This Web page has been archived on the Web.

1983 Report of the Auditor General of Canada

1983 Report

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

SECTION 2

1982-83 PUBLIC ACCOUNTS

Audited 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 Ill 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 I (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 deficit or surplus of the Government, that is 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 generally on the accrual basis. Expenditure 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 items to be paid from statutory authorities on which Parliament has not imposed annual ceilings, employee termination benefits, unpaid annual vacation entitlements, and the indexing of pensions.

The second category, non-budgetary transactions, consists of loans, investments and advances made by the Government, the Government's liability to outside parties from its role of administrator of certain public moneys 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 financial obligations owing 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, the principal objective of which is to aid in the control and protection of 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 deficit or surplus represents the difference between the expenditures and the revenues of the year, in accordance with the accounting policies previously summarized.

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 $1, and revenues not yet received, such as uncollected taxes, are not recorded as assets. 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 net recorded assets and liabilities is simply the aggregate of annual budgetary deficits and surpluses determined in accordance with the accounting policies of the Government; in no way does this difference reflect the Government 5 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.

These four financial statements, when read in conjunction with the notes thereto, present fairly, in the opinion of the Government, the revenue, expenditure, assets and liabilities of the Government of Canada. Fair presentation is achieved through the consistent application of the significant accounting policies, which are summarized in Note I to the financial statements.

Tables 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 Constitution Acts (formerly the British North America Acts): 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 put 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 generally 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, non-budgetary, foreign exchange and unmatured debt transactions.

In general terms, budgetary transactions enter into the calculation of the annual deficit or surplus 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 a net basis 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 and territories, and amounts credited to the Canada Pension Plan, the Unemployment Insurance Account, the superannuation accounts, other specified purpose accounts and other 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.

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 amounts charged to the Canada Pension Plan, the superannuation accounts, the Unemployment Insurance Account except for benefits to fishermen, other specified purpose accounts and other 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. 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: items to be paid from statutory authorities on which Parliament has not imposed annual ceilings; unused 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 deficits and surpluses since Confederation, together with - the write-off of certain amounts charged directly to this account.

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 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.

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. Change in Financial Statement Presentation

3. Contingent Liabilities of the Government of Canada

The contingent liabilities of the Government as at March 3 I, I 983 amounted to $6,894 million and are summarized in the following table:

Table not available

4. 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, 1983. or corporations with financial year ends other than March 1, unaudited financial information is included in this table.

Table not available

5. 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, 1983.

Table not available

6. International Development Assistance-Loans and Subscriptions

Included in loans to National governments of $4,048 million ($3,775 million in 1982) are loans to developing countries in the amount of $2,698 million ($2,431 million in 1982). 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 $4 million ($5 million in 1982) was received from developing countries. Details can be found in Sections 7 and 14 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 $2,917 million ($2,585 million in I 982) are subscriptions to the capital of the International Development Association and loans to other international financial institutions of $2,453 million ($2,175 million in [982). 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 in sub-section i. 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 7 and I 4 of this volume.

7. Transactions Internal to the Government

Table not available

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, except as described in Reservation 1, 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 on a basis consistent with that of the preceding year. However, in my opinion, because of Reservations 2, 3 and 4, these stated accounting policies are inappropriate for a fair presentation of the assets and liabilities and revenues and expenditures of the Government of Canada.

Reservation 1: Failure To Comply With Stated Accounting Policy

Reservation 2: Fragmented Reporting Of Government Activities

(i) Significant departmental activities are reported in separate financial statements or accounts that are not combined in the Government's financial statements. These separate financial statements or accounts are presented in the other sections of Public Accounts Volume I indicated below.

• Unemployment Insurance Account (Section 8)
• Canadian Ownership Account (Section 8)
• Exchange Fund Account (Section 10)
• Canada Pension Plan Account (Section 8)
• other similar Accounts (Section 8)

For the VIA, accumulated benefits paid and administrative expenditures are reduced by accumulated revenues from employee and employer contributions and the Government's share of benefits paid; and the resulting amount is reported as a reduction of liabilities. In my view, transactions of the VIA should be consolidated in the Government's financial statements, with employee and employer contributions included in reported revenues, and benefits and administrative expenditures included in reported expenditures. If VIA transactions were reported in this manner, liabilities and accumulated deficit would be increased by $3,642 million ($353 million in 1982), revenues increased by $5,039 million ($4,887 million in 1982), and expenditures increased by $8,328 million ($4,902 million in 1982). The deficit for the year would be increased by $3,289 million ($15 million in 1982).

For the COA, accumulated levies of $ 1,676 million received in respect of oil and gas charges, reduced by accumulated investments of $ 1,609 million in PetroCanada, is reported as a liability. If the investments were reported as assets and the levies reported as revenue, as in my view they should be, assets would be increased by $1,609 million ($711 million in 1982), liabilities reduced by $67 million ($75 million in 1982), and accumulated deficit reduced by $ 1,676 million ($786 million in 1982). The deficit for the year would be reduced by $890 million ($786 million in 1982).

The effect of VIA and COA transactions on the financial statements is significant and readily quantifiable and, in my view, can be resolved with little further study. However, in the case of accounting for activities reported in the Exchange Fund and Canada Pension Plan Accounts, while the effects are significant and quantifiable, further study by the Government is required to determine how and to what extent these activities should be included in the Government's financial statements to best satisfy the information needs of users.

(ii) Investments in Crown-owned corporations and agencies at March 31, 1983 amounted to approximately $25 billion, or 57 per cent of the Government 5 recorded assets. The assets, liabilities, revenues and expenditures reported in the separate financial statements of these entities are not consolidated in the accompanying financial statements. Further study by the Government is required to determine to what extent the activities of such corporations and agencies should be consolidated, and for those not consolidated, what alternative presentation would be appropriate. Until this fundamental question is resolved, I am unable to determine the effect of this matter on the Government's financial statements.

Reservation 3: Assets Reported At Amounts In Excess Of Their Value

Reservation 4: Unrecorded Liabilities

Additional information and comments on these reservations are included in my observations on the financial statements in Section 3 of this volume.

Ottawa, Canada KENNETH M. DYE, F.C.A.

September 15, 1983 Auditor General of Canada

SECTION 3

1982-83 PUBLIC ACCOUNTS

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." (italics added)

"...these stated accounting policies are inappropriate for a fair presentation of the assets and liabilities and revenues and expenditures of the Government of Canada." (italics added)

The observations that follow provide additional explanatory information on these four reservations, and comment on the reporting of summary financial information.

Reservation 1: Failure to Comply with Stated Accounting Policy

I take exception to the accounting and reporting of oil export charge revenue and related expenditure because it results, in my view, in:

• an incomplete reporting of revenues received, which is contrary to the accounting policy requirement stated in Note 1(iv) that revenue shall consist of all tax and non-tax receipts which affect the deficit or surplus of the Government; and
• a method of accounting, contrary to the accounting policy stated in Note 1(v), whereby expenditures pursuant to a statutory appropriation granted by Parliament are effectively eliminated from reporting in the financial statements of the Government.

From the inception of the oil export charge in 1975, and up to and including 1981, all amounts collected during a year were reported as tax revenues of that year in accordance with the accounting policy set out in Note 1 (iv). However, commencing in 1982, a portion of amounts collected was excluded from tax revenues and shown as owing to certain oil-producing provinces. This was done to give effect to an undertaking by the Minister of Finance, in his October 1980 budget speech, to pay to certain oil-producing provinces 50 per cent of oil export charges collected in respect of oil exported from those provinces. This undertaking was subsequently confirmed by agreements between the Government and the provinces.

The required appropriation authority to pay over amounts to certain oil-producing provinces on a continuing basis was included in the Energy Administration Act (SC 1980-81-82, Chapter 114) assented to on July 7, 1982. Amounts excluded from revenue and shown as owing to these provinces were paid to them under this authority in the year ended March 31, 1983.

In the preface to the financial statements, the Government explains that the accounting policies it has adopted are designed primarily to provide an accounting of the financial resources appropriated by Parliament. The Energy Administration Act, under which payments are made to provinces in respect of oil exports, is an appropriation granted by Parliament. However, because of the accounting followed, payments to the provinces are excluded from reported expenditure and from reported use of appropriations. As a consequence, in my opinion, Parliament has not received the accounting for resources appropriated by it that the financial statements are designed to provide.

In summary, it is my view that all oil export charges collected should be accounted for and reported as general purpose tax revenues, and that payments to certain oil-producing provinces in respect of oil exports under the Energy Administration Act should be accounted for and reported as expenditures.

Reservation 2: Fragmented Reporting of Government Activities

Transactions in respect of the following departmental activities are reported in financial statements or accounts that are not combined with the financial statements of the Government:

• Unemployment Insurance Account;
• Canadian Ownership Account;
• Exchange Fund Account;
• Canada Pension Plan Account; and
• other similar Accounts.

Under the Government's accounting policies, unemployment insurance contributions received, benefits paid and administrative expenditures are recorded in the Unemployment Insurance Account (VIA) and, except for a portion of benefits paid, are excluded from the Government's reported revenues and expenditures. The excess of accumulated benefits paid and administrative expenditures over accumulated revenues from employee and employer contributions and the Government's share of benefits paid is reported as a reduction of liabilities. In my view, unemployment insurance contributions levied on employees and employers are, in substance, federal revenues which should be included in reported revenues of the Government. Similarly, I believe that the full amount of unemployment insurance benefits paid and administrative expenditures are, in substance, expenditures of the Government which should be reported as such. If unemployment insurance transactions were reported in this way, liabilities and accumulated deficit would be increased by $3,642 million ($353 million in 1982), revenues increased by $5,039 million ($4,887 million in 1982), and expenditures increased by $8,328 million ($4,902 million in 1982). The deficit for the year would be increased by the VIA revenue shortfall of $3,289 million ($15 million in 1982).

It also seems clear that transactions now reported in the Canadian Ownership Account (COA) as a net liability constitute, in substance, revenues and assets which should be reported as such. In my view, levies received in respect of oil and gas charges and credited to the COA are federal revenues which should be included in Government revenues; and Investments in Petro-Canada, charged to the COA as a reduction of the levies, are investments which should be included in Government assets. If these transactions were reported in this way, assets would be increased by $ 1,609 million ($711 million in 1982), liabilities reduced by $67 million ($75 million in 1982), and accumulated deficit reduced by $1,676 million ($786 million in 1982). The deficit for the year would be reduced by $890 million ($786 million in 1982).

Further study is required by the Government to determine how best to include transactions in the Exchange Fund, Canada Pension Plan and other similar Accounts in the financial statements of the Government. Recognizing that such a study has not yet been completed, and for purposes of illustration only, I have summarized below certain levies that are not currently reported as revenues on the Government's Statement of Revenue and Expenditure.

Table not available

The significance of these amounts in relation to the size of the Government, as reflected by its revenues, and the size of the Canadian economy, as reflected by Gross National Product, is shown by the following table. It compares total tax revenues now reported in the Government's financial statements with total tax revenues that would be reported if the above levies were included.

Table not available

Because the effect is readily quantifiable and easily understood, I have used a possible effect on total reported tax revenues to illustrate my concern about certain departmental activities not being combined with the financial statements of the Government. The issue is, however, much broader and also affects reported non-tax revenues, expenditures, assets and liabilities. Further study by the Government is required to determine how and to what extent these departmental activities should be included in the Government's financial statements to best satisfy the information needs of users.

In addition to the departmental activities discussed above, government activities are also carried out by many Crown-owned corporations and agencies whose financial statements are not consolidated with the financial statements of the Government. At March 31, 1983, investments in such corporations and agencies amounted to approximately $25 billion, or 57 per cent of the Government's recorded assets before allowance for valuation. The reporting of postal activities illustrates how use of the corporate form of organization can affect the Government's financial statements.

The activities of the Post Office Department were transferred to the Crown-owned Canada Post Corporation (CPC) on October 16, 1981. The financial statements of CPC are not consolidated with those of the Government because CPC is a Crown corporation named in Schedule C of the Financial Administration Act. As a consequence, beginning October 16, 1981, Canada's postal revenues and expenditures are to be reported only in the financial statements of CPC. Only the net contribution to the deficit of CPC is included in expenditure reported in the Government's financial statements subsequent to October 15, 1981. Significant revenues and expenditures have been excluded from the Government's statements simply by varying the legal form of the entity carrying out Canada's postal activities. Such changes in reporting make it difficult to compare meaningfully the information reported in these financial statements, over a period of years. In 1981, the last full year for which postal operations were included in the Government 5 statements, reported revenues and expenditures of the Post Office amounted to $ 1,109 million and $ 1,597 million respectively.

In my view, the current definition of the Government of Canada accounting entity based on legal form is not satisfactory. The accounting entity should be defined in such a way that the economic substance of an activity determines how that activity should be reported in the financial statements. Only in this way will a comprehensive, consistent reporting of government activities from year to year be achieved. Further study by the Government is required to determine how and to what extent activities carried out by Crown-owned corporations and agencies, or otherwise reported in separate financial statements or accounts, should be consolidated and, for those activities not consolidated, what alternative presentation would be appropriate. This is discussed further in my observation "Reporting of Summary Financial Information".

Reservation 3: Assets Reported at Amounts in Excess of their Value

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. Because of the concessionary terms described in Note 6 to financial statements, the loans and subscriptions, like grants and contributions, confer financial benefits on developing countries and are an important part of Canada's official program of assistance to 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. Because the loans are repayable and the subscriptions considered to be eventually realizable, they are made under non-budgetary authority and recorded as assets.

The amount of special assistance loans included in loans to national governments at March 31, 1983 is $2,698 million. Of these loans, $2,470 million are repayable over 50 years without interest, with no payments for the first 10 years. At March 31, 1983, subscriptions to special development funds of international financial institutions amounted to $2,453 million. These special development funds make loans to developing countries under 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.

Because the loans and subscriptions described above are made without interest or at less than economic rates, the Government is not fully compensated for the use of its funds over the period the loans and subscriptions are outstanding. As a result, when loans and subscriptions are issued, the value given is significantly greater than the value received. As stated in the Government's 1975 Report on 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."

Sometimes a "true economic value" for financial claims 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, with the addition of interest to compensate for use of funds, the amount advanced is equal to the asset value received.

When special assistance loans and subscriptions to special development funds are issued, they should be similarly recorded as assets only to the extent of their economic value at that date. Any excess of amounts advanced over asset value received should be recorded as expenditure. As with loans to Crown corporations, the selection of an appropriate interest rate for calculating asset value received 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.

If special assistance loans and subscriptions to special development funds had been recorded and reported as assets at their economic value when issued, the amount outstanding would have been approximately $800 million as at March 31, 1983. 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 $4,400 million between the amount at which they are currently recorded ($5,200 million) and the amount at which they should be recorded ($800 million) constitutes expenditure in respect of international development assistance that should have been reported as such on the Statement of Revenue and Expenditure and included in deficit in the year the loans and subscriptions were issued. This would have properly recognized the cost of benefits conferred by these loans and subscriptions in the year they were issued.

Reservation 4: Unrecorded Liabilities

Following is a summary of those recorded 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 actuarial liabilities arising from the indexing provisions of employee pension plans (including the Canadian Forces and the Royal Canadian Mounted Police) 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. For the reasons set forth in the following paragraph, I have estimated the provision respecting Canadair, de Havilland and other troubled companies at approximately the amount of government-guaranteed loans of these companies at March 31, 1983. Such loans are reported as contingent liabilities of the Government in Table 12.8 of Section 12 of this volume, and include:

Table not available

In their most recent audited financial statements, which cover the year ended December 31, 1982, Canadair and de Havilland reported losses of $1,415 million and $265 million respectively. Additional losses of $107 million and $77 million were reported by these two companies in their unaudited financial statements for the six months ended June 30, 1983. The companies have already received $700 million of Government assistance, $400 million in the Government's year ended March 31, 1983 and $300 million in the period April 1 to September 15, 1983. In my judgement, the financial condition of Canadair and de Havilland has deteriorated to the point where they will require further assistance from the Government of Canada to service and repay their long-term debt.

Unrecorded liabilities for earned and unpaid annual vacation leave have not been estimated by my Office because the information required was not readily available. 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 referring to personnel and other records maintained by departments and agencies.

Based on the Government's 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 annual and accumulated deficit and the financial position at the year end. In my opinion, these financial obligations 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

The Government, in the preface to the financial statements in Section 2, explains that the statements are "designed primarily to provide an accounting of the financial resources appropriated by Parliament" and "to report compliance with legislative authority". The question of purpose or objective of the. Government's financial statements is not simply an academic matter of interest only to accountants. The current financial statements, designed to satisfy the objective of reporting compliance with authority, do not fully present significant information such as the Government's total revenues, expenditures, deficit, financial requirements and debt. My Opinion shows, for example, that the annual and accumulated deficits would change by many billions of dollars if the Government accounted for its activities in accordance with their economic substance.

Media attention to the Government's reported deficit and financial requirements indicates a high degree of public interest in an economic interpretation of such summary information. In my opinion, readers would be best served by comprehensive, summary financial statements that report on government activities in accordance with their economic substance. Financial statements so prepared would also satisfy Parliament's intention as expressed in Section 55 of the Financial Administration Act that the Public Accounts include audited statements "of the expenditures and revenues of Canada for the fiscal year" and "of such of the assets and liabilities of Canada as in the opinion of the Minister are required to show the financial position of Canada as at the termination of the fiscal year

In my observations last year, I called attention to the need for appropriate consultation among the interested and affected parties in order to achieve as soon as possible the common goal of providing financial information that best serves the needs of users.

Within the federal Government, the Office of the Comptroller General (OCG) is studying the purposes of summary financial reporting for the Government. The OCG expects to have a position paper on the objectives of summary financial statements ready by March 31, 1984.

Both the OCG and my Office have provided input and advice to the Public Sector Accounting and Auditing Committee (PSAAC) of the Canadian Institute of Chartered Accountants (ClCA). In September 1983, PSAAC issued its first Accounting Statement, "Disclosure of Accounting Policies". This Statement contains Committee recommendations that are applicable to the federal and provincial governments. Currently, PSAAC is developing an Exposure Draft on objectives of government financial statements. This Exposure Draft is expected to be released within the next year.

My Office will continue to support the important work being conducted by both the OCG and the CICA, and will report in subsequent years on progress. It will be equally important to take every opportunity to obtain the views of readers of the financial statements on these important matters. The development of well-founded, meaningful and consistent summary financial statements for the Government of Canada is a challenge to and responsibility of Members of Parliament and other users as well as those responsible for their preparation and audit.