Public Sector Accounting Board
20 Questions
About the Government Reporting Entity
THE CANADIAN INSTITUTE OF CHARTERED ACCOUNTANTS
Public Sector Accounting Board
20 Questions
About The Government Reporting Entity
THE CANADIAN INSTITUTE OF CHARTERED ACCOUNTANTS
Foreword
This publication answers some basic questions about a
government’s financial reporting entity – what it is, why it’s
important and how its financial statements are put together.
Who Should Read this Publication?
Elected officials of Canada’s federal, provincial, territorial and
local governments, the media, taxpayers and other interested
individuals will find this guide useful for:
• Understanding the need for, and the benefits of, a
government’s consolidated financial statements.
• Determining why certain organizations are included in, or
excluded from, a government’s summary financial statements.
• Furthering the understanding of “control” and what it
means for governments.
• Gaining insights into how a government accounts for its
individual organizations.
• Assessing the extent of the financial affairs and resources
entrusted to a government.
• Asking appropriate questions about what is and should be
included in the scope of a government’s financial statements.
Why should you read this guide?
A government’s financial statements are designed to
communicate information useful for assessing its financial
position, results of operations and cash flows at a particular
point in time. To permit that assessment, it is important that
its financial statements describe the full nature and extent
of all of its financial activities and resources. The individual
financial statements of each organization under a government’s
control can provide only a fragmented view of its overall
financial position and results.
Understanding what makes up a government’s financial
reporting entity is important because it establishes the criteria
for determining which organizations are part of a particular
government and how those organizations are accounted for
in that government’s financial statements. This aspect of
government financial statements helps users understand the
size of government and provides the necessary accountability
reporting that users expect.
What is a reporting entity?
A reporting entity is any unit or activity that uses resources to
provide goods or services. A unit or activity encompasses legal,
administrative, economic, accounting and other entities.
For the purposes of external financial reporting, a reporting
entity is an organization that is obliged to prepare general
purpose financial reports. This obligation arises when users
of financial information depend on those reports for the
information they need to make financial decisions but are
unable to ask for specific information from the reporting
organization directly. It is generally the existence of these
“dependent users” that determines whether an organization is a
reporting entity. A “non-reporting entity,” on the other hand,
could be a small company whose owners are also the managers
and does not have to prepare general purpose financial
statements.
Who sets the standards?
The Public Sector Accounting Board (PSAB) of the Canadian
Institute of Chartered Accountants (CICA) sets generally
accepted accounting principles (GAAP) for the public sector
in Canada. One of the fundamental building blocks of GAAP
for governments is a standard that defines what a government
reporting entity is and how organizations within that
government-as-whole entity should be accounted for. That
standard is found in the Public Sector Accounting (PSA) Handbook
Section PS 1300, GOVERNMENT REPORTING ENTITY.
Contents
Questions
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Why do we need consolidated financial statements?
Why is defining the reporting entity important?
How do you decide which organizations are part of government?
What is control?
Are there different types of control?
How do you know whether government control exists?
What are the main indicators of government control?
What are other indicators of government control?
How is control assessed considering the definition and indicators?
What is temporary control?
What is not control?
If an organization is restricted, can it be controlled?
How important is the legal form of the relationship between a government and an organization?
What types of government organizations are there?
How should controlled organizations be accounted for in government financial statements?
Why are government business enterprises treated differently?
What impact does the revised standard have on the budget process?
When does the standard apply?
What types of organizations are likely to be accounted for using the transitional provisions?
Did the revised definition of the government reporting entity change the government reporting entity in every jurisdiction?
See Page
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1 Why do we need consolidated financial statements?
How a government chooses to deliver its services should
not significantly alter the financial information it reports. It
is a fact that governments differ in the way they choose to
provide some programs even though the actual programs are
essentially similar in nature. For example, one government
may choose to manage a licensing function through a
department while another may choose to establish a separate
board for that purpose.
Although many government organizations prepare their
own financial statements, individually those statements
can provide only a fragmented view of the overall activities
of their host government. Without summary financial
statements, it is impossible to get a complete picture of
the government’s overall activity, whether for decisionmaking purposes or for demonstrating accountability for
the resources provided by, and managed on behalf of, the
resource providers. One cannot determine if these individual
organizations are actually part of that government.
If an organization that should be part of government is
accounted for outside a government’s reporting boundaries:
• The revenues and expenses of that activity will not be
reported in the government’s financial statements, therefore
understating the total revenue-raising and costs of
government programs.
• Assets and liabilities attributable to the excluded
organization will not appear in the government’s financial
statements, thereby understating the assets and liabilities.
• Advances between the organization and the government
will be treated as assets and liabilities by both, thereby
overstating these amounts. Yet, in reality, the government
is merely lending money to one of its component parts and
will end up repaying itself. Similarly, if a person transfers
money from one of his pockets to another, he is not better
or worse off.
A government’s summary financial statements provide an
accounting of the full nature and extent of its financial
affairs and resources, including those of its agencies and
enterprises. Summary financial statements are a key element
of government financial reporting because governments use
them to report on how they managed their financial affairs
and resources at an overview level.
Summary financial statements recognize that, even though
a government and its organizations may be separate legal
or organizational entities, together they make up a single
economic unit. Consolidation ensures that the financial
statements reflect only transactions and balances with third
parties. Providing consolidated information helps users
gain an overall understanding of a government’s assets and
liabilities, revenues and expenses and cash flows.
What you need to know:
• What are the total assets and liabilities for which the
government is responsible?
• What are the government’s total revenues and expenses?
• What were the government’s total cash requirements
and how did it meet those requirements?
2 Why is defining the reporting entity important?
For the purposes of financial reporting, the phrase “reporting
entity” describes which departments, funds, agencies,
boards, commissions, Crown corporations and not-for-profit
organizations’ assets, liabilities, revenues, expenses and cash
flows are part of a government’s summary financial statements
and which are not.
In broad terms, governments are seen to be responsible for
many things that would not ordinarily be included in their
financial statements. For example, although a government
may be responsible for the provision of healthcare, this does
not mean that it is responsible for the assets and liabilities of
a particular private sector healthcare provider.
The issue of what should be included when a government
prepares its summary financial statements is critical because
choosing to include or exclude certain organizations can have
an enormous impact on the financial statements and the
picture they provide about government finances. No issue has
a greater impact on a government’s financial reporting than
establishing the boundaries of its financial statements.
Think of the Enron scandal and you will understand how
important it is to have clear criteria for what organizations
should be included in a government’s financial statements.
Summary financial statements are supposed to tell users what
the financial position and results are for the government
as a whole. And so the rules for deciding what is part of
government – what a government is responsible for and what
it is not – need to be clear.
As a starting point for understanding the reporting entity
issue in the public sector, consider whether the federal,
provincial, territorial and local governments are one
consolidated reporting entity or separate reporting entities.
Answering this question paints a rather different picture of
government finances.
The government reporting entity standard helps to draw a
circle around the activities a government should report in
its summary financial statements. The standard looks at the
substance of the relationship between a government and
the various organizations it uses to carry out its policies and
deliver services to determine what organizations should be
included in the financial statements. Having clear boundaries
for including or excluding organizations helps users
understand and assess the magnitude of the public financial
affairs and resources entrusted to governments. It also helps
elected officials understand the extent of the financial affairs
and resources for which they are responsible.
Some public sector organizations are clearly part of
government. Others clearly are not. And the status of some
public sector organizations is less obvious. PSAB’s reporting
entity standard provides criteria to help governments know
which organizations should be reported as part of their
financial statements.
What you need to know:
• Does the audit opinion contain any reservations
regarding organizations that should be included or
excluded from the government’s financial statements?
• If so, what effect would including (or excluding) these
organizations have on financial position and results?
• Do the notes to the financial statements include a
listing of the major organizations that make up the
government’s reporting entity?
3 How do you decide which organizations are part of government?
A government reporting entity comprises all organizations
controlled by that government. The challenge is to understand
what control means in the public sector because that is a
major part of what governments do – control.
PSAB decided that a principles-based approach to
determining what organizations should be included in a
reporting entity was best because of the wide variety of
organizations out there and their different relationships
with government. It was not possible to provide a list
of organizations that would be included because each
government is different and ever changing.
This approach recognizes that, in different jurisdictions,
organizations may be treated in different ways depending
on whether or not they are controlled by a government. So,
for example, in some provinces, hospitals may be part of a
government reporting entity if it is determined that they are
controlled by that government. In other provinces, hospitals
may not be part of the government reporting entity because
it does not control them. Organizations are included as part
of a government reporting entity because they are controlled,
not because they are a particular type of organization.
Section PS 1300, therefore, relies on an evaluation of the
substance of the relationship between a government and an
organization rather than on the organization’s legal form.
While some organizations may have a certain legal form, it is
important not to allow this form to cloud the determination
of whether an organization is included or excluded from the
reporting entity. If, in substance, a government controls an
organization (as defined in the standard), then regardless of
the legal form of the relationship, that organization should
be included in the government’s financial statements. An
organization is outside the government reporting entity if the
government cannot exercise control over it.
A determination of whether an organization is included or
excluded from a government reporting entity is based on
legislation existing at the reporting date. The fact that a
government can introduce new legislation or change existing
legislation and, thus, change the nature of its relationship
with an organization in the future, doesn’t affect whether
that organization is included as part of the government at the
reporting date. Given the government’s ability to influence,
without this requirement, virtually every economic unit could
be included in a government’s reporting entity. Also, without
this requirement, it might be necessary to make judgments
in some jurisdictions about a government’s ability to change
legislation. Such judgments might depend on whether a
majority or minority government existed. In local jurisdictions,
where elected officials are non-partisan, the ability to make
legal changes may be even more uncertain. Therefore, it
was concluded that Section PS 1300 should be based on the
legislative framework existing at the reporting date.
What you need to know:
• Was control used as the criteria for determining which
organizations comprise the reporting entity?
• Have any organizations come into or gone out of the
reporting entity in the current period?
• Are there instances where legislation has made changes
affecting the reporting entity?
4 What is control?
The standard defines control as:
“the power to govern the financial and operating policies of
another organization with expected benefits or the risk of loss
to the government from the other organization’s activities.”
It helps to think of the concept of control using a continuum
(see Figure 1). Governments achieve their objectives through
a wide range of organizations which, individually in their
relationship with a particular government, fall somewhere
along a continuum. At one end of the continuum are
organizations clearly within the boundaries of government,
for example, a government department or a Crown
corporation. These organizations do not have the power to
act independently and are controlled by the government.
At the other end, organizations do act independently and,
while the government may have some influence on them,
it will be clear that there is no control. An example might
be an independently constituted for-profit organization that
contracts with the government. The middle of the continuum
contains many other organizations under varying levels of
government influence.
Figure 1
CONTINUUM OF INFLUENCE
Government
Organization
Control exists
Along the continuum, the nature of the relationship between
a government and an organization needs to be considered to
determine whether the government does, in fact, control the
organization. In theory, there is a point on the continuum at
which control exists. In reality it is likely not a set point, but
rather a grey area where control will be difficult to determine.
Professional judgment will be necessary to evaluate the
Private
Organization
Control does not exist
but government may
regulate or fund
status of each organization. The goal of the standard is to
provide guidance that narrows down the grey area and helps
determine whether an organization within this grey area is
controlled by a government.
Care needs to be taken when assessing control as there
is a difference between control, regulation and financial
dependence.
Having the power to govern
There are three main elements to this definition of control.
The first is that having control does not depend on actually
having to exercise that control. Even if a government never
exercises control, the fact that it has the power to do so
is sufficient. An organization that has been delegated a
financial and operational authority must operate within the
parameters established by the government and, as long as
the organization is doing what it is supposed to, there is no
need for government intervention. If it doesn’t, however, the
government has the power to re-direct the operations of that
organization.
The financial and operating policies
The second element of the definition of control relates to
governing an organization’s financial and operating policies.
Financial and operating policies are principles and practices
that determine how an organization carries out its activities
or conducts its business.
The ability to govern these policies is an important element
of government control because, together, these policies
establish the fundamental basis for how the organization
operates and achieves its mission and mandate.
The financial and operating policies may be governed in
different ways:
• A government may establish an organization’s fundamental
purpose and, by predetermining its financial and operating
policies, eliminate or significantly limit the ability of that
organization to make future decisions.
• A government may direct the organization’s financial and
operating policies on an ongoing basis.
• A government may veto, overrule or modify the
organization’s financial and operating policies.
A government does not need to manage an organization’s
activities on a day-to-day basis to control it. It is the
government’s authority to determine the policies governing
those activities that is important.
Government expects to benefit
The final element necessary to establish control is that a
government must expect to benefit (or be exposed to the
risk of loss) from the controlled organization’s activities.
Benefits may be financial or non-financial. For example, the
government might require the organization to cooperate in
pursuing the government’s public policy objectives. Or a
government may benefit financially by receiving dividends.
A government may also be exposed to the risk of loss or
be responsible for an organization’s net liabilities. Such
benefits or risks would have to flow directly from the control
relationship and not just be incidental benefits or risks. And,
they would have to accrue to the government itself rather
than affecting the public at large.
What you need to know:
• What factors were considered when determining
whether a particular organization is controlled by a
government?
• Does the government actively or passively exercise its
control over that organization?
• What are the benefits or risks associated with this
organization?
5 Are there different types of control?
No. Control, from the perspective of Section PS 1300, is
a fact. There are, however, different ways a government
can control another organization. These different methods
of control result in variations in the level of influence the
government has.
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6 How do you know whether government control exists?
Having established that a government reporting entity should
include all the organizations a government controls, the real
work is in deciding which organizations the government
actually controls. Such determinations can be difficult.
when they exist together with certain other badges. Whether
a government controls an organization is a matter of
professional judgment based on the definition of control and
the particular circumstances of each case.
The starting point in assessing control is the definition
of control (see Question 4) and the related guidance set
out in the PSA Handbook Section PS 1300, GOVERNMENT
REPORTING ENTITY. Control is determined by looking at the
particular circumstances of each organization. In applying the
guidance, it is necessary to determine the substance of the
relationship between a government and an organization. All
relevant aspects and implications of the relationship would
be considered in determining whether or not the government
controls the organization.
For each possible indicator, the degree of government
influence involved would determine its importance as
evidence of control. The degree of importance of each
indicator depends on the particular circumstances in each
case. As noted, each indicator might provide a badge of
control that, together with other badges, would provide
sufficient evidence to conclude that control exists.
The standard sets out various indicators that provide evidence
that control exists. Because of the complexity and diversity
of relationships between a government and the many
organizations under its purview, no one criterion provides
sufficient evidence of control in all cases. In other words,
there is no “bright line” or “silver bullet” test to indicate
control exists. Rather, it is the preponderance of evidence
that, taken in its totality, allows such a judgment to be made.
The factors that provide evidence of control can be thought
of as “badges of control.” Some badges are bigger than others
and some provide better evidence of control, particularly
In some circumstances, it will be easy to determine the
existence of control, for example, when an organization’s
relationship with a government lies on the extremes of the
control continuum. In other cases, it will be more difficult
and the degree of professional judgment required will be
higher. For example, whether a government has the power
to appoint a majority of an organization’s governing body
is generally a question of fact – it either exists or it does
not. Whether a government is in a position to govern an
organization’s financial and operating policies might be less
clear. Although a government might directly determine
some organizational policies, it is a matter of judgment to
determine if this is evidence of control and the size of the
badge it represents.
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7 What are the main indicators of government control?
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There are four persuasive indicators of control:
1.The government has the power to unilaterally
appoint or remove a majority of the members of the
organization’s governing body.
If the government can appoint a majority of the board
members, this would be an indicator of control. Similarly,
the government’s ability to remove board members could
be an indicator of control.
2.The government has ongoing access to the assets of
the organization, has the ability to direct the ongoing
use of those assets, or has ongoing responsibility for
losses.
If a government can access the organization’s assets on an
ongoing basis or is responsible for its liabilities, that can
be an indicator of control. A government can access assets
when it can force an organization to pay a dividend. A
persuasive indicator of government control might exist
if, on dissolution of the organization, the assets revert
back to the government. Similarly, if on such dissolution,
the government is “on the hook” for the liabilities, this
responsibility could be an indicator of control.
3.The government holds the majority of the voting
shares or a “golden share” that confers the power
to govern the financial and operating policies of the
organization.
Government organizations don’t often have voting shares.
But, if they do, and the government owns a majority of
them, this ownership would be a persuasive indicator of
control. A “golden share” refers to a class of shares entitling
the holder to specified powers or rights exceeding those
normally associated with the holder’s ownership interest in
the organization or representation on its governing body.
In other words, the golden share grants rights that are
consistent with controlling the organization.
4.The government has the unilateral power to dissolve
the organization and thereby access its assets and
become responsible for its obligations.
A government may create an organization and establish
parameters around governance. The ability of the
government to dissolve the organization is also a factor
to consider. If a government can step in and dissolve an
organization without consultation, this ability may be an
indicator of control.
While none of these indicators on its own is a “silver
bullet” for control, each is persuasive evidence of control.
If all of them were to exist together, for example, it would
be hard to conclude that the government does not control
the organization. What is important in assessing control is
not the absolute number of indicators but, rather, applying
the definition of control and examining the nature of the
evidence that describes a government’s relationship with an
organization.
8 What are other indicators of government control?
There may be other indicators of control as well. In
determining whether a government controls an organization,
it is necessary to evaluate these other indicators along with
all other aspects of a government’s relationship with an
organization, including the four persuasive indicators of
government control set out in Question 7. The other possible
indicators of control are:
1.The government provides significant input into
the appointment of members of the organization’s
governing body, by appointing a majority of those
members from a list of nominees provided by others
or by being involved in the appointment or removal of
a significant number of members.
While a government may not have the right to appoint the
majority of board members, if it can appoint a significant
number of members or is heavily involved in those
appointments, this may be evidence of control. On its own,
this ability is unlikely to be adequate evidence of control,
but in conjunction with some of the other indicators, it
may be an important factor to consider in the control
assessment.
2.The government can appoint or remove the CEO or
other key personnel.
The ability of the government to hire or fire key personnel,
such as the CEO, may provide evidence of control.
3.The government establishes or can amend an
organization’s mission or mandate.
The key to this indicator is whether a government has
established an organization’s mission and/or mandate to
carry out government objectives, including how this will
be done. For example, a government may establish in
legislation an organization’s purpose and how it will carry
out this purpose. The government may also establish limits
to the organization’s mandate.
4.The government approves the organization’s business
plans or budgets and requires amendments, either on
a net or line-by-line basis.
If a government approves an organization’s budget or
business-plan, this approval could be an indicator of
control. The approval does not have to be on a line-by-line
basis but could be on a net basis only.
5.The government establishes borrowing or investment
limits or restricts the organization’s investments.
If the government establishes organizational borrowing
limits or approvals, this may provide evidence of control.
Similarly, the government might set investment limits.
This factor alone is not adequate evidence but, in
combination with other factors, could be an indicator of
control.
6.The government restricts the revenue-generating
capacity of the organization, notably the sources of
revenue.
A government may be in a position to control an
organization’s revenue source. In such cases, the
government may be able to direct where revenues are to be
earned or limit the organization’s ability to earn revenues
from certain areas.
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7.The government establishes or can amend the
policies an organization uses to manage, such as those
governing accounting, personnel, compensation,
collective bargaining or deployment of resources.
This category relates to a government’s ability to influence
an organization’s financial polices, accounting, personnel,
collective bargaining and the deployment of resources.
This potential indicator of control is intended to address a
myriad of organizational management functions in which
the government might be involved.
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These indicators of control are individually less persuasive
than the four described in Question 7. In combination
with other indicators they may, however, provide evidence
of control. Again, it is important to apply the definition
of control and use the indicators as evidence in assessing
whether or not control exists. All aspects of a government’s
relationship with an organization would be evaluated.
9 How is control assessed considering the definition and indicators?
One way to evaluate the nature and extent of these
indicators of control is to summarize them considering the
persuasiveness of the indicators and the degree of judgment
involved in evaluating and identifying them.
For some factors, the degree of judgment required to determine
if a control criterion exists could be low or high. For example, it
will be fairly straightforward to determine if a government has
the ability to appoint an organization’s chief personnel. It may
be more difficult, however, to determine if the government has
the ability to establish the organization’s mission and mandate.
In addition, when assessing control, some factors will have a
greater degree of importance or carry a higher “weighting”.
For example, if a government can appoint a majority of the
board or can access the organization’s assets at will, then it is
highly likely that control exists. These factors carry a higher
degree of importance than others.
The discussion below illustrates what type of evaluation
might be done for a particular control criterion. The
discussion is general and should not be considered a definitive
judgment of how to evaluate a particular control criterion.
A government would need to look at each of the individual
relationships with its organizations and determine the
appropriate weighting of the control criteria identified for
each organization. The degree of importance of the control
indicators depends on the circumstances. In some situations,
a particular indicator may provide a higher degree of evidence
of control, whereas in other situations, the same indicator
may not be as important.
It is fairly straightforward to determine if a government has
the ability to appoint or remove the majority of the members
governing an organization. It is normally a factual situation
and so requires little judgment to determine if it exists. The
government either has the ability to appoint the majority of
members or it does not. Because this criterion is one of the
four persuasive indicators of control, it is very important in
evaluating whether control exists. If a government has this
ability, it would be given significant weight when evaluating
whether the government controls the organization.
In contrast, it might be more difficult to determine if a
government has the ability to establish an organization’s mission
and mandate. One example of the possible analysis is as follows:
• Having this ability is one of the less persuasive indicators
of government control over an organization.
• In many cases, this ability would be classified as having
moderate importance in determining if control exists.
• Evaluating whether this ability exists for a government
may take a significant degree of judgment.
• You might conclude that when a government has the ability
to establish the organization’s mission and mandate, this
ability should not be given significant weight in determining
whether the government controls the organization.
Each element of a government’s relationship with an
organization would be evaluated in the same way. The
weighting of the indicators of government control identified
for a particular organization will be unique to that
government’s relationship with that particular organization.
Whatever method of evaluation is chosen, it is the
preponderance of evidence that will determine whether a
government controls an organization. For each applicable
indicator, the degree of government influence would
determine its importance as evidence of control. In weighing
the evidence, it would be necessary to consider the indicators
collectively as well as individually.
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10 What is temporary control?
In looking at the indicators of control that relate to
governance, one of the challenging tasks is delineating the
differences between these governance abilities under “normal”
circumstances versus a “force majeur” situation, where a
specific event or crisis situation might require a government
to step in or otherwise intervene to control an organization.
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This type of control is temporary and arises only when a
specific, infrequent event occurs. A government’s ability
to take temporary control of an organization in exceptional
circumstances (such as a crisis involving bankruptcy or a
board failure) doesn’t mean that the organization has to be
included in the government reporting entity. Temporary
control is short term in nature and the intention is to
relinquish control as soon as the crisis has been addressed.
11 What is not control?
The focus of the reporting entity standard is on defining
control and providing guidance to help in assessing when
control exists. But it’s also important to distinguish what
doesn’t constitute control.
Financially dependent ≠ controlled
Many organizations, both inside and outside a government
reporting entity, are financially dependent on a government.
This dependence creates a relationship of influence, where the
government may require the organization to be accountable
for certain things, such as reporting compliance with funding
agreements.
Financial dependence on its own would not, however, allow a
government to control an organization. The governing body
of that organization can still make independent decisions
on its financial and operating policies. As these policies
might have significant financial impacts on the organization,
retaining this ability to set policies is important. It means
that the governing body has the ability to walk away from
the government funding or shut things down if it wants to.
A government may require an organization to submit reports
to demonstrate compliance with certain funding terms and
conditions. But these requirements aren’t evidence of control
because the government’s interest in the organization extends
only to the funding aspects of operations. For example, a
private sector day care service that receives government
funding may be required to demonstrate compliance with
the associated terms and conditions. The governing body
of the day care provider will, however, retain discretion as
to whether it will take funding from, or do business with,
the government. Many not-for-profit organizations rely
on government funding but that does not mean they are
controlled by government.
Regulation ≠ control
Governments often establish the regulatory environment
for an industry or to protect the public interest. This role
could include establishing regulations imposing conditions
or sanctions on the operations of an organization or type
of organization. Even in such scenarios, however, the
governing bodies of the regulated organizations make
independent decisions within that regulatory framework. A
government may require the organization to submit reports
to demonstrate compliance with the regulations, but these
requirements are not evidence of control. The government’s
interest in these organizations extends only to the regulatory
aspects of operations. For example, although a regulator
might establish limits on rates for revenue purposes or set
limits on borrowing, the regulator does not control the
organization.
Constitutional responsibility
≠ control
Many of the responsibilities of Canadian governments,
such as defense, health care and education, are set out in
the Constitution. When a government has constitutional
responsibility for health care, this does not mean that the
government necessarily controls all entities delivering
health care services. The government may choose to
meet its constitutional responsibility by delivering those
services directly through a controlled organization, such as
a government department, or more indirectly through an
independent contractor, which is not a controlled entity.
What is relevant is not the nature of the services being
provided and who is constitutionally responsible to see that
they are delivered, but rather the nature of the relationship
between the government and the organization providing the
services.
17
12 If an organization is restricted, can it be controlled?
Some organizations are subject to restrictions or stipulations
that limit their ability to do certain things. Arguments
have been made that, if a government’s ability to access an
organization’s assets is restricted, such an organization is
outside government’s control. This approach focuses on the
risks and rewards of ownership.
18
The definition of the government reporting entity hinges on
control, not the risks and rewards of ownership. The fact that
restrictions exist does not change the relationship between a
government and an organization. In fact, restrictions don’t
relate to the right of government access but rather to the
degree of access the government has to resources. The fact
that an organization has to maintain certain resources which
do not necessarily accrue directly to a government isn’t a
criterion for excluding that organization from the reporting
entity – though the fact that limits exist under legislation as
to how such resources can be used is important information
to users and should be disclosed.
For example, RESTRICTED ASSETS AND REVENUES, PSA
Handbook Section PS 3100, defines internally restricted
entities as “separate legal entities within the government
reporting entity, created by the government’s own legislation.
This legislation establishes an accountability relationship
with parties external to the government reporting entity to
use the entity’s assets or net assets as specified while that
legislation is in effect.”
Governments do, in fact, control internally restricted
entities. As long as a government operates within the defined
limitations, it can fully access the resources of these entities
and so control them. Although, under the standards set out in
Section PS 3100, a government would be required to disclose
any such restrictions, the entities involved are controlled and
would be included in the government reporting entity.
What you need to know:
• Do the notes to the financial statements include
disclosures about restrictions related to internally
restricted entities?
13
How important is the legal form of the relationship between a government and an organization?
As already mentioned, in assessing control, you consider the
substance of the relationship between a government and an
organization. It’s important to note that the true nature of
such a relationship may not be reflected by its legal form.
It isn’t enough to assess control based on the legal form.
All aspects and implications of the relationship need to be
considered in determining whether or not control exists. You
should not let the legal form cloud the assessment of whether
an organization is controlled and, thus, should be included in
a government reporting entity.
The revised standard in GOVERNMENT REPORTING ENTITY,
Section PS 1300, is principles-based. It specifies the
characteristics of the organizations that should be included
rather than specific types of organizations (e.g., hospitals).
This approach means that, sometimes, professional judgment
will be required to determine if an organization is controlled
and therefore should be included in government financial
statements.
If, in substance, a government controls an organization (as
defined in Section PS 1300), regardless of the legal form of
their relationship, the organization should be included in the
government’s financial statements. An organization is outside
of the government reporting entity when the government
cannot exercise control over it.
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14 What types of government organizations are there?
Governments deliver public programs and services through
a wide variety of departments, funds, agencies, boards,
commissions, Crown corporations and not-for-profit
organizations. Some programs and services are the direct
responsibility of a government while, in other cases, this
responsibility has been delegated to other organizations.
Many of these organizations produce their own financial
statements for reporting to the government on their financial
affairs, resources and operations, as well as for providing
financial information and accountability to external users.
To have some consistency in government financial reporting,
PSAB identified some broad classifications of government
organizations.
Figure 2
Government and
its Organizations
20
Government
Departments,
Funds, Ministries
Government
Business
Enterprises
Government
Business-Type
Organizations
The Introduction to the Public Sector Accounting (PSA)
Handbook identifies the different types of government
organizations and provides each with specific directions on
which GAAP to use in preparing its financial statements.
These directions are based on the premise that, for some
Government
Not-for-Profit
Organizations
Other
Organizations
organizations, something other than government GAAP is
more appropriate to their objectives and operations. Some
government organizations are directed to use the GAAP used
by businesses while others are directed to use GAAP for notfor-profit organizations.
Some government organizations, such as government
departments, are so integral to the business of government
that their objectives and operations are substantially the same
as government. These organizations would generally use
government GAAP in preparing their financial statements.
Other government organizations are structured and have
objectives similar to those in the private sector.
Government business enterprises (GBEs)
A government business enterprise has all of the following
characteristics:
1.It is a separate legal entity with the power to contract in
its own name and can sue and be sued.
2.It has been delegated the financial and operational
authority to carry on a business.
3.It sells goods and services to individuals and organizations
outside of the government reporting entity as its principal
activity.
4.It can, in the normal course of its operations, maintain its
operations and meet its liabilities from revenues received
from sources outside of the government reporting entity.
GBEs are financially self-sustaining government organizations.
They operate as businesses and get very little government
funding. They make money (or at least break even) from
business activities carried on outside of the government. An
example of a GBE would be a provincial Liquor Control Board
or a local government’s hydro-electric utility.
Government business-type
organizations (GBTOs)
A government business-type organization has the
following characteristics:
1.It is a separate legal entity with the power to contract in
its own name and can sue and be sued.
2.It has been delegated the financial and operational
authority to carry on a business.
3.It sells goods and services to individuals and organizations
as its principal activity.
Government business-type organizations are different from
GBEs because they usually sell goods and services within the
government or they get significant government subsidies to
help carry on operations. But GBTOs do conduct themselves
like businesses and often compete in an open market. An
example of a GBTO is the Canadian Broadcasting Corporation
(CBC) or a property management Crown corporation such as
British Columbia Building Corporation (BCBC).
The Introduction to the PSA Handbook tells GBEs and
GBTOs to use the GAAP for business set out in the CICA
Handbook – Accounting when they prepare their financial
statements.
21
Government Not-for-Profit
Organizations (GNFPOs)
Not-for-profit organizations are defined in the private sector as:
…entities normally without transferable ownership interests,
organized and operated exclusively for social, educational,
professional, religious, health, charitable or any other notfor-profit purpose. A not-for-profit organization’s members,
contributors and other resource providers do not, in such
capacity, receive any financial return directly from the
organization.1
A government not-for-profit organization meets the
definition of a private sector not-for-profit organization and
has counterparts outside the public sector.
22
Key to the GNFPO definition is the requirement that the
GNFPO be able to compare itself to similar organizations
in the private sector. An example of a GNFPO would be a
government museum or a public hospital.
The Introduction to the PSA Handbook tells GNFPOs to use
GAAP for not-for-profit organizations, set out in the CICA
Handbook – Accounting, when they prepare their financial
statements.
1
Other government organizations
Although most government organizations will fall into one
of these categories, some won’t fit quite as easily. These other
organizations would typically not have a set of identifiable
characteristics but, rather, would be fairly unique and less
homogeneous across jurisdictions. Not many government
organizations would be classified as “other.”
Some government organizations are clearly not GBEs,
GBTOs or GNFPOs, nor such an integral part of government
that government GAAP is appropriate for their financial
statements. These organizations must evaluate the nature of
their primary objectives and operations and choose the GAAP
that is most appropriate to their circumstances and then
apply it consistently.
When preparing their financial statements, many government
organizations may apply GAAP that is different from the
government GAAP used to prepare the summary whole of
government financial statements. When those government
organizations are added together to make up the summary
financial statements, the government makes sure that
everything is converted to government GAAP (see “What is
consolidation?”, Question 15, “conforming the accounting
policies”).
FINANCIAL STATEMENT PRESENTATION BY NOT-FOR-PROFIT ORGANIZATIONS, CICA Handbook – Accounting, paragraph 4400.02.
controlled organizations be accounted 15 forHowinshould
government financial statements?
GOVERNMENT REPORTING ENTITY,
Section PS 1300, says
that government financial statements should consolidate the
financial statements of all controlled organizations except
government business enterprises (GBEs). GBEs are to be
included in government financial statements using the
modified equity method.
What is consolidation?
Consolidation combines the individual financial statements of
the organizations that make up a reporting entity to present
it as a single economic unit. The financial statement items of
controlled organizations are aggregated line-by-line, adding
together all of the corresponding assets, liabilities, revenues
and expenses. Where needed, the financial statements of the
organizations being consolidated would be adjusted so that
they are based on the same accounting policies and standards
(as set out in the PSA Handbook) as the government’s financial
statements. This is called “conforming” the accounting policies
of the controlled organizations to those of the government.
Once these adjustments are made, any inter-organizational
balances and transactions would be eliminated so that only
the transactions and balances with parties outside of the
government remain. Then, the assets, liabilities, revenues and
expenses are added together on a line-by-line basis and the
aggregate amount for each financial statement item is reflected
in the government’s summary financial statements.
What is “modified equity” accounting?
The equity method of accounting produces the same
net results as consolidation. It, however, reports an
organization’s net equity and income as one line on the
statement of financial position and statement of annual
results, respectively, instead of adding the organization’s
corresponding financial statement items to those of the rest of
government on a line-by-line basis. In a pure equity method
of accounting, the organization’s accounting principles are
changed to be consistent with those of the government (i.e.,
to government GAAP as set out in the PSA Handbook).
GBEs, however, are included in government summary
financial statements on a modified equity basis. The equity
method is modified only to the extent that the GBE’s
accounting principles are not adjusted to conform to those
of the government. GBEs use business GAAP as set out
in the CICA Handbook – Accounting. The net assets of the
GBE are reflected as an investment (a financial asset) on the
government’s consolidated statement of financial position,
while the GBE’s net income is presented as a separate item on
the government’s statement of results.
What you should look for:
Do the notes to the financial statements include:
• An accounting policy note explaining consolidation
and which organizations are consolidated in
government financial statements?
• An accounting policy note explaining modified equity
and which organizations are included in government
financial statements on a modified equity basis?
• An accounting policy note explaining that some
government organizations are excluded from
consolidation or inclusion on a modified equity basis?
• An accounting policy note explaining that some
government organizations have been included in the
financial statements on a basis other than consolidation
or modified equity?
23
Figure 3
Government departments,
funds and agencies
GBEs
Other government
organizations
GNFPOs
The Government
Reporting Entity
GBTOs
24
Red =Consolidated controlled government organizations
Grey = GBEs — Controlled government organizations included in government financial statements on a modified
equity basis
16 Why are government business enterprises treated differently?
Government business enterprises (GBEs) are different from
other government organizations because their objectives and
operations are more akin to a business. Business GAAP, as
set out in the CICA Handbook – Accounting, is the best way
of measuring a GBE’s results of operations (see Question 14
regarding types of government organizations). GBEs sell
goods or services to individuals and organizations outside
of government. In the normal course of business, a GBE is
able to maintain its operations and meet its liabilities with
revenue from outside the government reporting entity. In
other words, GBEs are “self-supporting” or “financially selfsustaining.”
Because GBEs are self-supporting, they have a different
relationship with the government. Government financial
statements report a GBE as an investment because the
government expects the enterprise to repay its debts and
perhaps even to generate surpluses that may be available for
the government to use. The investment in a GBE is reported
as a financial asset2 because at a minimum, the GBE is
expected to be financially self-sufficient and may even provide
resources that will finance future operations.
Accounting for a GBE by the modified equity method avoids
co-mingling the GBE’s results with those of the government.
By reporting net assets as a single-line investment in a GBE
2
and the net income as a separate item on the statement of
results, the accounting reflects the unique accountability
relationship between a government and a GBE.
Recording the net assets of a GBE as an investment shows
the impact of the organization on the government’s ability to
repay its own debts or finance future government operations.
What you should look for:
• Do the financial statements contain, in notes or
schedules, a list of the GBEs included by the modified
equity method in the government’s summary financial
statements?
• Do the financial statements include, in notes or
schedules, condensed supplementary financial
information on government business enterprises? For
example:
- the financial position and results of operations;
- the nature and amount of any adjustments of the net
assets or the net income;
- transactions and balances with other organizations
included in the reporting entity (these are not
eliminated under the modified equity method).
FINANCIAL STATEMENT CONCEPTS, Section PS 1000, defines financial assets as “assets that could be used to discharge existing liabilities or finance future operations
and are not for consumption in the normal course of operations.”
25
17 What impact does the revised standard have on the budget process?
In some jurisdictions, the revised definition of the entity
will result in the inclusion of many more organizations in
the government reporting entity. Some governments have
expressed concern that budgeting and providing in-year
fiscal updates on a fully consolidated basis for so many
organizations will be much more difficult.
26
For example, in some jurisdictions, hospitals would now
meet the definition of controlled organizations and would,
therefore, under the revised standard, be fully consolidated. If
a government prepares a consolidated budget on a full accrual
basis, it would need to budget for these organizations on a
line-by-line basis. Such budgeting requires the collection
of timely and detailed information from these organizations
including, for example, staffing levels and spending
allocations. The data collection problem would be even more
significant for governments that prepare monthly or quarterly
fiscal updates.
To try and address these concerns, the revised standard
includes provisions to ease the transition to the new rules.
An exception to full consolidation is allowed for certain
organizations on a transitional basis. During the transition
period, the exception allows governments to include
organizations from the SUCH sector (schools, universities,
colleges and hospitals) in their financial statements on a
modified equity basis. This exception is a practical way to
encourage governments to include all of the organizations
they control in their reporting entity and could help as a
transitional measure in moving to full accrual budgets for
the entire government reporting entity (i.e., the whole of
government).
18 When does the standard apply?
The revised reporting entity standard began to apply as of
April 1, 2005.
As noted in the previous discussion, for many governments,
the revised standard meant including many more
organizations in their reporting entity than before. The
administrative effort needed to include them on a line-by-line
basis for the first time all at once may well be onerous. To
help ease implementation, the standard allows an exception
to full consolidation of all government organizations for a
three year period after the effective date of the new rules. The
exception is set out in the transitional provisions at the end of
the standard.
The transitional provisions allow, for a limited time,
organizations newly included in a government reporting
entity to be included on a modified equity basis instead of
being consolidated line by line. By April 1, 2008, no further
exceptions will be allowed and all controlled organizations
(except for GBEs – see Questions 15-16) must be fully
consolidated on a line-by-line basis.
Some governments implemented the standard early or began
to compile the information needed to comply with the
standard as soon as it was issued. They found that bringing
organizations into the entity on a line-by-line basis was
not overly problematic. The information for line-by-line
consolidation is not significantly more than that needed for
modified equity accounting, and some governments chose
not to use the transitional provisions. This choice meant they
would have to implement changes to the accounting for the
government reporting entity only once.
27
19
What types of organizations are likely to be accounted for using the transitional provisions?
The types of organizations likely to be accounted for using
the transitional provisions fall into a fairly narrow category.
All of these organizations meet the criteria for being
controlled, so they are part of the reporting entity. The
transitional provisions apply to only those organizations that
are being included in the government reporting entity for
the first time, not organizations already included in previous
years.
28
Often, the organizations to which the transitional provisions
apply are in the SUCH sector (i.e., schools, universities,
colleges and hospitals). They generally have a significant
level of autonomy in carrying out the services they provide,
often interacting directly with those receiving the services.
Although they are controlled by government, they have a
lot of discretion over their day-to-day operations and are
supported by a strong local board of directors responsible
to stakeholders and clients. In these cases, the government’s
governance is focused on providing global funding, defining
standards and reviewing/assessing program outcomes.
Government organizations eligible for the transitional
provisions have all of the following characteristics:
1.They are separate legal entities with the power to contract
in their own name, and can sue and be sued.
2.They have the financial and operational authority to
provide a government service within a defined service area.
3.There is a governance framework of appointed or elected
local board representatives from the defined service area.
4.There are significant restrictions on the government’s
ability to access their assets.
The decision tree in Figure 4 helps governments apply the
transitional provisions.
Figure 4
Decision Tree – Applying the Transitional Provisions
Is the organization part of the
government reporting entity?
No
Yes
Is the government
organization a government
business enterprise?
Do not include in government
financial statements
No
Yes
Include in government
financial statements by the
modified equity method
Was the government organization
included as part of the government
reporting entity in the financial
statements of the previous year?
No
Yes
Does the government
organization have the
characteristics specified?
No
Fully consolidate in
government financial statements
Fully consolidate in
government financial statements
Yes
Fully consolidate in government
financial statements but may
choose modified equity accounting
until fiscal years beginning on or
after April 1, 2008
29
20
Did the revised definition of the government reporting entity change the government reporting entity in every jurisdiction?
The change in the definition of the government reporting
entity will have an impact. In some jurisdictions, the changes
will be few since the structures and relationships already
in place offer little substantive difference in moving to a
definition that is based solely on control.
30
For other jurisdictions, the impact will be much greater, and
both the size and composition of the government reporting
entity will change. Some governments will find the scope
of the reporting entity expanded to include a variety of
organizations previously excluded. The change will mean
that some governments will have to gather information not
previously compiled for their financial statements. There
may also be budget implications. Many senior governments
have balanced budget legislation, and changes in the scope
of the reporting entity could affect compliance with such
legislation.
For example, in some provinces, school boards were part of
government, falling under the domain of the Ministry of
Education. In other provinces, school boards were outside the
provincial government reporting entity, and the government’s
results for education did not include the activities of school
boards, only transfers to school boards. Under the new
definition of the entity, many provinces have reviewed the
relationship with their school boards and determined that
they do, in fact, control these boards. This is the case, for
example, in British Columbia, where school boards have not
previously been included as part of the government. Under
the new standard, British Columbia school boards have been
fully consolidated in the government’s summary financial
statements. The same is true of hospitals in many provinces.
Because of the change to the reporting entity based on
control, all governments will need to assess their relationships
with a multitude of organizations and decide whether or not
they are in control.
Ultimately, PSAB hopes that the new definition of the
government reporting entity will help solve the problems of
inconsistent interpretation and provide better information for
government decision making.
Appendix
What is PSAB?
What is GAAP?
PSAB is the acronym for the Public Sector Accounting Board
of the Canadian Institute of Chartered Accountants (CICA).
PSAB has the authority to set accounting standards for the
public sector. That authority means that PSAB sets generally
accepted accounting principles (GAAP) for governments.
“GAAP” stands for “generally accepted accounting
principles.” For governments, the standards set out in the
CICA Public Sector Accounting (PSA) Handbook are the primary
source of GAAP. GAAP for governments have concentrated
mainly on government summary financial statements.
PSAB has 12 members, including a Chair. Members are
appointed as individuals, not as representatives of their
governments or organizations. This policy allows for full and
open debate on issues. The Board and task force members
are drawn from the ranks of senior government (including
Deputy and Assistant Deputy Ministers of Finance and
Municipal Affairs, comptrollers, legislative auditors and
budget directors) and municipal treasurers and auditors,
but also include academics, bond-raters and other experts in
government accounting and auditing.
GAAP encompasses broad principles and conventions of
general application together with rules and procedures that
determine accepted accounting practices at a particular time.
Establishing generally accepted accounting principles for any
sector is an evolutionary process. GAAP evolves and adapts to
changes in economic or social conditions.
PSAB:
• Is committed to serve the public interest.
• Follows due process and respects and encourages input from
all of its stakeholders.
• Brings objectivity to the consideration of issues.
• Respects stakeholders’ ability to change.
• Recognizes the need for timely responses to stakeholders’
needs.
GAAP are the basis of accounting used for general purpose
financial statements of governments, which are intended to
meet the common financial information needs of a broad
range of external users, such as taxpayers, the media and
special interest groups. GAAP govern the format and content
of these multi-purpose financial statements.
31
20 Questions
About the Government Reporting Entity
Feedback
Let us know how we can improve this guide.
Contact PSAB at www.psab-ccsp.ca
THE CANADIAN INSTITUTE OF CHARTERED ACCOUNTANTS
277 Wellington Street West
Toronto, Ontario
M5V 3H2