX XXX
Accumulated remeasurement gains
(losses)
XXX XXX
PUBLIC SECTOR ENTITY
Statement of Cash Flow - For the year ended March 31, 2014
2014 2013
Operating Transactions XXX XXX
Capital Transactions XXX XXX
Investing Transactions XXX XXX
Financing Transactions XXX XXX
Increase in cash and cash equivalents XXX XXX
Cash and cash equivalents at beginning of year XXX XXX
Cash and cash equivalents at end of year XXX XXX
PUBLIC SECTOR ENTITY
Statement of Net Debt - For the year ended March 31, 2014
Budget
2014
Actual
2014
Actual
2013
Annual operating surplus XXX XXX XXX
Acquisition of tangible capital assets (XXX) (XXX) (XXX)
Amortization of tangible capital assets XXX XXX XXX
Changes in other non nancial assets XXX XXX XXX
(Increase)/decrease in net debt XXX XXX XXX
Net debt at beginning of year XXX XXX XXX
Net debt at end of year XXX XXX XXX
PUBLIC SECTOR ENTITY
Statement of Operations - For the year ended March 31, 2014
Budget
2014
Actual
2014
Actual
2013
REVENUES XXX XXX XXX
EXPENSES XXX XXX XXX
Operating Surplus (Decit) XXX XXX XXX
Accumulated operating surplus (decit) at
beginning of year
XXX XXX XXX
Accumulated operating surplus (decit) at
end of year
XXX XXX XXX
PUBLIC SECTOR ENTITY
Statement of Remeasurement Gains and Losses -
For the year ended March 31, 2014
2014 2013
Accumulated remeasurement gains (losses)
at beginning of year
XXX XXX
Net remeasurement gains (losses) XXX XXX
Accumulated remeasurement gains (losses) at end of year XXX XXX
Statement of Financial Position Statements Explaining Changes in
Financial Position
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WHAT THE FINANCIAL STATEMENTS
REVEAL ABOUT FINANCIAL
PERFORMANCE AND ACCOUNTABILITY
e nancial statements tell the nancial performance story for the current and prior
scal periods. Exhibit 2 summarizes the nancial performance measures, or indicators,
presented on each nancial statement.
3
THE IMPORTANCE OF THE NOTES TO
FINANCIAL STATEMENTS
Supporting the ve nancial statements are the explanatory notes that go along with
them. ese notes (referenced on each applicable statement) provide expanded
disclosures on the reported amounts. An entity’s reported nancial results cannot be
fully understood without reading the notes to the nancial statements.
3 Governments are not required to present this statement until fiscal periods beginning on or after April 1,
2016. Some government organizations are now required to report remeasurement gains and losses; however,
as many do not have such transactions to report this statement is often not included.
Exhibit 2: Performance and accountability measures by financial statement
Financial
performance &
accountability
measures
Statement
of Financial
Position
Statement of
Operations
Statement of
Remeasurement
Gains and
Losses
3
Statement of
Cash Flow
Statement of
Change in Net
Debt
Net nancial assets
or debt
Accumulated surplus
or decit
Budget to actual
comparisons
Annual operating
surplus or decit
Net remeasurement
gains or losses
Cash ow by activity
WHAT A SET OF PUBLIC SECTOR
FINANCIAL STATEMENTS INCLUDES
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QUALITATIVE CHARACTERISTICS
OF PUBLIC SECTOR FINANCIAL
STATEMENTS
To eectively communicate nancial information, nancial statements must go beyond
the numbers. To do this, nancial statements must also meet the following qualitative
characteristics:
Timely – For the information to be useful, the nancial statements should be
published as soon as possible aer the annual reporting period. e value of the
information for decision making or accountability purposes decreases over time.
Comparable – Financial statements must show results on a consistent basis to
enable readers to compare the current and prior periods and make assessments on
whether the entity’s nancial position is improving or deteriorating.
Reliable – e information presented in nancial statements must be accurate and
complete if it is to be seen as reliable. In the public sector, nancial statements are
normally audited by an independent auditor to provide assurance for readers that
the information is reliable. e last section of this guide discusses the information
communicated by an auditor’s report.
Understandable – e information in the nancial statements must be clearly
presented and explained so that readers with a reasonable interest in interpreting
what the information means can understand it.
WHAT A SET OF PUBLIC SECTOR
FINANCIAL STATEMENTS INCLUDES
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The Statement of Financial Position presents an entity’s
nancial assets and liabilities at a point in time. e statement layout provides two
key performance measures of the entity’s ability to nance its operations and provide
future services.
e main sections of this statement are described below along with an explanation of
how the unique presentation of assets within the statement generates the two nancial
position performance measures. Exhibit 3 is a sample statement of nancial position
for your reference as you read this section.
FINANCIAL ASSETS
Financial assets are the nancial resources an entity controls and can use to pay what it
owes to others. ese assets include cash, accounts receivable, investments, and assets
that are convertible to cash or that generate cash so that the entity can pay its liabilities
as they come due.
Information about the liquidity of an entity’s nancial assets is not presented on the
Statement of Financial Position. (Liquidity means how quickly assets can be used to
pay bills.) However, the notes to the nancial statements include disclosures on the
liquidity of an entity’s nancial assets.
LIABILITIES
Liabilities are existing nancial obligations to outside parties at the date of the nancial
statements. ey result from past transactions and events and will lead to the future
sacrice of economic benets (e.g., nancial assets).
Common liabilities are accounts payable, debt, employee pension obligations, and
unearned revenue. Users should also read the notes to the nancial statements to beer
understand the nature of an entity’s liabilities and when liabilities are due.
FINANCIAL PERFORMANCE MEASURE:
NET DEBT OR NET FINANCIAL ASSETS
Net debt is a term unique to public sector nancial reporting. It is the dierence
between an entity’s nancial assets and liabilities at a point in time. is performance
measure provides readers with important information regarding the entity’s
requirement to generate future revenues to fund past services and transactions.
THE STATEMENT OF FINANCIAL POSITION
Statement of Financial
Position: nancial
statement elements
• assets (nancial and
non-nancial)
• liabilities
Financial accountability
and performance
measures
• net debt or net nancial
assets
• accumulated surplus or
decit
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Financial assets are the resources available to sele an entity’s liabilities to external
parties. When liabilities exceed nancial assets, an entity is in a net debt position.
Entities in a net debt position must generate future revenues to cover the cost of past
transactions and events. e reverse is true when an entity is in a net nancial asset
position (nancial assets exceed liabilities). Entities in a net nancial asset position
have sucient nancial assets to sele existing liabilities.
To understand how an entity’s net debt (or net nancial asset) position has changed,
users should read the statement of change in net debt.
NON-FINANCIAL ASSETS
Non-nancial assets are assets that an entity will use up when providing future services to the
public. ese assets are not normally used by an entity to sele its liabilities with external
parties. As a result, they are shown separately in the Statement of Financial Position.
Oen, the most signicant group of assets within this category are tangible capital
assets, like buildings or roads, which are acquired to provide services over many years.
As entities deliver services, the estimated portion of the assets used is recorded as
an expense in the Statement of Operations. e balance presented represents the
remaining service potential of the non-nancial assets.
Crown lands and natural resources inherited in right of crown and all intangible
assets are not recognized as assets in public sector nancial statements. When these
assets are important to an entity’s ability to generate revenues or deliver services,
additional information should be included in either the notes to the nancial
statements or in the nancial statement discussion and analysis accompanying the
nancial statements.
FINANCIAL PERFORMANCE MEASURE:
ACCUMULATED SURPLUS OR DEFICIT
e accumulated surplus or decit represents the net recognized economic resources
(all assets and liabilities) of the entity at the date of the nancial statements. is
measure provides the net economic position of the entity from all years operations at a
point in time.
e accumulated surplus or decit is comprised of all of the past :
operating surpluses or decits; and
remeasurement gains and losses.
When total assets exceed total liabilities, the entity is in an accumulated surplus
position. An accumulated surplus position means that the entity has net positive
resources that, subject to direction of the government or governing board, could be
used to provide future services. However, when an entity is in an accumulated decit
position (total liabilities exceed total assets), the entity must fund past transactions
and events from future revenues. An accumulated operating decit position means the
entity has borrowed to nance annual operating decits.
THE STATEMENT OF FINANCIAL POSITION
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As noted in Exhibit 1, the statement of operations and statement of remeasurement
gains and losses provides information explaining the change in the accumulated surplus
or decit position of the entity over the past two scal years.
PUBLIC SECTOR ENTITY
Statement of Financial Position
As at March 31, 2014
Note 2014 2013
FINANCIAL ASSETS
Cash and cash equivalents 2 1,908 1,573
Accounts receivable 3 1,864 1,708
Portfolio investments 4 2,254 1,331
Derivatives 5 35 -
Loans 6 4,909 5,659
Inventories for resale 7 109 135
Total Financial Assets 11, 0 7 9 10,406
LIABILITIES
Accounts payable and accrued liabilities 8 2,383 2,644
Derivatives 9 10 105
Debt 10 9,398 9,796
Pension obligation 11 4,813 4,890
Other accrued liabilities 12 1,395 1,510
Deferred revenue 13 308 331
Total Liabililies 18,307 19,276
Net nancial assets (debt) 14 (7,228) (8,870)
NON-FINANCIAL ASSETS
Tangible capital assets 15 7,218 7,215
Inventories of supplies 16 112 222
Prepaid expenses 17 30 20
Total Non-nancial Assets 7,360 7,457
Accumulated surplus (decit) 18 132 (1,413)
Accumulated surplus (decit) is comprised of :
Accumulated operating surplus (decit) 10 (1,366)
Accumulated remeasurement gains (losses) 122 (47)
132 (1,413)
e accompanying notes are an integral part of these nancial statements.
Exhibit 3: Sample Statement of Financial Position
Source: Adapted from the CPA Canada Public Sector Accounting Handbook
THE STATEMENT OF FINANCIAL POSITION
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POTENTIAL QUESTIONS TO ASK
WHEN REVIEWING A STATEMENT OF
FINANCIAL POSITION – AND HOW TO
FIND THE ANSWERS
1. Is the net debt or net financial asset position of
the entity increasing or decreasing?
is performance measure shows the extent to which sucient nancial assets exist
to discharge liabilities. When assessing trends in the net debt or net nancial asset
position, readers should look to the Statement of Change in Net Debt to identify the
key components of the current trends. Increases or decreases may indicate that:
signicant tangible capital assets have been added (net debt increasing), or the entity
has not fully replaced consumed tangible capital assets (net debt decreasing); or
debt nancing is being used to fund operations (net debt increasing), or current
year revenues exceed operating expenses (net debt decreasing).
e strength of the net nancial asset position (or weakness of the net debt position)
is determined by the ratio of nancial assets to liabilities. When nancial assets
signicantly exceed liabilities the entity will be in a strong net nancial asset position.
However, when liabilities signicantly exceed nancial assets the entity will be in a
weak nancial position. A trend of increasing net debt or decreasing net nancial assets
may indicate that current operations are unsustainable.
e ratio of nancial assets to liabilities is one of the sustainability indicators published
by the Public Sector Accounting Board (PSAB) in Statement of Recommended Practice
(SORP) 4 – indicators of nancial condition. SORP 4 provides guidance to entity’s when
reporting supplementary information on the nancial condition of the entity including
possible sustainability, exibility and vulnerability indicators.
2. Is the accumulated surplus or deficit of the entity
increasing or decreasing, and how strong is the
overall financial position of the entity?
It is important to understand the balance between the entity’s historic revenue generation
and its service delivery. is means looking at current trends to see whether the nancial
position (the accumulated surplus or decit) is increasing or decreasing, as well as the
overall strength of the nancial position in which these results occurred. An entity in
a strong accumulated surplus position may be able to incur annual decits for a longer
period of time than an entity in a weaker nancial position (i.e., accumulated decit
position). e strength or weakness of the accumulated surplus or decit position is
determined by the ratio of assets (nancial and non-nancial) to liabilities. e ratio of
assets to liabilities is one of the sustainability nancial condition indicators recommended
in SORP 4.
THE STATEMENT OF FINANCIAL POSITION
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3. What investment has the entity made in tangible
capital assets for providing future services?
e type of services a public sector entity provides determines the extent to which it
must invest in and maintain tangible capital assets. Some services depend heavily on
long-life tangible capital assets such as sewer and water infrastructure; other services
do not. It is important to rst understand the nature of what services an entity provides
before conclusions can be drawn on an entity’s investment in tangible capital assets.
Considerations when looking at an entity’s tangible capital assets include:
What type and mix of tangible capital assets has the entity acquired (this
information is disclosed in the notes)?
Is the entity acquiring sucient assets (purchases) to replace those that have been
consumed in service delivery (amortization expense)?
What level of resources is the entity spending on maintaining capital assets? (this
may be disclosed in the notes)
To what extent is the entity securing the use of capital assets through operating leases
or other arrangements to supplement the capital asset stock acquired by the entity?
(this information is disclosed in the notes)
e nancial statements can not provide all of the information necessary for making
assessments on the eective management of tangible capital assets. However, the
nancial statements do provide basic information on tangible capital asset purchases,
disposals, estimated service potential and current period usage through amortization,
as well as resources the entity has expended for maintenance of the tangible capital
asset stock.
PSAB has also developed a statement of recommended practice (SORP – 3 Assessment
of tangible capital assets) to assist public sector entities with reporting more detailed
information on tangible capital assets to supplement the basic information contained in
the nancial statements. is includes information on the nature and extent of tangible
capital assets, the condition of assets and the estimated remaining useful life.
THE STATEMENT OF FINANCIAL POSITION
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The Statement of Operations is one of the nancial statements
prepared to explain the changes in the overall nancial position of the entity during the
accounting period. is statement explains the change in the accumulated surplus or
decit from the prior year except changes due to remeasurement gains or losses. Exhibit 4
shows a sample Statement of Operations for your reference as you read this section.
e nancial elements in the Statement of Operations include revenues and expenses.
e performance and accountability measures are the annual surplus or decit and the
comparison of budgeted to actual results.
REVENUES
Revenues are increases in economic resources that result from the entity’s operations,
transactions and events during the accounting period. Revenues result from decreases
in liabilities or increases in assets. Common revenues include:
taxation revenue, such as income or property tax;
transfers from governments, such as federal equalization payments to the provinces
and contributions from a provincial government to service delivery organizations
such as hospitals;
investment income; and
revenues from the sale of goods and services.
EXPENSES
Expenses are decreases in economic resources that result from the entity’s operations,
transactions and events during the accounting period. Expenses result from decreases
to assets or increases in liabilities.
e Statement of Operations presents expenses by function or program, such as health or
education. is presentation conveys the entity’s nancial resource allocation decisions.
e notes to the nancial statements contain additional information on the classication
of expenses by type. For example, amortization expense represents the portion of tangible
capital assets consumed during the year and is disclosed in the notes.
Statement of
Operations: nancial
statement elements
• revenues
• expenses
Financial performance
and accountability
measures
• annual operating surplus
or decit
• budget to actual results
THE STATEMENT OF OPERATIONS
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FINANCIAL PERFORMANCE MEASURE:
ANNUAL OPERATING SURPLUS OR
DEFICIT
e annual operating surplus or decit shows whether the revenues raised in the year
were sucient to cover the year’s operating expenses and consequently, whether the
nancial position improved, was unchanged or declined during the year. is measure
explains the overall change in nancial position for entities that do not prepare a
Statement of Remeasurement Gains and Losses.
e impact of an entity’s annual operating surplus or decit must be viewed in the
context of the entity’s overall nancial position. An entity in a strong nancial position
is beer positioned to absorb the impact of annual operating decits than an entity in a
weak nancial position. is makes it important to look at the annual operating surplus
or decit trends over time.
FINANCIAL ACCOUNTABILITY –
BUDGET TO ACTUAL RESULTS
Annual budgets approved by elected ocials and boards convey the nancial policy
and resource decisions for the entity in question. As a result, a key component of
nancial accountability in the public sector is comparing the actual nancial results
with the originally planned results in the budget.
To achieve this reporting objective, the Statement of Operations includes an entity’s
original approved annual budget. is is a unique requirement of public sector nancial
statements. By reporting the budget, you can see how the entity’s revenues and
expenses compared against the original plan.
THE STATEMENT OF OPERATIONS
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PUBLIC SECTOR ENTITY
Statement of Operations
For the year ended March 31, 2014
Budget
2014
Actual
2014
Actual
2013
REVENUE (Note 19)
Personal income tax 5,392 5,969 5,655
Corporate taxes 2,642 2,659 3,848
Sales and other taxes 2,080 2,296 2,431
Health and insurance premiums 641 680 652
Fees, permits, licenses and nes 581 651 669
Other revenue 1,237 2,122 1,669
Investment income 409 610 747
Canada health and social transfer 940 970 903
Other transfers 355 365 280
14,277 16,322 16,854
EXPENSE (Note 20)
Education 4,329 4,287 4,168
Health 4,541 4,626 4,457
Agriculture, environment, development 1,706 1,856 1,740
Social services 1,654 1,701 1,709
Transportation and utilites 626 823 807
Recreation and culture 281 272 217
General government 551 627 560
Justice 468 487 462
Interest expense 93 267 183
14,249 14,946 14,303
Operating Surplus (Decit) 28 1,376 2,551
Accumulated operating surplus (decit)
at beginning of year
(1,366) (1,366) (3,917)
Accumulated operating surplus (decit)
at end of year
(1,338) 10 (1,366)
Exhibit 4: Sample Statement of Operations
Source: Adapted from the CPA Canada Public Sector Accounting Handbook
THE STATEMENT OF OPERATIONS
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POTENTIAL QUESTIONS TO ASK
WHEN REVIEWING A STATEMENT OF
OPERATIONS – AND HOW TO FIND
THE ANSWERS
1. How did the entity’s actual results for revenues
and expenses compare with its approved financial
plan and prior year results?
Comparing planned results with actual results is useful for assessing whether or not the
entity met the nancial objectives set at the beginning of the year. Signicant variances
between planned and actual results may be indicators of:
changes to program oerings or program delivery;
delayed or accelerated program implementation; or
unplanned funding contributions or events.
When signicant variances between planned and actual results occur, the notes
may provide some information. However, readers should nd the rationale for
signicant variances in the unaudited nancial statement discussion and analysis from
management, aached to the nancial statements.
Similar variances and trends may also be observed between current and prior period results.
2. Did the entity raise sufficient annual revenues to
cover annual operating expenses?
One of the primary nancial performance measures is the annual operating surplus
or decit. An entity’s overall nancial position improves with annual surpluses and
declines with annual decits.
Readers should rst consider the trend of the current and prior year results within the
context of the accumulated surplus or decit presented in the Statement of Financial
Position. en they should assess whether the position is improving or deteriorating.
Questions to ask include:
Is the entity consistently generating annual surpluses or decits?
How signicant are the annual surpluses or decits incurred?
Is the overall nancial position (i.e., accumulated surplus or decit) improving or
deteriorating over time?
THE STATEMENT OF OPERATIONS
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3. How dependent is the entity on transfers from
other governments or organizations to meet its
operating costs?
An entity may be highly dependent on transfers of resources from governments or
other entities in order to deliver services. Readers should consider how eectively the
entity could respond if those transfers were reduced. Would the entity be able to:
raise additional revenues from its own revenue generating activities such as taxation
or fees?
obtain debt nancing to nance unexpected annual decits?
reduce operating expenses to match potential revenue reductions?
e nancial statement notes will provide some detail on the xed future expenses and
payments the entity cannot avoid, such as debt payments, and contractual obligations.
4. How is the entity allocating resources to the
functions or programs it is accountable for?
e entity conveys its nancial priorities through the planned and actual service costs
presented in the Statement of Operations. Based on their policy decisions, entities
will allocate more or fewer resources to a specic function or purpose. By analyzing
this information, readers can identify changes in nancial priorities. is information
can also be a starting point for asking if the entity is allocating the right amount of
resources to specic functions or programs.
5. Was the annual operating surplus or deficit
impacted by unusual or non-recurring transactions?
When assessing the nancial performance of an entity, it is important to understand
the impact of non-recurring events or non-routine transactions on the nancial results
presented. ese transactions do not create ongoing revenues or expenses for the
entity. erefore, in analyzing the entity’s performance, a reader must consider the
impact of these transactions.
For example, an entity might sell a signicant tangible capital asset and realize a large
gain (revenue) in the current year. is is a one-time revenue source that will not occur
in future periods. e reader should therefore assess what the annual surplus or decit
would have been had this transaction not occurred. If the revenue from this sale was
necessary for an annual operating surplus to occur, the entity may need to generate new
revenue sources to cover future operating expenses.
THE STATEMENT OF OPERATIONS
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PSAB approved new accounting standards in 2011
4
that
introduced the new statement of remeasurement gains and losses for public sector
nancial reporting
5
. When entities apply the new standards, the change in the
accumulated surplus or decit of the entity may be explained by two nancial
statements (the statement of operations and the statement of remeasurement gains
and losses). Entities will only prepare this statement when the entity’s operations
require the reporting of remeasurement gains and losses.
Exhibit 5 shows a sample statement of remeasurement gains and losses for your reference.
WHAT ARE REMEASUREMENT GAINS
AND LOSSES?
Remeasurement gains and losses result from the following:
Fair value measurement
Public sector accounting standards now require that the recognized value of specic
nancial assets and liabilities be updated annually using the current fair value.
ese include certain derivative nancial instruments and investments in publicly
traded equity instruments. Entities may also elect to value other nancial assets and
liabilities using fair value when they are evaluated and managed on a fair value basis.
e annual change in the fair value of these assets and liabilities are reported in the
statement of remeasurement gains and losses until the assets are sold or liabilities
are seled.
Foreign currency exchange rate uctuations
When an entity holds foreign currency such as US dollars, the value of the US
dollar cash is subject to changes in foreign exchange rates. To prepare the nancial
statements preparers must convert these monetary nancial assets and liabilities
to Canadian dollars. e annual uctuations that result from changes in exchange
rates are reported in the Statement of Remeasurement Gains and Losses until the
monetary assets or liabilities are used or seled.
Changes in the reported value of assets and liabilities due to fair value measurement or
changes in exchange rates are only included in the Statement of Remeasurement
4 The new standards are 1201 Financial Statement Presentation and Disclosure, 2601 Foreign Currency
Translation and 3450 Financial Instruments. All three accounting standards must be adopted
concurrently.
5 The new accounting standard for financial statement presentation and disclosure must be applied for
fiscal periods beginning on or after April 1, 2016. Entities that transitioned from the CICA Handbook to
the PSA Handbook (most government organizations) were required to apply the new standards for fiscal
periods beginning on or after April 1, 2012.
THE STATEMENT OF REMEASUREMENT
GAINS AND LOSSES
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Gains and Losses until the asset or liability is disposed of or seled. When this occurs,
previously reported unrealized gains and losses are transferred from accumulated
remeasurement gains and losses and the entire gain or loss (relative to cost) is
recognized in the statement of operations.
WHAT THE STATEMENT PRESENTS
is statement provides a reconciliation of the opening and closing remeasurement
gains and losses. To do this the statement is structured with four main sections:
1. e opening remeasurement gain or loss position;
2. Current year changes in the remeasurement gains or losses by type;
3. Gains or losses realized in the year and transferred to the statement of operations;
and
4. e ending remeasurement gain or loss position.
WHY ARE REMEASUREMENT GAINS
AND LOSSES NOT REPORTED IN THE
STATEMENT OF OPERATIONS?
Entities cannot anticipate with any certainty how the market values of assets or foreign
exchange rates will change. erefore, the statement of remeasurement gains and losses
was introduced to separately report the nancial impact of these unrealized uctuations
on the nancial position of the entity.
By excluding these changes from the statement of operations, the budget to actual
comparisons presented for accountability purposes in that statement continues to
reect the operations that the entity can traditionally plan for.
WILL ALL PUBLIC SECTOR ENTITIES
PREPARE THIS STATEMENT?
Unlike the other nancial statements explained in this document, this statement may not
be prepared by all entities. e statement mainly captures the nancial changes resulting
from the use of fair values and holding foreign currency monetary assets and liabilities.
An entity will only prepare the statement when it applies to their circumstances.
THE STATEMENT OF REMEASUREMENT
GAINS AND LOSSES
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PUBLIC SECTOR ENTITY
Statement of Remeasurement Gains and Losses
For the year ended March 31, 2014
2014 2013
Accumulated remeasurement gains
(losses) at the beginning of the year (47) 0
Unrealized gains (losses) aributable to:
Foreign exchange (35) -
Derivatives 130 (105)
Portfolio investments 54 108
Amounts reclassied to statement of operations
Portfolio investments 20 (50)
Net remeasurement gains (losses) for the year 169 (47)
Accumulated remeasurement gains (losses) at end of year 122 (47)
Exhibit 5: Sample Statement of Remeasurement Gains and Losses
Source: Adapted from the CPA Canada Public Sector Accounting Handbook
THE STATEMENT OF REMEASUREMENT
GAINS AND LOSSES
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POTENTIAL QUESTIONS TO ASK
WHEN REVIEWING THE FINANCIAL
STATEMENTS– AND HOW TO FIND
THE ANSWERS
1. Why do the entity’s published financial
statements not include a Statement of
Remeasurement Gains and Losses?
Entities generally only include this statement when there are remeasurement gains
or losses to report. erefore, the inclusion of this statement will depend on the
circumstance of the entity. In addition, governments and some government organizations
are not required to adopt the accounting standards that require the reporting of
remeasurement gains and losses until scal periods beginning on or aer April 1, 2016.
e accounting policy note should explain if these standards have been applied.
When portfolio investments are valued using cost, any changes to the fair value of
the investments will be recorded only when the investment is sold or if there is a
permanent impairment in value. To assist readers with understanding the value of an
entity’s investments when the cost basis is used, the notes provide information on the
market value of specic investments.
2. What is the potential exposure of the entity to
future fair value and foreign currency exchange
rate changes?
e notes to the nancial statements should provide you with information to
determine which nancial assets and liabilities result in remeasurement gains and losses
along with the potential impact to nancial results from changes in risk factors.
For example, an entity that issues debt in US dollars is impacted by foreign currency
risk. e value of the liability increases or decreases as exchange rates change (this
change is reported in the Statement of Remeasurement Gains and Losses). e notes
should also provide you with information on the organization’s exposure to this risk
and how it is being managed.
THE STATEMENT OF REMEASUREMENT
GAINS AND LOSSES
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The Statement of Cash Flow explains the change in cash and
cash equivalents from the prior year and provides readers with important information
about how the entity generated cash to meet its requirements. Exhibit 6 is a sample
Statement of Cash Flow for your reference as you read this section.
FOUR CATEGORIES OF CASH FLOW
e layout of the statement is designed to show how the entity nanced its activities
during the current and prior year. e statement presents cash ow in four categories.
How the cash is generated and used is shown separately in each case:
1. Operating activities: Cash ow from operating activities demonstrates the extent
to which an entity generates sucient cash ow from revenues to cover the cost of
programs, purchase capital assets and repay debts.
2. Capital activities: is category of activities, unique to the public sector, reects
how the public and private sectors use tangible capital assets dierently. e public
sector normally purchases capital assets to provide services.
Cash ow related to purchasing capital assets, therefore, reects the decision to use
resources to acquire future service potential. Businesses acquire tangible capital
assets to generate future cash ow from the sale of goods and services. erefore,
businesses include transactions related to capital assets within investing activities.
3. Investing activities: Cash ow from investing activities relates to the purchase and
disposal of investments similar to a business. is category includes investments such as
marketable securities and investments in government-controlled business enterprises.
4. Financing activities: Cash ow from nancing activities includes the issuance
and payment of debt obligations by the entity. is category also includes cash
transactions associated with tangible capital assets acquired through a capital lease.
DIRECT OR INDIRECT METHOD OF
PREPAR ATION
e statement of cash ows can be prepared using either the direct or indirect method.
e indirect method is more commonly used in practice, however, the PSA Handbook
describes the direct method as the preferred method.
e dierence between the two methods relates to the presentation of operating
activity information. e indirect method is a reconciliation that adjusts the annual
surplus or decit for non-cash items such as tangible capital asset amortization. e
direct method provides cash inows and outows for each major source of operating
activities such as cash inows from taxation and cash outows from employee
compensation. e additional information provided by the direct method is useful for
estimating future cash ows from operating activities. is information is not available
when the statement is prepared using the indirect method.
Cash equivalents
Short-term, highly liquid
investments that are
readily convertible to
known cash amounts.
Unique Public Sector
Cash Flow Category
Capital activities for
cash ows associated
with investments in non-
nancial assets
THE STATEMENT OF CASH FLOW
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PUBLIC SECTOR ENTITY
Statement of Cash Flow
For the year ended March 31, 2014
2014 2013
OPERATING TRANSACTIONS
Cash received from:
Ta xes 8,239 7,267
Transfers 1,541 1,943
Non-renewable resources 2 ,118 3,808
Fees, permites, licenses and nes 1,581 1,291
Investments 1,564 1,675
Other 3,201 2,706
18,24 4 18,690
Cash paid for:
Salaries, wages, employment 1,345 1,276
Material and supplies 3,192 2,936
Grants and other transfers 12,074 10,290
Financing charge 282 733
Travel and communication 108 102
17,0 01 15,337
Cash provided by operating transactions 1,243 3,353
CAPITAL TRANSACTIONS
Proceeds on sale of tangible capital assets 46 72
Cash used to acquire tangible (294) (250)
Cash applied to capital transactions (248) (178)
INVESTING TRANSACTIONS
Proceeds from disposals and redemptions of portfolio investments 262 2,997
Repayment of loans and advances 768 1,129
Portolio investments (594) (4,089)
Loans and advances (290) (280)
Other (17) (15)
Cash provided by (applied to) investing 129 (258)
FINANCING TRANSACTIONS
Public debt issues 13,970 3,694
Public debt retirement (14,759) (6,175)
Cash applied to nancing transactions (789) (2,481)
Increase in cash and cash equivalents 335 436
Cash and cash equivalents at beginning of year 1,573 1,137
Cash and cash equivalents at end of year 1,908 1,573
Exhibit 6: Sample Statement of Cash Flow (Direct Method)
Source: Adapted from the CPA Canada Public Sector Accounting Handbook
THE STATEMENT OF CASH FLOW
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POTENTIAL QUESTIONS TO ASK
WHEN REVIEWING A STATEMENT OF
CASH FLOW – AND HOW TO FIND
THE ANSWERS
1. Did the entity use the direct or indirect method
to prepare the Statement of Cash Flow?
If the entity used the direct method, the reader will have additional information with
which to compare the amounts recognized in the Statement of Operations with the
related cash selement amounts.
2. Did the entity generate sufficient cash flow from
operations to cover the cash requirements during
the period?
Public sector entities use the cash generated from operations to: fund the acquisition
of tangible capital assets; purchase investments; and repay debt nancing. Insucient
cash ow from operating activities may require the entity to sell investments or obtain
additional debt nancing. Readers should assess the extent to which the entity is reliant
on obtaining cash ow from non-operating sources to meet cash requirements.
3. Does the entity have excess cash that could be
used to pay down debt?
Entities need to manage their nancial resources to ensure that sucient cash is on
hand to pay liabilities as they come due. As part of good cash ow management,
entities should therefore look for ways to use excess cash resources to pay down debts
to reduce interest costs or generate additional investment returns.
THE STATEMENT OF CASH FLOW
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As discussed for the Statement of Financial Position, the net debt or
net nancial asset position of a public sector entity is a key indicator of its nancial
position. e Statement of Change in Net Debt reconciles the change in net debt for
the current and the prior year. is information helps readers understand why the net
debt position of the entity changed. A sample Statement of Change in Net Debt is
provided in Exhibit 7.
EXPENDITURES
In the public sector, the accounting standards distinguish between expenses and
expenditures. Expenses are the cost of goods and services consumed during the period.
Expenditures are the costs of goods and services acquired during the period.
e Statement of Change in Net Debt provides information on the extent to which the
expenditures of the scal period were met by the revenues recognized in the Statement
of Operations.
6
An increase in net debt means that more future revenues will be needed
to pay for past transactions and events.
RECONCILIATION OF THE CHANGE IN
NET DEBT
To explain how the expenditures of the period were met by revenues, the statement
reconciles the annual operating surplus or decit shown in the Statement of
Operations (which includes revenues and expenses) to the change in net debt.
e common items that explain the dierence between the annual surplus or decit
and the change in net debt are:
the acquisition and disposal of tangible capital assets;
the current year amortization expense for tangible capital assets (expense for
current year consumption); and
the acquisition and disposal of other non-nancial assets.
FINANCIAL ACCOUNTABILITY –
BUDGET TO ACTUAL RESULTS
As the Statement of Operations does, the Statement of Change in Net Debt also
compares the current period results with the entity’s original spending plans. is
presentation provides key accountability information about the entity’s performance in
achieving its spending objectives.
e incremental budget information in the statement generally relates to the planned
spending to acquire tangible capital assets and other non-nancial assets.
6 For entities that have adopted PS 1201, the statement also shows the extent to which expenditures were
met by revenues recognized in the Statement of Remeasurement Gains and Losses.
THE STATEMENT OF CHANGE IN NET DEBT
(FINANCIAL ASSETS)
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PUBLIC SECTOR ENTITY
Statement of Change in Net Debt
For the year ended March 31, 2014
Budget
2014
Actual
2014
Actual
2013
Operating Surplus 28 1,376 2,551
Acquisition of tangible capital assets (294) (294) (250)
Amortization of tangible capital assets 226 226 230
(Gain) loss on sale of tangible capital assets - (5) (19)
Proceeds on sale of tangible capital assets - 46 72
Write-downs of tangible capital assets - 24 44
(68) (3) 77
Acquisition of supplies inventory - - (324)
Acquisition of prepaid expenses - (30) (20)
Use of supplies inventory - 110 102
Use of prepaid expenses - 20 -
- 100 (242)
(40) 1,473 2,386
Net remeasurement gains (losses) 169 (47)
(Increase) decrease in net debt (40) 1,642 2,339
Net debt at beginning of year (8,870) (8,870) (11,209)
Net debt at end of year (8,910) (7,228) (8,870)
Exhibit 7: Sample Statement of Change in Net Debt
Source: Adapted from the CPA Canada Public Sector Accounting Handbook
THE STATEMENT OF CHANGE IN NET DEBT
(FINANCIAL ASSETS)
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POTENTIAL QUESTIONS TO ASK
WHEN REVIEWING A STATEMENT OF
CHANGE IN NET DEBT – AND HOW
TO FIND THE ANSWERS
1. How did actual spending on capital assets
compare with the original plan?
As the Statement of Operations does, the Statement of Change in Net Debt also
provides accountability information on how actual results compared with previously
communicated plans. Readers should assess whether actual spending on capital assets
exceeded, met, or fell below planned acquisitions.
Readers should also seek additional information on the entity’s investing decisions in
the Financial Statement Discussion and Analysis (FSD&A), including explanations for
signicant variances between planned and actual results.
2. How were expenditures for the current and
prior period financed?
e Statement of Change in Net Debt highlights how entity expenditures were
nanced. Readers should assess whether the entity raised sucient operating revenues
to nance reported expenditures.
Net debt increases when insucient operating revenues are raised to nance
expenditures. erefore, when operating revenues are insucient to nance
expenditures, readers should assess what expenditures the entity was required to
nance with increased liabilities.
Entities commonly nance the purchase of long-lived tangible capital assets with debt.
When the purchase of tangible capital assets exceeds the current year consumption of
tangible capital assets in operations, the net debt of the entity will increase. erefore,
net debt may increase signicantly in periods when the entity makes signicant
investments in tangible capital assets. And the reverse can occur: net debt may decrease
signicantly in periods when an entity makes limited tangible capital asset investments.
THE STATEMENT OF CHANGE IN NET DEBT
(FINANCIAL ASSETS)
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The notes and schedules are an integral part of the nancial statements
and form the majority of pages in a set of nancial statements. e note disclosures must be
read to fully understanding the results presented in the nancial statements.
Note disclosures provide you with a variety of information on the entity’s current and
future nancial performance including:
the basis on which the nancial statements were prepared – what is recognized,
when it is recognized and what amount is recognized;
expanded details on items recognized in the nancial statements – the nancial
statements present highly summarized information. e notes provide more
detailed information of what is included in the nancial statements;
items not recognized in the nancial statements – what is not recognized can be as
important as what is recognized when assessing the nancial results; and
details for future transactions of the entity – the notes provide information on
future liabilities and transactions of the entity that result from existing transactions.
While all disclosures required by the Public Sector Accounting Handbook are essential for
fairly presenting an entity’s nancial results, specic aention should be paid to those
summarized in the table below:
Note disclosure Why the disclosure is important
e reporting entity e nancial statements should include the nancial position and results of all
activities that the entity controls.
Governments and government organizations may establish separate legal entities
to administer specic programs or policies. e nancial position and results of
all controlled entities should be consolidated.
7
e notes to the nancial statements describe all entities consolidated and how
the results are consolidated.
e schedules to the nancial statements provide summarized nancial
statements for all government business enterprises.
Signicant accounting policies All nancial reporting frameworks require preparers to exercise professional
judgement when applying accounting principles.
e signicant accounting policies describe the recognition and measurement
policies applied when preparing the nancial statements.
Where the accounting standards provide preparers with options, the signicant
accounting policies should describe which option the entity selected for
preparing the nancial statements.
7 Government business enterprises and government business partnerships are consolidated using the
modified equity method. The accounting policies for these entities are not conformed to those of the
parent organization for consolidation purposes and the financial results are not consolidated on a line-by-
line basis.
FINANCIAL STATEMENT NOTE DISCLOSURES
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Note disclosure Why the disclosure is important
Estimates and measurement
uncertainty
To produce timely information for readers, preparers must make estimates for
some transactions that will sele at future dates. Preparers must use all available
information at the date of the nancial statements to support their estimates.
When it is reasonably possible that an estimate recorded could change by a
material amount within the next year, management should disclose information
for the reader to understand the nature of the uncertainty and the range of
amounts. Common disclosures for measurement uncertainty relate to taxation
revenues, and pension benet liabilities.
Alternative presentation of expenses e Statement of Operations presents expenses by function or program, such
as health or education services. e notes include supplementary reporting on
the resources used to deliver those services (e.g., employee salaries and benets,
transfers to individuals or organizations, building rent, maintenance expenses).
is disclosure provides critical information about how an entity delivers
services.
Subsequent events e nancial statements present the nancial position and results at a specic
point in time. However, transactions or events aer that date but before the
release of the nancial statements can change the reported performance or
signicantly aect future performance results.
e notes to the nancial statements should disclose information on material
subsequent events so that readers can assess the impact of those events on
reported performance or the potential future performance of the entity.
Contractual obligations Contractual obligations are future liabilities that will be recorded when the terms
of agreements or contracts in place at the nancial statement date are met.
Contractual obligation note disclosure provides readers with key information
about an entity’s future nancial exibility for program delivery.
Contingencies Contingencies exist when it is unclear whether the entity has an obligation to an
external party or is entitled to receive assets. e uncertainty is resolved when a
future event conrms the obligation or entitlement.
A common example of a contingent liability is a lawsuit against an entity.
Whether a liability exists is conrmed by a court ruling on the external party
claim.
Contingent liabilities may or may not be recorded in the nancial statements.
Contingent assets are not recorded in the nancial statements until the
conrming event occurs. e notes to the nancial statements provide
information explaining the impact of contingencies on the reported amounts and
the potential impact of contingencies to future nancial performance.
FINANCIAL STATEMENT NOTE DISCLOSURES
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Note disclosure Why the disclosure is important
Accounting for pension plans and other
employee future benets
Accounting for employee pension plans and other employee future benets is
a complex area of accounting in both the public and private sector. Liabilities
associated with these plans are not always recognized in an entity’s nancial
statements when applying PSA standards. When liabilities are recognized, the
amounts recognized are usually complex estimates prepared in consultation with
actuaries.
e notes provide extensive disclosure on the accounting for these benets.
ese disclosures must be read carefully to fully understand how the accounting
for these benets impacts the nancial results presented.
Debt Governments frequently nance a portion of their expenditures with debt. e
notes provide extensive information on the terms of an entity’s borrowings and
the nancial risks associated with those borrowings. Common information
contained in the notes includes:
e total principal borrowed and the repayment timing;
e interest expense associated with the borrowings;
Funds the entity is required to set aside under the borrowing terms to nance
future debt principal repayments; and
Assets the entity pledged as collateral for the amounts borrowed.
Additional information on nancial risks associated with debt will also be
included in the notes.
Financial instrument risk disclosures
8
Financial instrument disclosures required by the accounting standards provide
readers with an understanding of the nature and extent of risks that arise from
nancial instruments held by a public sector entity supplemented with how the
entity manages those risks. Common risks from nancial instruments include
credit risk, liquidity risk, interest rate risk, price risk and foreign currency risk.
e accounting standards also allow for these disclosures to be included in the
unaudited nancial statement discussion and analysis (FSD&A) aached to the
nancial statements instead of the notes.
8 Government and some government organizations do not have to adopt the accounting standards requiring risk disclosures until fiscal periods beginning on or after
April 1, 2016.
FINANCIAL STATEMENT NOTE DISCLOSURES
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POTENTIAL QUESTIONS TO ASK
WHEN REVIEWING NOTES TO
FINANCIAL STATEMENTS – AND HOW
TO FIND THE ANSWERS IN THEM
1. What is the entity’s potential exposure to
contingent liabilities?
Entities record contingent liabilities when it is likely that a future event will conrm
that a liability existed. However, in many cases entities are unable to determine what
the likely outcome will be. When the outcome cannot be determined there are no
amounts recorded in the nancial statements. As a result of this uncertainty, the notes
provide readers with information on contingencies to broadly understand how the
resolution could impact the nancial results of the entity.
2. What future goods or services has the entity
secured through contractual arrangements?
It is common to secure the purchase of goods or service in advance through leasing or
other agreements. e notes to the nancial statements provide details on the obligations
the entity will be required to pay when suppliers meet the terms of the agreements.
is information can be a starting point for discussions about the nancial
management of the entity. Considerations would include: is the entity securing the
right resources in advance? Is the entity securing the right amounts and an appropriate
price, and how do the contractual obligations impact the exibility of the entity to
respond to potential changes in nancial circumstances?
3. Does the entity participate in a multi-employer
defined benefit plans such as a pension or long
term disability plan?
Governments frequently establish employee benet plans that multiple government
organizations participate in. When the benet plan liabilities are not segregated by
entity the statement of nancial position does not report their share of the liabilities (or
assets) of the plan. e contributions employers make to these plans are recorded as an
expense in the statement of operations.
As a result of the above, the notes provide information on the overall funded position
of the plan (assets available for benets and accrued benet obligations). is
information can be an indicator of potential increases or decreases to contribution rates
that would impact the entity’s future expenses.
FINANCIAL STATEMENT NOTE DISCLOSURES
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Audited financial statements prepared in accordance with
public sector accounting standards are the most common form of public sector
nancial accountability in Canada. However, nancial statements alone do not provide
readers with all the information necessary to assess an entity’s nancial performance.
is guide has presented some common questions a reader should keep in mind
when reviewing a set of nancial statements. However, fully answering many of these
questions requires additional information from an entity’s management.
A common method used to disclose such information to readers is to supplement the
audited nancial statements with a nancial statement discussion and analysis (FSD&A)
from management. is supplementary nancial reporting gives the entity’s management
a means of explaining the nancial statement results to all readers in a consistent manner.
e FSD&A aached to the nancial statements is unaudited.
Readers of public sector nancial statements should expect that the nancial reporting of
the entity include a FSD&A to supplement the audited nancial statements.
GUIDANCE FOR PREPARING A
FINANCIAL STATEMENT DISCUSSION
AND ANALYSIS
As part of its mandate, PSAB developed a statement of recommended practice
9
to
assist public sector entities with the development of FSD&A reporting. e statement
of recommended practice provides a general framework for determining the most
relevant information to report. A high level summary of the guidance is provided in
Exhibit 8. is exhibit should assist legislators and councillors, board members and
other stakeholders with understanding what management should be reporting to
readers when explaining the nancial statements.
e statement of recommended practice provides management with more detailed
guidance for specic nancial statement elements.
9 Statement of recommended practice SORP – 1 financial statement discussion and analysis
THE IMPORTANCE OF THE FINANCIAL
STATEMENT DISCUSSION AND ANALYSIS
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Financial report components
e entity’s nancial report should include an FSD&A along with the
audited nancial statements. e FSD&A should be cross-referenced to the
audited nancial statements.
e entity should include a statement acknowledging its responsibility for
preparing the FSD&A.
Qualitative characteristics
e FSD&A is meant to enhance readers’ understanding of the entity’s nancial
position and changes in nancial position. To do this, the report must have the
following qualitative characteristics:
information must be presented in a way that is understandable to a general
audience;
information presented must be relevant for decision-making or assessing
accountability;
information presented must be consistent with the nancial results
contained in the audited nancial statements; and
the current and historical information presented throughout the report must
be prepared on the same basis to enable comparability.
Key components of a FSD&A
e FSD&A should provide the following supplementary reporting to enhance
readers’ understanding of the nancial statements:
a summary of the signicant events aecting the nancial statements;
analysis that explains the reasons for signicant variances between planned
and current year actual results;
analysis that explains the reasons for signicant variances between current
and prior year results;
analysis of signicant trends (multi-year analysis) for specic nancial
statement elements; and
information on known signicant risks to, and uncertainties associated with,
the entity’s nancial position and changes to nancial position, along with a
discussion of the entity’s approach to managing the identied risks.
THE IMPORTANCE OF THE FINANCIAL
STATEMENT DISCUSSION AND ANALYSIS
Exhibit 8: Summary of SORP 1: Financial statement discussion and analysis
recommended practice
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An entity’s financial statements contain management’s
representations of the entity’s nancial performance, in accordance with Canadian
public sector accounting standards. For those nancial statements to be relevant, the
information must be reliable. A nancial statement audit by an independent auditor
provides readers with assurance on whether the nancial statements prepared by
management are free of material misstatement.
e auditor provides this assurance by expressing an opinion on whether or not the
nancial statements have been prepared in accordance with Canadian public sector
accounting standards. A sample of an unqualied independent auditor’s report is
provided in Exhibit 9.
INFORMATION COMMUNICATED IN
AN INDEPENDENT AUDITOR’S REPORT
e independent auditor’s report on a set of nancial statements explains:
the scope of the audit – Every nancial statement opinion identies the specic
nancial statements and other information subject to audit. e auditor does not
provide assurance on the FSD&A that accompanies the nancial statements.
the responsibilities of management and the auditor – e auditor’s report:
• identies that the nancial statements are the responsibility of management and
the nancial reporting framework management used to prepare the nancial
statements;
• identies the standards followed by the auditor to provide the opinion, and gives a
high-level overview of how the audit was conducted; and
• describes the level of assurance provided by the auditor (audits provide a high level
of assurance that the nancial statements are free of material misstatement – an
error or omission that would inuence or change the decisions of readers when
using the information).
e auditor’s opinion – e auditor provides his or her opinion on the nancial
statements based on the results of the audit. When the auditor does not issue an
unqualied opinion, the report will explain the reasons within the report. e types
of opinions are summarized below.
THE IMPORTANCE OF THE INDEPENDENT
AUDITOR’S REPORT ON THE STATEMENTS
Auditor General of British Columbia | June 2014
Understanding Canadian Public Sector Financial Statements
35
“Emphasis of maer” or “other maer” paragraphs – e use of these paragraphs is
rare. However, when auditors use them, it is to report signicant information that,
in the auditors’ opinion, is fundamental to the reader’s understanding of the
nancial statements. When the auditor includes these paragraphs, it is critical that
readers understand what the auditor is conveying.
Other legal and regulatory requirements – It is common in the public sector that
auditors provide opinions on legal or regulatory requirements such as compliance
with nancial legislation. e auditor’s report presents these requirements
separately from the auditor’s opinion on the nancial statements.
QUESTIONS TO ASK WHEN REVIEWING
AN INDEPENDENT AUDITOR’S REPORT
1. Were the financial statements prepared in accordance
with Canadian public sector accounting standards?
Readers should expect most public sector entities to prepare general purpose nancial
statements in accordance with Canadian public sector accounting standards.
11
However,
governments may direct organizations through legislation to prepare their nancial
statements using an accounting framework other than a framework for general purpose
nancial statements. When this occurs, the independent auditor’s report will bring this to
the reader’s aention through an emphasis of maer paragraph. e emphasis of maer
directs the reader to the note disclosure that describes the dierence between the reporting
framework used and generally accepted nancial reporting frameworks in Canada.
Furthermore, the entity’s nancial statements will not be comparable to other nancial
statements prepared in accordance with Canadian public sector accounting standards.
10 The audit opinion will not use the phrase “present fairly” when the financial statements are prepared
in accordance with a legislative accounting framework that differs from generally accepted accounting
frameworks for preparing general purpose financial statements.
11 When applying the PSA Handbook, government organizations may elect to use International Financial
Reporting Standards (IFRS) as the financial reporting framework for preparing financial statements.
Opinion type Opinion paragraphs
Unqualied opinion e report includes one opinion section:
Opinion
e nancial statements present fairly
10
, in all material
respects, the nancial position and results of the entity.
Qualied opinion e report includes two opinion sections:
Basis for qualied opinion
Qualied Opinion
In the auditor’s opinion, the nancial statements contain
material misstatements or omissions. e dierent
opinions reect the pervasiveness of the misstatement on
the nancial statements.
Financial statement readers should regard the statements
with caution when the auditor has not issued an
unqualied opinion.
Adverse opinion e report includes two opinion sections:
Basis for adverse opinion
Adverse opinion
Disclaimer of opinion e report includes two opinion sections:
Basis of disclaimer of opinion
Disclaimer of opinion
THE IMPORTANCE OF THE INDEPENDENT
AUDITOR’S REPORT ON THE STATEMENTS
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Understanding Canadian Public Sector Financial Statements
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2. Did the independent auditor issue an unqualified
opinion on the financial statements?
Readers should expect the nancial statements prepared by management to be free
of material error and to fairly present the nancial position and performance of the
entity in accordance with Canadian public sector accounting standards. An unqualied
opinion provides readers with this assurance.
All material errors identied during the external audit process should be corrected by
management prior to the issuance of the nancial statements. A material error is an
omission or error that in the opinion of the auditor would impact a reader’s decision
when using the nancial statements.
When the auditor issues a modied (qualied, adverse or disclaimer) opinion the
reader needs to consider the information contained in the paragraphs explaining the
opinion when using the nancial statements.
THE IMPORTANCE OF THE INDEPENDENT
AUDITOR’S REPORT ON THE STATEMENTS
Auditor General of British Columbia | June 2014
Understanding Canadian Public Sector Financial Statements
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Independent Auditor’s Report
To the Board of [Public Sector Entity]
Report on the Financial Statements
We have audited the accompanying nancial statements of [Public Sector Entity], which comprise the Statement of
Financial Position as at December 31, 20XX, and the Statements of Operations, Remeasurement Gains and Losses,
Cash Flow and Change in Net Debt for the year then ended, and a summary of signicant accounting policies and other
explanatory information.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these nancial statements in accordance with
Canadian public sector accounting standards and for such internal control as management determines is necessary to
enable the preparation of nancial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these nancial statements based on our audit. We conducted our audit in
accordance with Canadian generally accepted auditing standards. ose standards require that we comply with ethical
requirements and plan and perform the audit to obtain reasonable assurance about whether the nancial statements are free
from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the nancial
statements. e procedures selected depend on the auditor’s judgment, including the assessment of the risks of material
misstatement of the nancial statements, whether due to fraud or error. In making those risk assessments, the auditor
considers internal control relevant to the entity’s preparation and fair presentation of the nancial statements in order to
design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
eectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies
used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of
the nancial statements.
We believe that the audit evidence we have obtained is sucient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the nancial statements present fairly, in all material respects, the nancial position of [Public Sector Entity]
as at December 31, 20XX, and its nancial performance and its cash ows for the year then ended in accordance with
Canadian public sector accounting standards.
Report on Other Legal and Regulatory Requirements
[e form and content of this section of the auditor’s report will vary depending on the nature of the auditor’s other
reporting responsibilities.]
Auditor’s Signature
Date of Auditor’s Report
[Auditor’s address]
Source: Adapted from the CPA Canada Handbook - Assurance
Exhibit 9: Sample unqualified independent auditor’s report
THE IMPORTANCE OF THE INDEPENDENT
AUDITOR’S REPORT ON THE STATEMENTS
Auditor General of British Columbia | June 2014
Understanding Canadian Public Sector Financial Statements
38
APPENDIX A: WHY THE PUBLIC SECTOR HAS
DIFFERENT ACCOUNTING STANDARDS THAN
THE PRIVATE SECTOR
Governments and government organizations exist
for dierent purposes than private businesses do. In general:
Governments and government organizations raise revenues to deliver services on
behalf of the citizens they represent.
Businesses exist to generate value for shareholders or owners by earning a prot.
e unique characteristics of public sector entities are summarized in Exhibit A1
(le column). e implications of these characteristics for nancial reporting and
accounting standards are summarized in the table’s right column.
12
Because nancial statements alone can’t fully meet all nancial accountability needs,
various other means are also oen used to demonstrate accountability. ese are noted
in the table’s right column as well.
Together these characteristics explain why public sector entities prepare their nancial
reporting using an accounting framework, standards and guidance designed specically
for the public sector.
12 Most of these public sector characteristics apply to the federal and provincial governments. The
characteristics that apply to local governments and government organizations vary by the nature of the
entity.
e special case of
business-like
government entities
Some government
organizations are set up
with unique mandates that
allow them to operate like a
business. Examples include
tolling authorities, utility
authorities, and gaming
corporations. Because they
were set up to be self-
sustaining, they have some
characteristics of a business.
is makes the public sector
accounting standards less
appropriate for measuring
performance.
e Public Sector Accounting
Handbook directs these types
of organizations to prepare
their nancial statements
using world-wide private
sector standards called
International Financial
Reporting Standards
(IFRS). Other government
organizations may also elect
to prepare their nancial
statements using IFRS
when the standards are
more appropriate for their
operating circumstances.
Auditor General of British Columbia | June 2014
Understanding Canadian Public Sector Financial Statements
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13 The majority of public sector characteristics will apply to the federal and provincial governments. The characteristics applicable to local governments and government
organizations will depend on the nature of the entity.
14 PSAS developed four statements of recommended practice (SORP) outlining information that should be reported in addition to the financial statements in order to
provide a complete picture of performance. One of these SORPs provides guidance on preparing a financial statement discussion and analysis and is discussed earlier in
this document.
Characteristic
13
Effect of characteristic on financial reporting by public sector entities
Accountability
Public sector entities are held to a higher standard of accountability than
private organizations are.
ey use funds raised from taxpayers to provide public services, and the
public expects the use of those funds to be transparent. e stakeholder
community for governments and their organizations is therefore
signicantly broader than for businesses.
Financial statements must be designed to meet the information
needs of a broad range of readers.
Public sector entities need to supplement their nancial statements
with other performance information to meet all accountability
information needs of stakeholders
14
.
Additional guidance is provided to public sector entities for the
development of supplemental nancial and performance reporting.
Entity objectives
Public sector entities provide services to the public and redistribute wealth
based on government policies.
Businesses, however, generate wealth and prots for shareholders through
the sale of goods and services.
Readers need information about:
e cost of providing current services; and
e resources available to provide future services.
Budgets
Public sector entities communicate public policies through approved
annual budgets for revenues, expenses, and nancing requirements.
Readers need accountability information to assess how actual
nancial performance compares with communicated plans.
Financial statements must therefore include a comparison of
budgeted with actual results.
Revenue sources
Governments generate revenues mainly through taxation. Payment of
taxes is mandatory. Taxpayers therefore demand that governments and
the organizations to which they distribute the funds spend those revenues
wisely and be transparent about their use.
Because the taxes that citizens pay are not usually directly linked to
the goods or services they receive, nancial statements must clearly
account for how government has used the funds raised through
taxation.
Non-exchange transactions
Public sector entities require taxpayers to provide resources without direct
entitlement to specic services, and distribute resources without any
expectation of receiving goods or services in return.
Businesses, however, provide goods and services to customers in exchange
for agreed amounts. us, while the transactions of businesses are
generally on an exchange basis, a large portion of public sector transactions
are one sided or occur on a non-exchange basis.
Public sector accounting standards address a range of non-exchange
transactions that accounting standards for the private sector do not
specically address.
Tangible capital assets
Public sector entities acquire a variety of assets – such as schools, hospitals,
roads and other infrastructure – to deliver services. ese “tangible capital
assets” represent future potential to provide services.
Businesses, on the other hand, use tangible capital assets to generate
revenues.
In public sector nancial reporting, nancial assets (like cash and
investments) are shown separately from tangible capital assets
because they are for separate purposes.
Operation in a non-competitive environment
Public sector entities generally do not provide goods and services in a
competitive environment. ey and their organizations must therefore
demonstrate to the public their eective and ecient use and stewardship
of the resources entrusted to them.
Public sector entities like the private sector cannot show they are
ecient and eective solely through published nancial statements.
Additional accountability reporting is needed. PSAB issued SORP
2 – Public performance reporting to provide entities with guidance
in this area.
Source: Adapted from the CPA Canada Public Sector Accounting Handbook
Exhibit A1: Public sector characteristics, and the effect of each on financial reporting
APPENDIX A: WHY THE PUBLIC SECTOR HAS
DIFFERENT ACCOUNTING STANDARDS THAN
THE PRIVATE SECTOR
Auditor General of British Columbia | June 2014
Understanding Canadian Public Sector Financial Statements
40
APPENDIX B: HOW THE STANDARD-SETTING
PROCESS IN CANADA RESULTS IN HIGH-QUALITY
PUBLIC SECTOR ACCOUNTING STANDARDS
WHO IS RESPONSIBLE FOR SETTING
ACCOUNTING STANDARDS IN CANADA?
The Accounting Standards Oversight Council established
by CPA Canada oversees the development of accounting standards for nancial reporting
in Canada. Responsibility for determining accounting standards is divided between two
boards. e Public Sector Accounting Board (PSAB) sets accounting standards for public
sector entities. e Accounting Standards Board sets accounting standards for private
sector and all other entities. is segregation reects the diering accountabilities and
measurement of nancial performance between the public and private sectors.
How the standard-setting process results in
high-quality public sector accounting standards?
To ensure the nancial reporting standards and guidance developed result in high-
quality information for accountability and decision-making purposes, PSAB follows a
rigorous due diligence process. Key elements include:
An open and transparent process – General acceptance of an accounting framework
requires users and preparers to agree on the overall objectives that drive accounting
standards and other nancial reporting guidance. PSAB members represent
users, preparers and auditors from all levels of government. PSAB’s due process
invites comments from all interested parties (users, preparers and auditors) at all
development stages. erefore, the standard-seing process considers all expressed
views on the overall framework and resulting standards and guidance.
Consistent with being open to all stakeholder groups, PSAB is transparent about
the standard-seing process and publishes key information on the process as it
progresses. is information is publicly available.
Consultation occurs at multiple points – e standard-seing process follows a set
development process. PSAB receives and considers comments from stakeholders at
each stage of the process. is ensures stakeholders have multiple opportunities to
provide feedback on the direction of new or revised standards as they are developed.
International standard seing developments considered – PSAB participates in the
international standard-seing process and considers developments in international
public sector standard-seing when developing Canadian standards.
e intended result of PSAB’s standard-seing process is a nancial framework,
standards and guidance that all public sector stakeholders agree produces relevant
nancial information for accountability and decision-making purposes. When entities
prepare their nancial statements using common accounting standards, users can also
compare the nancial performance of similar public sector entities, such as provinces
or municipal governments.
PSAB Mission Statement
e Public Sector
Accounting Board (PSAB)
serves the public interest
by establishing standards
and other guidance for
nancial reporting by
all Canadian entities
in the public sector
and by contributing
to the development of
internationally accepted
public sector nancial
reporting standards. e
mission of the PSAB
shall be to contribute
to supporting informed
decision-making and
accountability by
maintaining a framework
that provides a basis for
high-quality information
about organizational
performance reported by
Canadian public sector
entities.
Auditor General of British Columbia | June 2014
Understanding Canadian Public Sector Financial Statements
41
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Victoria, British Columbia
V8V 1X4
Office Hours:
Monday to Friday
8:30 am – 4:30 pm
Telephone: 250-419-6100
Toll free through Enquiry BC at: 1-800-663-7867
In Vancouver dial 604-660-2421
Fax: 250-387-1230
Email: bcauditor@bcauditor.com
Website:
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oce: www.bcauditor.com
Reproducing:
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