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1981 Report of the Auditor General of Canada

1981 Report

Appendix D—Opinion and Observations by the Auditor General on the Financial Statements of the Government of Canada

SECTION 2

PUBLIC ACCOUNTS 1980-81

Audited Financial Statements of the Government of Canada

CONTENTS

Statement of transactions

Statement of revenue and expenditure

Statement of assets and liabilities

Statement of use of appropriations

Notes to the financial statements of the Government of Canada

Opinion of the Auditor General on the financial statements of the Government of Canada

PREFACE TO THE AUDITED FINANCIAL STATEMENTS OF THE GOVERNMENT OF CANADA

The four financial statements in this section, together with the accompanying notes, are presented for audit in compliance with Section 55 of the Financial Administration Act. These statements form the basis of the Government's accounting for the management of the financial authorities granted by Parliament. Other sections in this volume, together with Volumes II and III of the Public Accounts, are designed to provide information supporting the financial statements.

The first financial statement is the Statement of Transactions, which summarizes all transactions of the Government, as defined in Note 1 (ii), and shows how the financial requirements were met, and the effect of all transactions on the cash balance. The financial transactions are classified into four main categories: budgetary, non-budgetary, foreign exchange and unmatured debt.

The first category, budgetary transactions, consists of all the transactions which enter into the calculation of the annual surplus or deficit of the Government, and includes the receipts from tax and non-tax revenue together with the expenditures authorized by Parliament. Revenue is recognized only when received and does not include amounts due but not collected. Budgetary expenditure, however, is recorded largely on the accrual basis and includes charges for work performed, goods received, services rendered, transfer payments made, amortization of the actuarial deficiencies of the three main superannuation accounts, a provision for estimated losses on realization of recorded assets and accruals for interest on unmatured debt. Fixed assets, which include land, buildings, works and equipment, are not capitalized but are charged to budgetary expenditure at the time of acquisition or construction. Budgetary expenditure does not include amounts payable or accrued at the year end, for contributions paid from statutory appropriations, employee termination benefits, unpaid annual vacation entitlements and the indexing of pensions.

The second category, non-budgetary transactions, includes loans, investments and advances made by the Government, the Government's liability to outside parties from its role of administrator of certain public monies received or collected for special purposes, and other liabilities recorded as a result of the budgetary accruals mentioned above. These transactions account for the change in the financial claims due to or by the Government, in accordance with the accounting policies referred to in Note 1 to the financial statements.

The third category, foreign exchange transactions, reflects transactions with the Exchange Fund Account, required to protect the external value of the Canadian dollar, together with an accounting of the net position of the Government with respect to the International Monetary Fund. Foreign exchange transactions also include unmatured debt payable in foreign currencies.

The fourth category, unmatured debt transactions, represents the extent to which financial requirements have been met through the increase in unmatured debt, that is the net changes in the amounts owing for such debt instruments as marketable bonds, Canada savings bonds and Treasury bills. Unmatured debt transactions exclude unmatured debt payable in foreign currencies.

The second statement is the Statement of Revenue and Expenditure. This statement gives a more detailed accounting of the budgetary transactions summarized in the Statement of Transactions. The annual surplus or deficit represents the difference between the expenditures and the revenues of the year in accordance with the accounting policies previously described.

The third statement is the Statement of Assets and Liabilities. Since this statement is based on the Government's accounting policies, it does not parallel the conventional balance sheet presented in the private sector. More particularly, fixed assets having been accounted for as expenditures, are recorded at the nominal value of $ I, and revenues not yet received, such as uncollected taxes, are not recorded as financial claims. The effect of inflation on the economic value of the Government's reported assets and liabilities has not been reflected. It is generally recognized that inflation tends to reduce the value of financial assets and liabilities while at the same time increasing the recorded value of fixed assets. Thus it should be noted that the difference between the reported assets and liabilities is simply the aggregate of budgetary surpluses and deficits determined in accordance with the accounting policies of the Government; in no way does this difference reflect the Government's net worth.

The fourth statement is the Statement of Use of Appropriations, which summarizes, by department, the use, during the year, of parliamentary appropriations for budgetary expenditure and loans, investments and advances.

(Table not available)

(Table not available)

(Table not available)

(Table not available)

Notes to the Financial Statements of the Government of Canada

1. Significant Accounting Policies

i. Basic concepts

The two basic concepts on which the Government's accounting system is based are found in the British North America Act: first, the concept of the Consolidated Revenue Fund, which emanates from the requirement that all duties and revenues received, other than those reserved to the provinces, "shall form One Consolidated Revenue Fund"; second, the concept that the balance of the Fund, after certain prior charges, "shall be appropriated by the Parliament of Canada".

Parliament provides authority to make payments out of the Consolidated Revenue Fund in annual appropriation acts and other statutes (referred to as statutory appropriations). Spending authority granted in appropriation acts is for stated purposes and maximum amounts. Unless provided for in vote wording, unused spending authority granted in appropriation acts lapses at the end of the year for which granted. Spending authority provided by statutory appropriations is for specified purposes and for such amounts and such time as the acts prescribe. Spending authority provided by statutory appropriations does not lapse at the end of the year in which granted.

ii. Government of Canada as an accounting entity

For purposes of maintaining the Accounts of Canada and preparing the Public Accounts as required by the Financial Administration Act, the Government of Canada is defined as all the departments named in Schedule A of the Act; any division or branch of the Public Service, including a commission appointed under the Inquiries Act, designated by the Governor in Council as a department for purposes of the Financial Administration Act; the staffs of the Senate, the House of Commons, and the Library of Parliament; and, any corporation named in Schedule B of the Financial Administration Act.

In accordance with the above definition, the corporations named in Schedules C and D of the Financial Administration Act are excluded from the Government of Canada as an accounting entity; therefore, their financial statements are not consolidated with those of the Government. The financial statements of these Crown corporations are presented in Volume III of the Public Accounts.

In addition, certain accounts and funds have financial statements which are not combined with those of the Government, but appear separately in Volumes I and II. These accounts and funds include the Exchange Fund Account, the Canada Pension Plan Account, the Unemployment Insurance Account and other similar accounts.

iii. Classification of financial transactions

The financial transactions of the Government as recorded in the Accounts of Canada and reflected in the Public Accounts are classified into budgetary, nonbudgetary, foreign exchange and unmatured debt transactions.

In general terms, budgetary transactions enter into the calculation of the annual surplus or deficit and are disclosed on the Government's Statement of Revenue and Expenditure. All other transactions lead to the acquisition or disposal of financial claims or to the creation or discharge of financial obligations, and are disclosed on the Statement of Assets and Liabilities.

For purposes of accounting and reporting, the Public Accounts uses the classification in force at the end of the year to which the report refers, and presents figures for the previous year adjusted where necessary to provide consistency.

iv. Budgetary revenue

Budgetary revenue consists of all tax and non-tax receipts which affect the deficit or surplus of the Government and includes revenue internal to the Government.

The Government generally reports revenue in the year in which it is received, with refunds of revenue allocated to the year in which they are actually paid.

Revenue is reported after deducting refunds paid and excludes amounts receivable, taxes collected on behalf of provinces, receipts from contributors to the Canada Pension Plan, the Unemployment Insurance and the superannuation accounts, and receipts and revenues credited to other asset and liability accounts.

In the Statement of Revenue and Expenditure, revenue is reported both gross and net. The difference between the two is revenue credited to appropriations, and postal receipts used to defray postal expenditures.

v. Budgetary expenditure

Budgetary expenditure consists of all charges to budgetary appropriations which affect the deficit or surplus of the Government. Such charges include those for work performed, goods received, services rendered, and transfer payments made, during the year, and, expenditure internal to the Government.

Expenditure excludes pensions paid under the Canada Pension Plan, superannuation and other pension accounts, Unemployment Insurance payments other than benefits to fishermen, payments financed from undisbursed balances of appropriations to special accounts and payments charged to other asset and liability accounts.

In the Statement of Revenue and Expenditure, expenditure is reported both gross and net. The difference between the two is revenue credited to appropriations, and postal receipts used to defray postal expenditures.

vi. Assets

Assets are defined as the financial claims acquired by the Government of Canada on outside organizations and individuals as a result of events and transactions prior to the accounting date.

However, as a result of the Government's accounting policies described above, and in accordance with the provisions of the Financial Administration Act and other legislation, certain financial claims are not reported on the Statement of Assets and Liabilities. The most important of these are accounts receivable for tax and non-tax revenue.

vii. Liabilities

Liabilities are defined as financial obligations to outside organizations and individuals as a result of events and transactions prior to the accounting date.

However, as a result of the Government's accounting policies described above, and in accordance with the provisions of the Financial Administration Act and other legislation, certain financial obligations are not reported on the Statement of Assets and Liabilities. These include amounts for: contributions paid from statutory appropriations; annual vacation and benefits payable upon termination of employment; and, actuarial liabilities arising from the indexing to the cost of living, of superannuate pensions and annuities.

viii. Fixed assets

The fixed assets of the Government, which include land, buildings, works and equipment, are charged to budgetary expenditure at the time of acquisition or construction. Their existence, however, is acknowledged on the Statement of Assets and Liabilities by reporting them at the nominal value of $1.

ix. Accumulated deficit

The accumulated deficit consists of the annual surpluses and deficits since Confederation, together with the write-off of certain amounts charged directly to this account.

x. Valuation of assets and liabilities

ASSETS

Assets are recorded at cost and are subject to annual valuation to reflect reductions from the recorded value to the estimated realizable value.

LIABILITIES

Liabilities are recorded in the amounts ultimately payable except for liabilities for the superannuation accounts of the Canadian Forces, the Public Service and the Royal Canadian Mounted Police, and the beer Government Annuities Account, which are valued on the actuarial basis.

The Canada Pension Plan Account and the Supplementary Retirement Benefits Account are not maintained on the actuarial basis. The Canada Pension Plan Act limits payments from the Consolidated Revenue Fund to the balance in the Canada Pension Plan Account.

xi. Translation of foreign currency transactions

Foreign currency transactions are translated and recorded in Canadian currency equivalents at the exchange rates prevailing at the transaction dates.

Assets and liabilities resulting from foreign currency transactions are, in turn, reported at year-end closing rates of exchange; net gains are credited to revenue, while net losses are charged to expenditure.

2. Changes in Accounting Policies

i. Revolving funds

The non-budgetary authorities for all working capital advances to revolving funds, departments and agencies were terminated. Certain revolving fund operations were continued under non-lapsing budgetary authorities; the remainder has been integrated with other budgetary operations.

As a result of these adjustments, working capital advances to revolving funds of $811 million have been deleted by a charge to departmental expenditure, and revenues and expenditures resulting from the operations of revolving funds have been included in gross reported revenue and gross departmental expenditure of the Government.

ii. Government's cost of paying unemployment insurance benefits

The Act also amended the Unemployment Insurance Act to require that the Unemployment Insurance Account be credited commencing April 1, 1980, with the Government's cost of paying benefits on a current fiscal year basis rather than on a lagged calendar year basis. This change has eliminated the need to make non-interest bearing advances to the Account.

As a result of this adjustment, non-interest bearing advances of $1,013 million and an allowance for the Government's cost of paying benefits of $532 million have been deleted by a charge to departmental expenditure.

iii. Other internal accounts

Certain other assets and liabilities amounting to $124 million have also been deleted by a charge to departmental expenditure. Assets deleted were unamortized bond flotation costs of $140 million, while liabilities deleted were undisbursed balances of appropriations to special accounts of $16 million.

Since 1979, the amounts deleted under this legislation have been fully provided for in the Accounts of Canada. Accordingly their deletion has had no effect on the deficit for the current or prior year. However, reported revenue and departmental expenditure for the current year are not comparable amounts reported for the prior year since the effects of adjustments described above have not been applied actively. The Government's stated accounting policies do provide for retroactive restatement because it is necessary report expenditure in accordance with authority granted by Parliament. Had the effects of the adjustments been applied retroactively, it is estimated that revenue and departmental expenditure would have been reported as follows (actual amounts reported are also shown for comparison):

(Table not available)

3. Allowances for Valuation

The decrease in allowances for loans, investments and advances represents the difference between loans deleted during the year and the additional allowances resulting from the annual valuation.

As a result of the changes in accounting policies stated in Note 2 above, no allowances were required in 1981 for accounts internal to the Government and for the Government's cost of paying unemployment insurance benefits. The following table summarizes the allowances for valuation:

(Table not available)

4. Contingent Liabilities of the Government of Canada

The contingent liabilities of the Government as at March 31, 1981 amounted to $4,171 million and are summarized in the following table:

(Table not available)

5. Financial Information Regarding Agent Crown Corporations

Although borrowings by agent Crown corporations from lenders other than the Government are considered direct liabilities of the Government, such borrowings are not included in the Accounts of Canada since they are intended to be, and in practice are, repaid directly by the corporations.

The following table summarizes financial information regarding agent Crown corporations as at March 31, 1981. The information has not been audited since certain of these corporations have financial year-ends other than March 31.

(Table not available)

6. Insurance Programs

The following table summarizes information regarding such insurance programs. The information has not been audited since the corporations have financial year-ends other than March 31.

(Table not available)

7. International Development Assistance -- Loans and Subscriptions

Included in loans to National governments of $2,942 million ($2,713 million in 1980) are loans to developing countries in the amount of $2,149 million ($1,896 million in 1980). These loans are part of Canada's international development assistance program and are either interest-free or bear interest at rates that were more favourable than those prevailing in Canada at the time the assistance was provided. The balances outstanding at March 31, grouped by term, are:

(Table not available)

During the year, loan interest and commitment/service charges of $3.9 million ($2.5 million in 1980) was received from developing countries. Details can be found in Sections 6 and 13 of this volume and in Section 8 of Volume II.

ii. Subscriptions and loans to international organizations

Included in Loans, investments and advances -- International organizations of $2,255 million ($1,966 million in 1980) are subscriptions to the capital of the International Development Association and loans to other international financial institutions of $1,877 million ($1,606 million in 1980). These subscriptions and loans are also part of Canada's development assistance program. These institutions make loans to developing countries on terms similar to the loan assistance set out above. Subscriptions to international organizations do not provide a return on investment. They are repayable on termination of the organization or on Canada's withdrawal therefrom. Details can be found in Sections 6 and 13 of this volume.

OPINION OF THE AUDITOR GENERAL ON THE FINANCIAL STATEMENTS OF THE GOVERNMENT OF CANADA

- Statement of Transactions;

- Statement Of Revenue and Expenditure;

- Statement of Assets and Liabilities; and

- Statement of Use of Appropriations.

In my opinion, these financial statements present information in accordance with the stated accounting policies of the Government of Canada as set out in Note 1 to the financial statements. Further in my opinion, except for the changes in accounting policies relating to revolving funds and the Government's cost of paying unemployment insurance benefits, the effect of which is described in Note 2, the accounting policies are consistent with the preceding year.

I have the following reservations concerning certain of the stated accounting policies of the Government of Canada.

- In accordance with Notes 1 (vi) and (x) to the financial statements, the full amounts of special assistance loans to developing countries and subscriptions to the special development funds of international financial institutions are recorded as assets. As described in Note 7, most of the loans are repayable over 50 years without interest, with no payments for the first 10 years. Loans with similar terms are made from the special development funds of international financial institutions. These loans and subscriptions by their terms confer financial benefits, the cost of which, in my opinion, should be included in the Statement of Revenue and Expenditure in the year of the transactions by providing an allowance against the loans and subscriptions. This allowance would be taken into revenue over the next 30 to 50 years in the case of loans, and over a longer period in the case of subscriptions. 1 have estimated that the adoption of such a practice would reduce reported assets and increase accumulated deficit by approximately $3.4 billion as at March 3l, 1981 ($3.0 billion as at March 31, 1980).

- As stated in Note 1 (vii), certain financial obligations are not recorded. I have estimated that recorded liabilities and accumulated deficit would be increased by approximately $5.6 billion as at March 31, 1981 ($4.7 billion as at March 31, 1980) if financial obligations at that date related to contributions paid from statutory appropriations, employee termination benefits and the indexed portion of pensions for persons now retired were recorded. This estimate does not include unrecorded financial obligations related to earned and unpaid annual vacation leave and the indexed portion of pensions for persons not yet retired. In my opinion, all these financial obligations should be appropriately recorded and reported in the financial statements to provide a more complete disclosure of liabilities.

KENNETH M. DYE, F.C.A.

Auditor General of Canada

Ottawa, Canada

September 15, 1981

SECTION 3

1980-81 PUBLIC ACCOUNTS

Observations by the Auditor General on the Financial Statements of the Government of Canada

CONTENTS

International development assistance - Loans and subscriptions

Unrecorded liabilities

Reporting of summary financial information to Parliament

Observations by the Auditor General on the Financial Statements of the Government of Canada

Introduction

My examination was made in accordance with generally accepted auditing standards and included such inquiries, tests and other procedures as I considered necessary to enable me to report as required by section 6 of the Auditor General Act. This section provides that:

"The Auditor General shall examine the several financial statements required by section 55 of the Financial Administration Act to be included in the Public Accounts, and any other statement that the Minister of Finance may present for audit and shall express his opinion as to whether they present fairly information in accordance with stated accounting policies of the federal government and on a basis consistent with that of the preceding year together with any reservations he may have."

The observations also deal with the reporting of summary financial information to Parliament. In these observations, I comment on the need for generally accepted accounting principles appropriate for governments, the need for improved disclosure in explanatory notes to the financial statements, the need to reconsider the current and potential use of financial statements for government and the information they should display, and the need for strong central direction by the Comptroller General of Canada.

International Development Assistance Loans and Subscriptions

Canada provides assistance to developing countries by making grants and contributions and special assistance loans to them and by subscribing to special development funds of international financial institutions. The grants and contributions and the loans and subscriptions all confer financial benefits on developing countries. The grants and contributions, because they are not repayable or otherwise recoverable, are made under budgetary authority, recorded as expenditure and included in the deficit. The loans and subscriptions, because they are repayable or considered to be eventually realizable, are made under non-budgetary authority and recorded as assets.

Special assistance loans and subscriptions to special development funds are, like grants and contributions, an important part of Canada's official program of assistance to developing countries. Over the past 12 years, such loans and subscriptions increased from an accumulated balance of approximately $200 million before 1969 to approximately $4,000 million at March 31, 1981. During the same period, approximately $5,000 million of assistance was provided to developing countries in the form of grants and contributions.

The amount of special assistance loans included in loans to national governments at March 31, 1981 is $2,149 million. Of these loans, $1,953 million are repayable over 50 years without interest, with no payments for the first 10 years. Additional information concerning these special assistance loans is presented in Note 7 to the financial statements and on pages 6.29 and 6.30 of Section 6 of this volume. At March 31, 1981, subscriptions to special development funds of international financial institutions amounted to $1,877 million. These special development funds make loans to developing countries with terms similar to the special assistance loans made by Canada. The terms of these subscriptions provide that, on withdrawal from or termination of the special development funds, Canada will receive a pro-rata share of the funds' assets. Because of the nature of such assets, it would take many years for Canada to realize its share on termination or withdrawal. Additional information concerning these subscriptions is also presented in Note 7 to the financial statements, and on pages 6.31 through 6.33 of Section 6 of this volume.

As described above, amounts expended by the Government in the current and prior years in respect of special assistance loans and subscriptions to special development funds will be recovered or realized without interest over a significant number of years. Since interest is not provided, the Government is not compensated for the use of its funds over the period the loans and subscriptions are outstanding. Since the Government is not compensated for the use of its funds, the present value of the amounts to be recovered or realized in the future is much less than the amounts expended today.

As stated in the Study of the Accounts of Canada: "Ideally, the Government's Statement of Assets and Liabilities should come as close as possible to reflecting the true economic value of the assets and liabilities recorded on it". For example, a Treasury bill, which does not bear interest, is recorded as a liability by the Government at an amount determined by discounting (expressing at present value) future payments of principal at a rate set by public auction at the date of issue. The difference between the amount payable and the amount at which the Treasury bill is recorded -- the discount -- is the amount of compensation the Government pays for the use of borrowed funds. This compensation is included in interest on the public debt over the period the bill is outstanding.

Sometimes a market value for financial claims and obligations is not available, and an alternative approach is required. For example, when a loan is made to a Crown corporation by the Government, it is recorded as an asset at the amount advanced. To compensate for the use of its funds, the Government charges interest on the loan. In the absence of a market-determined interest rate, the Government calculates an arbitrary rate by reference to its cost of borrowing. Accordingly, the amount at which the loan is recorded is equal to the present value of future repayments of principal and interest, discounted at this rate to the date of issue.

Special assistance loans and subscriptions to special development funds should be similarly recorded at their present value through discounting, at an appropriate rate, amounts that will be recovered or realized in future years. As with loans to Crown corporations, the selection of an appropriate rate is, to some extent, arbitrary. However, it would seem reasonable to determine a rate by reference to the Government's cost of borrowing in the same manner as rates are set for loans to Crown corporations.

Discounted at the Government's long-term borrowing rate for the year of the transactions, the amount that will be recovered or realized in future years in respect of special assistance loans or subscriptions to special development funds is approximately $600 million at March 3l, 1981. In my opinion, this is the amount at which these loans and subscriptions should be recorded in the accounts of Canada at the year end. The difference of $3,400 million between the amount at which they are currently recorded ($4,000 million) and the amount at which they should be recorded ($600 million) represents the cost to the Government of the benefit conferred on developing countries by the terms of these loans and subscriptions. This cost should be recorded by providing an allowance against the loans and subscriptions. This allowance, in the case of loans, would be taken into revenue over the next 30 to 50 years, their terms to maturity. In the case of subscriptions, the allowance would be taken into revenue commencing in the year of Canada's withdrawal from, or the termination of, the special development funds. The period over which the allowance would then be taken into revenue would correspond to the maturity of the loans outstanding in the funds at the time of such termination or withdrawal.

In its Report dated February 21, 1979, the Standing Committee on Public Accounts recommended that the Office of the Comptroller General expedite a study to establish an appropriate basis for valuing loans to developing countries and subscriptions to international financial institutions, and that it report back to the Committee as soon as possible. The Committee also recommended that appropriate information regarding the loans and subscriptions be disclosed in the notes to the financial statements. As mentioned earlier, Note 7 to the financial statements provides such additional information. The Government has considered what basis is appropriate for valuing such loans and subscriptions and has concluded that, because they are financial claims on outside organizations and therefore assets as defined in Note 1 (vi), they should be recorded at cost. In the Government's view, cost is the full amount expended in respect of the loans and subscriptions rather than the present value of amounts that will be recovered or realized in future years. Although there is general agreement that benefits are conferred, the Government considers that the cost of such benefits is indirectly recognized in the accounts and included in the deficit in future years as costs of financing the amounts expended are incurred, and that it is sufficient to disclose the terms of loans and subscriptions outstanding at the year end in a note to the financial statements.

In my opinion, the cost of benefits conferred by the terms of special assistance loans to developing countries and subscriptions to special development funds of international financial institutions should be recorded in the accounts of Canada and included in the Government's Statement of Revenue and Expenditure in the year the loans and subscriptions are made. In addition to recognizing such costs at the time the benefits are conferred, this would result in loans and subscriptions being reported at amounts that more closely reflect their economic value.

Unrecorded Liabilities

Following is a summary of those unrecorded liabilities which have been estimated:

(Table not available)

The liability for subsidies under the Railway Act has been estimated by the Canadian Transport Commission. The liability for employee termination benefits, and the present value of the indexed portion of pensions for former public service employees (including Canadian Forces and Royal Canadian Mounted Police) or their survivors, were estimated by the Department of Insurance based on methods and assumptions used by the Department for purposes of current actuarial reports on the Government's superannuation accounts.

Unrecorded liabilities for earned and unpaid annual vacation leave have not been estimated by my Office because the information required was not readily available during our audit. However, based on annual salary and wage costs, they are also likely to be substantial. The Government should estimate these unrecorded liabilities at the end of each fiscal year by reference to personnel and other records maintained by departments and agencies.

With respect to the indexing of employee pensions, determination of an appropriate liability is somewhat more complex. As a minimum, the liability should include the present value of the indexed portion of pensions for persons now retired. This minimum liability would not include provision for any further increases in these indexed benefits related to increases in the cost of living in future years. The $4,200 million estimate by the Department of Insurance referred to above has been prepared on this basis. This estimate is also presented on page 7.7 of Section 7 of this volume.

The liability for indexing employee pensions should include some provision for the indexed portion of benefits for persons who have not yet retired and for future indexing for persons now retired as discussed in the preceding paragraph. However, the determination of appropriate amounts is a matter requiring further study. The additional liability may be significant. In my opinion, the Office of the Comptroller General, in consultation with other members of the accounting profession with background in pension issues and with the Chief Actuary of the Department of Insurance, should examine alternative methods of accounting for pension costs and obligations and determine an appropriate basis of recording and disclosing actuarial liabilities and related pension costs arising from the indexing to the cost of living of superannuation annuities.

Based on the definition of liabilities as financial obligations to outside organizations and individuals as a result of events and transactions prior to the accounting date, the exclusion from reported liabilities of the significant financial obligations described above results in an incomplete reporting of liabilities as defined. This directly affects the reported accumulated deficit and financial position at the year end. In my opinion, financial obligations at the year end related to contributions paid from statutory appropriations, employee termination benefits, earned and unpaid annual vacation leave, and actuarial liabilities arising from the indexing to the cost of living of superannuation annuities should be appropriately recorded in the accounts of Canada and reported in the financial statements to provide a more complete accounting and disclosure of liabilities.

Reporting of Summary Financial Information to Parliament

- generally accepted accounting principles appropriate for governments;

- improved disclosure in explanatory notes to the financial statements;

- reconsideration of the current and potential use of financial statements for government and the information they should display; and

- strong central direction by the Comptroller General of Canada.

Need for government accounting principles

The Government of Canada prepares its financial statements in accordance with stated accounting policies. These accounting policies are primarily based on concepts found in the British North America Act, as described in Note 1(i), together with other legislative provisions and administrative conventions that have evolved over the years. However, there are no generally accepted government accounting principles to provide objective standards of good accounting and reporting practice to which readers of the financial statements could refer and against which the statements could be audited.

In 1976, the Canadian Institute of Chartered Accountants (CICA) created a Study Group to catalogue existing practices in legislative accounting, reporting and auditing and to review underlying objectives and concepts. For the most part, members of the Study Group were drawn from the federal and provincial governments, including representatives from this Office and from the Office of the Comptroller General of Canada. In 1980, the Study Group issued its report, entitled Financial Reporting by Governments. In the Report, the Study Group concluded that there is a need for generally accepted reporting standards for federal and provincial governments to achieve consistency in financial reporting and comparability between governments.

The Study Group also concluded that the ClCA should take the initiative in encouraging the establishment of a body to work toward the development of generally accepted government reporting standards. In June 1981, the ClCA announced the establishment of a new Government Accounting and Auditing Committee to recommend accounting and auditing principles and practices for use by governments. I am pleased to report that senior personnel from both this Office and the Office of the Comptroller General of Canada are members of this committee.

Need for improved disclosure in notes to financial statements

As in prior years, important summary information relevant to the Government's financial position and its revenues and expenditures is excluded from the notes to the financial statements in Section 2 of Volume I of the Public Accounts. Although there is selective referencing of amounts in the financial statements to summary information in other sections of this volume, this summary information is presented in the midst of other more detailed information which may inconvenience and confuse a reader who is looking for a complete overview of the Government's financial position, revenues and expenditures.

For example, in response to a recommendation of the Standing Committee on Public Accounts in its Report dated February 21, 1979, the Government introduced Note 7 to the financial statements to summarize the terms and conditions of international development assistance loans and subscriptions. Although it is my view that the cost of the financial benefit conferred by these loans and subscriptions should be recorded in the accounts of Canada in the year the loans and subscriptions are made, Note 7 does provide important summary information related to significant components of loans to national governments and subscriptions to international organizations as reported on the Statement of Assets and Liabilities.

I would encourage the Government to develop similar notes for other significant balances reported in the audited financial statements in Section 2. This would permit readers to have ready access to the summary information they need to understand the statements without having to constantly refer to information presented in the various other sections of Volume I. Since most of the information required to do so is currently available, much can be accomplished with little effort.

Need to reconsider purposes financial statements

The current and potential use of summary financial statements and the information they should display need to be reconsidered. The nature and extent of information reported in financial statements and how it is presented depend on the objectives that the statements are designed to satisfy. Although the financial statements included in Section 2 of this volume are entitled "The Financial Statements of the Government of Canada", they include only government departments as defined in the Financial Administration Act. Because many activities of government are carried out by organizational units other than government departments, significant assets, liabilities, revenues and expenditures are excluded from the existing financial statements. There is a need for summary financial statements that provide a comprehensive and complete summary of the Government's financial position and its revenues and expenditures.

In his 1980 observations, the Auditor General stated that the Office of the Comptroller General planned to study the purposes of summary financial reporting for the Government and the feasibility of developing comprehensive financial statements. We have been advised by the Comptroller General that this important study has commenced.

Need for central direction

Under the Financial Administration Act, the Treasury Board, the Minister of Finance and the Receiver General for Canada all have certain responsibilities for developing accounting policies and preparing the Government's financial statements. The development of generally accepted government accounting principles and comprehensive summary financial statements will require strong central direction and leadership within the Government of Canada. In 1979 and 1980, the Auditor General recommended that central direction should be provided by the Comptroller General of Canada and that the Treasury Board should be given primary responsibility for the Government's accounting and financial reporting policies. Appropriate amendments to the Financial Administration Act have not yet been made to vest this responsibility and authority in the Treasury Board and the Comptroller General.