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1988 Report of the Auditor General of Canada

Main Points

The Government of Canada is a world leader in providing summary financial information about its operations in audited form. However, the information is based on certain accounting policies that I believe are inappropriate and is presented in a manner that makes it difficult to understand. (paragraphs 2.1 to 2.4)

The accounting policies that I believe are inappropriate result in:

    - failure to provide an allowance for at least $1.3 billion in borrowing by Crown corporations; (2.51 to 2.64)
    - failure to consolidate the financial statements of Crown corporations, causing reported assets, liabilities, revenues and expenditures to be understated by significant but as yet undetermined amounts; (2.65 to 2.70)
    - failure to record about $4.2 billion in liabilities related to the indexing of employee pensions. (2.71 to 2.73)
Members of Parliament and other users need financial information about the Government that is both credible and understandable. (2.5 to 2.8)

Credibility will be enhanced if the Government modifies its accounting policies to conform with recommendations of the Canadian Institute of Chartered Accountants' Public Sector Accounting and Auditing Committee. (2.9 to 2.19)

Understandability will be enhanced if the Government presents its financial statements in a comprehensive yet succinct annual financial report similar to annual reports published by corporations in the private sector. (2.20 to 2.31)

Introduction

Members of Parliament and other users need financial information about the Government of Canada that is both credible and understandable.

2.1 The Government of Canada is a world leader in providing summary financial information about its operations in audited form. However, the information is based on certain accounting policies that I believe are inappropriate and is presented in a manner that makes it difficult to understand. The information I refer to is contained in the Audited Financial Statements of the Government of Canada.

2.2 The financial statements of the Government for the year ended 31 March 1988, and my audit Opinion on them, are in Section 2 of Volume I of the Public Accounts of Canada. In this chapter, I present additional information and comments on the Government's financial statements and my audit Opinion. In prior years, this additional material was presented in Section 3 of Volume I of the Public Accounts.

2.3 The Government's financial statements convey a highly summarized overview of its various activities. The overview includes the Government's cash balances and investments together with amounts owing to and by the Government at the end of the year (its financial position), what its revenues and expenditures for the year have been (the results of operations), and the extent to which cash going out exceeded cash coming in (the Government's financial requirements).

2.4 My audit Opinion tells readers about two matters. First, whether the financial statements were prepared according to the Government's accounting policies, applied consistently from year to year. Second, whether users of the statements can rely on them to present fairly the Government's financial position, results of operations and financial requirements.

2.5 I believe that Members of Parliament and other users need financial information about the Government that is both credible and understandable.

2.6 The Canadian Institute of Chartered Accountants' Public Sector Accounting and Auditing Committee (PSAAC) is developing generally accepted accounting principles (GAAP) appropriate for Canadian governments. Public Sector GAAP should help make the Government's financial statements more credible by providing objective standards of good accounting and reporting practice that the Government can use in preparing its financial statements and against which I can audit.

2.7 In my judgment, the Government's financial statements would be more understandable if they were presented in a comprehensive but succinct annual financial report, similar to the annual reports published by corporations in the private sector. A concise annual financial report would show users "the big picture" in plain language and would serve as a key to the considerable detail that the Government provides elsewhere.

2.8 Preparing financial data in accordance with PSAAC recommendations, and presenting it in a concise annual financial report, are important initiatives for the Government to pursue. Continued support and encouragement from Members of Parliament will help create the climate within which this work can be accomplished.

The Canadian Institute of Chartered Accountants' Public Sector Accounting and Auditing Committee (PSAAC)

The Government's financial statements would be more credible if the accounting policies used in preparing them were modified to conform with recommendations of the Canadian Institute of Chartered Accountants' Public Sector Accounting and Auditing Committee.
2.9 At the present time, the federal and provincial governments in Canada prepare their financial statements in accordance with accounting policies that each has developed. These accounting policies differ from government to government. As a consequence, it is difficult for those who use the financial statements to compare one government with another.

2.10 It is also difficult for those who prepare and audit government financial statements to determine when they present information fairly and when they do not. Although progress is being made, there does not yet exist an agreed-upon set of standards for good accounting and reporting practice to help users get the information they need and to help preparers and auditors assess fairness.

2.11 In March 1981, the Board of Governors of the Canadian Institute of Chartered Accountants established PSAAC. The 19-person committee is composed of senior public sector officials, public accountants and academics. Public sector officials include Deputy Ministers, Comptrollers and Auditors General and senior executives of government-owned corporations from both the federal and provincial governments. Input and advice is sought from about one hundred other people, including users, preparers and auditors of government financial statements. PSAAC provides a forum for considering the needs of users, preparers and auditors, and an opportunity to develop and recommend enhanced accounting principles and disclosure standards for consideration by Canadian governments and their legislative auditors.

2.12 The existence of PSAAC does not alter the responsibility of legislative auditors to exercise independent, professional judgment when they examine and report on government financial statements. However, PSAAC can help legislative auditors discharge this responsibility better by developing a consensus view of appropriate financial reporting practice that both governments and auditors can refer to in assessing fairness. The result should be financial statements and audit reports that are more attuned to user needs and more comparable, both over time and from government to government. In my judgment, this would greatly enhance the credibility of government financial statements.

2.13 At the time of preparing this chapter, PSAAC had issued three statements on accounting and four on auditing. On the accounting side, the Committee began by issuing Statement 1 on disclosure of accounting policies. The Committee then decided to undertake three projects aimed at establishing a framework for generally accepted accounting principles and financial reporting standards appropriate for governments.

2.14 The first project, completed in 1984, identifies five objectives of government financial statements (Accounting Statement 2). The second was completed in 1986 and recommends general reporting principles and standards for the disclosure of information in government financial statements (Accounting Statement 3). Exhibit 2.1 provides a status report on the extent to which the Government has conformed with the 35 recommendations contained in Accounting Statement 3. The exhibit shows that current government practice is consistent with 27 of the recommendations.

Exhibit not available

2.15 The third project is well under way. It addresses the principles and criteria for determining which activities should be included in government financial statements, and how these activities should be accounted for if they are brought in.

2.16 In addition, PSAAC is working on a project that is nearing completion and which deals with accounting for government employee pensions. As well, a research study is being conducted on the recording and reporting of government physical assets. The study is designed to stimulate discussion and debate on this contentious public sector issue. Clearly, the development of generally accepted accounting principles for Canadian governments is well under way.

2.17 Transfer payments - another matter requiring further study. PSAAC is also planning to study how governments should account for and report transfer payment programs. In my Observations last year, I reported that I was uncertain whether the Government was accounting for one such program in an appropriate manner and called for further study. I am pleased that PSAAC has decided to address the transfer payment issue.

2.18 The federal transfer payment program that concerns me provides for payments to prairie grain farmers under the Western Grain Stabilization Act (WGSA). This is one of the Government's "automatic stabilizers"; it generates statutory payments when specified conditions occur. The fundamental issue is whether expenditures of this type should be recognized in the fiscal year when crops are harvested and payments can be estimated (the accrual basis), or in the fiscal year when payments are actually made (the cash basis).

2.19 Payments to farmers under the WGSA involve significant sums - over $1 billion annually in recent years. They have been accounted for on a cash basis, even though it seems possible to determine much earlier the amounts that will ultimately be payable under the program. Payments for crops harvested in calendar 1987 were made after 31 March 1988, and thus are not included in the Government's Statement of Revenue and Expenditure. The question is, should they be included in expenditure of the year ended 31 March 1988 even if paid later? I have not added a Reservation to my Opinion for failure to account for WGSA payments on the accrual basis, because the practicability of doing so for the Government's other transfer programs, and the effect on them, have not yet been fully assessed.

The Need for a Concise Annual Financial Report

The Government's financial statements would be more understandable if they were presented in a comprehensive yet succinct annual financial report, similar to annual reports published by corporations in the private sector.
2.20 In 1986, the results of a two-year Federal Government Reporting Study (FGRS) were published. FGRS was a research project undertaken jointly by my Office and the United States General Accounting Office. The purpose of the Study was to identify the financial information about federal governments that users need. The primary focus was on summary data such as those provided in financial statements. The results of the Study have been provided to Members of Parliament, the Government and PSAAC for their consideration. Copies of the Study reports are available from my Office.

2.21 Throughout FGRS, we found that users of government financial reports had concerns about the information they have been getting. We also found that users were able to describe their needs for information with a fairly direct linkage to their activities. The user groups we identified were:

    - legislators;
    - citizens, the media, policy analysts, special interest groups and other levels of government;
    - government planners and managers;
    - economists;
    - corporate users; and
    - lenders, security dealers and their advisers.
2.22 In Canada, expert representatives of each user group began by explaining what they do and the financial information about the federal government they need to do it. The accounting and financial reporting issues that emerged were then distilled down to 16 main questions. These questions were posed to the user group experts and a sample of other knowledgeable people from each user group. Their responses were analyzed, overall findings developed and results published.

2.23 The first question dealt with how the Government's annual financial statements should be communicated. At the present time, the financial statements are presented in the Public Accounts of Canada, a three volume set of documents of massive proportions. User respondents found this presentation cumbersome and difficult to work with. They called for a simpler, more focussed approach to presenting the Government's overall numbers. And they wanted some context for the numbers in plain, non-technical language.

2.24 The prevailing view of users was that a comprehensive but concise annual financial report by the federal government would be extremely valuable. They wanted such a report to provide a broad picture and a more complete understanding of the Government's activities and resulting financial position and to serve as a key to the more detailed information the Government provides in other financial documents.

2.25 More specifically, users thought an annual financial report would bring together, in readily understood format, a consistent set of basic data about the federal government. The data would provide:

    - an overview of the financial position and operating results of the entire Government;
    - a common framework to enhance users' understanding of government operations;
    - a common data base for analysis and for developing and debating policy positions; and
    - an historical perspective from which to consider future budget and spending proposals.
In addition, an annual financial report would:

    - assist users in demanding an accounting for actual results by comparison with earlier projections or budgets;
    - provide a key to matters of interest about which users might want further, more detailed information;
    - facilitate the communication of information on government (for example, by legislators to their constituents or by news media to their audiences); and
    - save users the time otherwise needed to search through voluminous reports for information about the Government and to work out the relationships among data from various sources.
2.26 Besides basic financial information, such as the Government's assets, liabilities, revenues, expenses, deficit and borrowing requirements, most users wanted an annual report to contain other information to increase their understanding of these indicators. Supplementary information often requested included data on tax expenditures, common measures of the performance of the economy, the effects of inflation, regional breakdowns of revenues and expenses and government employment. Users recognized that such information can be presented in an annual financial report only in a highly summarized format. Nevertheless, they wanted the information included to highlight matters that they may wish to examine in more detail; the report should include references to where more detailed information can be found.

2.27 Many users also thought graphs and charts would allow information to be captured quickly and communicated easily. They wanted the charts to provide data for ten years, where possible; numerical values should also be included to facilitate analysis of trends.

2.28 The need for and uses of a comprehensive yet succinct annual financial report for the Government of Canada were very clear from the research conducted. If the Government's financial statements were presented in this type of document, I believe they would be much more understandable to users.

2.29 Since the publication of FGRS, I have been pleased to observe that the Government has taken a number of steps to improve the way in which it communicates summary information to users. In 1987, Section 1 of Volume I of the Public Accounts of Canada was completely re-done. The Section now includes a Financial Overview containing tables, charts and explanatory narrative, together with more detailed Supplementary Information. Where possible, data are presented on a comparative basis for nine years. Topics covered include the deficit and net debt, factors affecting the deficit, and factors affecting financial requirements. Public Accounts Volume I has also been reduced in size. Information not directly related to the Government's summary financial statements has been moved to Volume II. With additional work, it may well be that Volume I of the Public Accounts could become the sort of concise annual financial report that users need.

2.30 In addition, the Department of Finance now publishes two new four-page documents entitled "The Fiscal Monitor" and "The Economy in Brief". These publications are attractively presented, and contain tables, charts and text designed to help users obtain "the big picture" without getting buried in massive amounts of detail.

2.31 I encourage the Government to continue improving the presentation of summary information to users.

A Challenge for the Government

2.32 In its Eighth Report of 30 June 1987, the Public Accounts Committee endorsed "... the need for a succinct annual financial report for parliamentarians and other users of government financial information" and endorsed"... the work of the Public Sector Accounting and Auditing Committee of the Canadian Institute of Chartered Accountants."

2.33 The need for overall financial information about the Government has never been clearer. In my view, if the Government's financial statements are prepared according to PSAAC recommendations, they will be more credible to users. If the statements are presented in a brief but comprehensive annual financial report, they will be more understandable to users. The challenge for the Government is to report more of its summary financial information in the form users need.

Background Information on My Audit Opinion

In reading my Opinion on the Government's financial statements, it is important to realize that I am not guaranteeing the absolute accuracy of the statements. Every year, the Government enters into millions of transactions involving many billions of dollars. Errors do creep in, and some might go uncorrected. When I audit the Government's statements, I seek reasonable assurance that they do not contain errors whose total effect would be material enough to mislead the reader.
2.34 In the next four sections I examine in more detail what my audit Opinion on the Government's financial statements means and how I have arrived at it.

Mandate for my Audit of the Government's Financial Statements

2.35 The mandate for my audit of the Government's financial statements is contained in section 6 of the Auditor General Act. Section 6 states 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 President of the Treasury Board or 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".

An Overview of my Audit Opinion

2.36 My audit Opinion on the Government's financial statements consists this year of two paragraphs followed by three Reservations. The first paragraph, commonly referred to as the "scope" paragraph, identifies the financial statements that I have examined and reported on and the nature and extent of the audit work that I have performed. The second paragraph, commonly called the "opinion" paragraph, contains my conclusions about the Government's financial statements.

2.37 The scope paragraph. The scope paragraph begins by listing the financial statements covered by my Opinion. These financial statements, and the information they convey, are summarized as follows:

Financial Statement

Information Conveyed

Statement of Transactions

the extent to which cash going out exceeded cash coming in (financial requirements)

Statement of Revenue and Expenditure and Accumulated Deficit

what the Government's revenues and expenditures for the year have been (results of operations)

Statement of Assets and Liabilities

the Government's cash balances and investments together with amounts owing to and by the Government at the end of the year (financial position)

Statement of Use of Appropriations

what Parliament authorized the Government to spend compared with what the Government actually spent during the year (summary of appropriations available and used)


It is important to note that my audit Opinion relates only to these summary financial statements and related notes contained in Section 2 of Volume I of the Public Accounts of Canada. It does not extend to the more detailed information presented in other Sections of the Public Accounts Volume I, or to Volumes II and III.

2.38 The scope paragraph concludes by stating that my audit work on the Government's financial statements has been conducted according to generally accepted auditing standards prescribed by the Canadian Institute of Chartered Accountants. I use these standards to ensure that my audit is conducted with appropriate rigour and professionalism.

2.39 The opinion paragraph. The opinion paragraph contains my conclusions about two matters. First, whether the financial statements were prepared in accordance with the Government's stated accounting policies consistently applied. Second, whether the financial statements may be relied on to present fairly the Government's financial position, results of operations and financial requirements. If I conclude that the statements inform readers reliably, I state that information is "presented fairly"; if they do not, I use the phrase "do not present fairly", and add supporting "Reservations" to explain why.

2.40 This year, as in 1987, I have concluded and reported that the financial statements have been prepared in accordance with the Government's stated accounting policies consistently applied. I have also concluded that compliance with these policies results in a summary of appropriations available and used that informs readers reliably. I have therefore reported that the Statement of Use of Appropriations presents information fairly.

2.41 But I have concluded that these stated accounting policies result in a display of information about the Government's overall financial position, results of operations and financial requirements that does not inform reliably. As a result, I have reported that the remaining financial statements do not present information fairly, for the reasons set out in three Reservations.

Materiality and Audit Assurance

2.42 In planning my audit of the Government's financial statements, there are two main factors that determine the nature and extent of the work required. The first factor is a dollar figure called "materiality". This represents a threshold: if total errors fall below this threshold, the financial statements present information fairly; if they exceed this threshold and are not corrected, I refer to them in Reservations to my Opinion. The second factor is a percentage figure called "audit assurance". This represents how certain I want to be that my audit will reveal total errors that equal or exceed the materiality threshold.

2.43 At the conclusion of the audit, I determine whether the effect of uncorrected errors in the financial statements would mislead those who use the statements. If the effect would mislead, I include a Reservation in my audit Opinion.

2.44 In conducting my audit, I cannot be 100 percent certain that it will reveal all errors in the financial statements that, individually or in total, may be material. The size and complexity of the Government, as well as cost considerations, make it impractical for me to examine all or even most of the one and one-half trillion dollars worth of individual transactions entered into during the year.

2.45 What I can do is verify samples of transactions and account balances, determine whether significant financial controls within the Government are working and can be relied on to produce complete and accurate data, and carry out other procedures, such as confirming year-end balances with third parties and conducting analytical procedures to identify anomalies in the reported data.

2.46 What it comes down to is exercising professional judgment about how much auditing is required to provide reasonable assurance to readers that they can rely on reported results and not be misled.

Auditing for Compliance with Parliamentary Authorities

2.47 As part of my audit of the Government's financial statements, I examine and verify compliance with parliamentary authorities to spend, borrow and raise revenues. This is done to the same level of materiality and audit assurance established for my audit of the Government's overall financial position, results of operations and financial requirements. However, this level of materiality is significantly larger than many of the authorities being audited.

2.48 For example, spending authority is granted by Parliament in Appropriation Acts, commonly called votes. There were approximately 460 in the current year. Many departments are responsible for several votes, whose size and complexity vary greatly. Votes range in size from $7 thousand to $11 billion. It would not be practical for me to audit each vote every year to a level of materiality relative to its size.

2.49 I have therefore decided to perform detailed verifications of individual authorities on a cyclical rather than on an annual basis. The results of this work are included throughout the various other chapters in this annual Report to Parliament.

Background Information on the Reservations in my 1988 Audit Opinion

2.50 The next three sections present background information on the three Reservations contained in my audit Opinion on the Government's 1988 financial statements.

Reservation 1: Failure to provide for borrowing by Crown corporations

This reservation concerns the Canadian Wheat Board, an agent Crown corporation that is not included in the Government's financial statements. The Government has guaranteed the Board's borrowings, so it is responsible if the Board cannot pay. In my judgment, the value of the Board's assets is not sufficient to repay its borrowings. I believe that at least $1.3 billion of the Board's borrowings should be provided for in the Government's statements.
2.51 The Canadian Wheat Board (CWB) buys grain from Canadian farmers and sells it on the world market. Under the CWB Act, any profit on operations is distributed to farmers, with any loss being absorbed by the Government. The terms of sales generally specify cash on delivery. However, credit sales are also made, but only with the concurrence of the Government and within guidelines it has established. The Board finances its accounts receivable from credit sales by borrowing from Canadian financial institutions. CWB's borrowings are fully guaranteed by the Government. Because CWB has no other significant assets, repayment of its borrowings depends entirely on receipt of payment for its credit sales.

2.52 As described in Note 12 to the Government's financial statements, the CWB has borrowed $3.8 billion, mainly to finance these accounts receivable. On 31 March 1988, CWB was owed approximately $3.2 billion in accounts receivable from countries experiencing difficulties in repaying their debts. Included in this figure is about $1.3 billion of interest that CWB has charged these countries. About one-half of this accrued interest has been converted to new loans by CWB on direction of the Government. This was done as part of debt rescheduling to ease the financial burden on countries experiencing repayment difficulties. These difficulties continue and, in some cases, further debt rescheduling is expected.

2.53 In my judgment, sound accounting practice requires that accounts receivable be reduced in value in circumstances where receipt is uncertain. I believe that the reported value of CWB's assets has been impaired, putting the Government at risk for some portion of the Board's borrowings.

2.54 An allowance has not been established in CWB's financial statements to reduce the value of amounts owed by countries experiencing repayment difficulties, and interest revenue on these amounts is still being recorded in the accounts. This is being done even where payments are not being received. The reason given in the Board's financial statements for not establishing a valuation allowance for these receivables is that CWB is not at risk should any of its receivables prove uncollectible, because the borrowings used to finance them are guaranteed by the Government. But what about the risk to the Government as guarantor? Surely this depends on the value of the CWB assets available to repay the borrowings that the Government has guaranteed.

2.55 According to the accounting policy stated in Note 1(vii) to the Government's financial statements, amounts receivable from sovereign states are not reduced in value unless a state has formally repudiated its debts. But why would a country formally repudiate its debts when a rescheduling agreement can be obtained that spreads out repayments over an extended period and includes a grace period of several years? Moreover, rescheduling of debts that are past due does not necessarily create assets with value, as the Estey Report on the collapse of the Canadian Commercial Bank and the Northland Bank has pointed out.

2.56 The Government has used the accounting policy stated in Note 1(vii) to determine whether assets of agent Crown corporations have sufficient value to repay corporate borrowings. If borrowings exceed a corporation's ability to repay, a liability is recorded by the Government under the accounting policy in Note 1(i). The purpose of this policy is to recognize borrowings that the Government will likely have to repay. However, application of this accounting policy does not permit the risk associated with CWB borrowings to be recognized, because the countries that owe money to the Board have not formally repudiated their debts.

2.57 I believe that the Government should provide an allowance for some portion of CWB's borrowings. The allowance would recognize the risk to the Government of countries with repayment difficulties not repaying CWB. There are many methods that may be considered in determining an allowance for amounts owed by sovereign nations. Most have been developed to value sovereign debts owed to commercial banks.

2.58 For example, regulatory agencies of several national governments have developed valuation guidelines for use by commercial banks. In Canada, the Superintendent of Financial Institutions' rules provide for the risk of non-payment by requiring that a valuation allowance be established of between 35 percent and 45 percent of loans receivable from countries experiencing repayment difficulties. Accrual of interest would also cease where countries were significantly in arrears.

2.59 Another method of valuing loans by commercial banks to sovereign nations would be by reference to prices in what is called the secondary market for foreign country debts owed to commercial banks. Banks buy and sell in this market to rearrange their holdings of sovereign loans receivable. The secondary market is relatively small compared with other financial markets and does not deal in sovereign to sovereign debts. It does, however, assign a value to the risk associated with amounts owed to commercial banks by countries experiencing repayment difficulties.

2.60 A third method of assigning a value to the risk associated with amounts owed by sovereign nations would be to provide an allowance for accrued and unpaid interest at the end of the year, whether rescheduled or not. Sound accounting practice requires that interest revenue should not be accrued when the ultimate collectability of amounts receivable is not reasonably assured.

2.61 As explained in Note 12 to the financial statements, the Government believes that payment delays on amounts receivable from sovereign nations are not necessarily indicative of a future loss requiring a valuation allowance (emphasis added). This may be so, but the individual circumstances of each country must be looked at separately. There may be situations where payment delays do indicate future losses. The Government does not necessarily receive preferential treatment.

2.62 I believe that an appropriate allowance for Canadian Wheat Board borrowings should be recorded in the Government's financial statements. Our analysis indicates that the allowance could range from $1.3 billion to $1.7 billion. In my judgment, the Government should record an allowance of at least $1.3 billion, the amount of accrued and unpaid interest. If this were done, reported liabilities and the accumulated deficit would be increased by at least $1.3 billion ($1.1 billion in 1987).

2.63 In saying this, I am not in any way suggesting that CWB should write off its accounts receivable from debtor countries. Sound collection practices must prevail if public assets are to be protected. But the Government is clearly at risk for at least $1.3 billion in borrowings by the CWB that it has guaranteed, and the Government's summary financial statements should reflect this reality.

2.64 I encourage the Government to revise its position on this matter and to establish an appropriate allowance for borrowings by the Canadian Wheat Board at the earliest possible date.

Reservation 2: Failure to consolidate the financial statements of Crown corporations

In my judgment, the Government's financial statements are incomplete. They include government activities of departments, but they do not include government activities of Crown corporations. The Government is bigger and its activities more diverse than the statements now reveal.
2.65 The assets, liabilities, revenues and expenditures reported in the separate financial statements of Crown corporations are excluded from the financial statements of the Government of Canada as described in Note 1(i). As a result, I believe that the Government's financial statements do not provide a comprehensive and complete summary of the full nature and extent of the financial affairs and resources for which the Government is responsible. As of 31 March 1988, the net investment in Crown corporations whose financial statements are not consolidated with those of the Government amounted to approximately $20.4 billion or about 50 percent of the Government's total financial assets.

2.66 The exclusion of Crown corporation activities from the Government's statements can have a significant effect on its reported financial position and results of operations. As an example, consider the Canada Deposit Insurance Corporation, whose financial affairs are summarized in Note 17. At 31 March 1988, the unaudited financial statements of the Canada Deposit Insurance Corporation showed an accumulated deficit of $1,136 million. If the financial statements of the Corporation had been consolidated with those of the Government, the accumulated deficit would have increased by $1,136 million ($1,269 million in 1987), and the deficit for the year would have decreased by $133 million ($10 million increase in 1987).

2.67 The Government is studying how and to what extent the separate financial statements of Crown corporations should be consolidated with those of the Government, as well as alternative presentations appropriate for any not consolidated. PSAAC is also studying this issue. As an interim measure, the Government has summarized Crown corporation activities in Note 7.

2.68 Note 7 shows the Government entity (as currently defined) in one column using the modified cash basis of accounting. All Crown corporations are combined in a second column, using the quite different accrual basis of accounting that the corporations use for external reporting. Although this approach is informative, it does not provide a comprehensive and complete financial picture of the Government. This would require adding the columns together and eliminating significant internal transactions and account balances. That has not been done because the bases of accounting differ.

2.69 I hope that PSAAC will recommend a reporting entity that, if implemented by the Government, would broaden the financial statements enough to allow me to delete this Reservation from my Opinion. I am unable to determine the effect on the Government's financial statements of the failure to consolidate Crown corporations until the Government's study and PSAAC recommendations are available for review.

2.70 A related concern - expenditures offset against revenues. In prior years, I have called attention to the Government's practice of reporting payments as a reduction in revenues rather than as program expenditures. This practice continues. For example, in Note 3 the Government has disclosed what the effect on reported revenues and expenditures would be if payments under the Child Tax Credit program were charged to expenditure of the Social Affairs envelope, as I believe they should be. I have not included this matter in my Reservations because it has no effect on the reported deficit for the year.

Reservation 3: Unrecorded liabilities

This reservation concerns unrecorded employee pension liabilities. Basic pension benefits are fully provided for in the Government's financial statements, but entitlements to indexed benefits are not. In my view, an additional liability for employee pensions of about $4.2 billion should be included in the Government's statements.
2.71 The Government has defined liabilities as financial obligations to outside organizations and individuals resulting from events and transactions recorded as of the closing date (31 March). However, in accordance with the accounting policy stated in Note 1(v), and as described in Note 11, financial obligations related to the indexing provisions of employee pension plans (including those of the Public Service, the Canadian Forces, the Royal Canadian Mounted Police, Members of Parliament and Judges) have not been fully recorded. I believe they should be. If full actuarial liabilities for all these obligations had been provided for in the accounts, reported liabilities and accumulated deficit would be increased by approximately $4.2 billion ($3.5 billion in 1987). The increase in the annual deficit will depend on how the Government decides to account for the transaction. This has not yet been determined.

2.72 Although Note 11 is informative, until the Government adjusts the financial statements to reflect an additional liability for pension indexing, the burden is on the reader to do so. I consider this both undesirable and unfair. A reader unfamiliar with financial statements may get quite a different picture than a reader with more experience.

2.73 Government officials have advised me that they will record an appropriate liability for indexing when revised employee pension legislation becomes law. At the date of signing my Opinion on the Government's financial statements, this revised legislation was still before the House of Commons. PSAAC is also studying how these pensions should be accounted for and disclosed by senior levels of government in Canada. When an appropriate liability is recorded by the Government, I should be able to withdraw this Reservation from my Opinion.