AMENDMENTS TO THE INTRODUCTION

Issues Analysis
February 2014
Prepared by the staff of the Public Sector Accounting Board

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TABLE OF CONTENTS
Introduction .................................................................................................. Background ................................................................................................. Major issues ................................................................................................ Transitional provisions for a government component .................... Standards for non-business government partnerships .................. Transitional provisions for a non-business government partnership and a government business partnership ..................... Other Issues ................................................................................................ Government organizations and government components .................... The need to separate government components from government organizations .............................................................. The power to contract in its own name .......................................... Organizations that are not controlled by a government ................. The PSA Handbook for government components ......................... What was meant by these standards may be supplemented ...... Government partnerships (including government business partnerships) Clarification of their definitions ....................................................... Other matters ........................................................................................ Definition of government ................................................................ Amendments to other PSA Handbook Sections ............................ Retention of transitional provisions for various types of government organizations .............................................................. General purpose and special purpose financial statements ..........

Paragraph
.01 .02-.05 .06-.17 .06-.10 .11-.15 .16-.17 .18-.50 .18-.33 .18-.21 .22-.24 .25-.27 .28-.31 .32-.33 .34-.38 .34-.38 .39-.50 .39-.41 .42-.43 .44-.45 .46-.50

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Introduction
.01 This issues analysis is a supporting document to the Public Sector Accounting Board (PSAB) Re-exposure Draft, Amendments to the Introduction. It provides information on how significant matters arising from comments received on PSABs Exposure Draft, Amendments to the Introduction, have been dealt with in the Re-exposure Draft. The analysis has not been issued under the authority of PSAB. Prior to approving final changes to the Introduction, the Board will review and deliberate responses submitted to the Re-exposure Draft.

Background
.02 With the objective of clarifying that most standards in the CPA Canada Public Sector Accounting (PSA) Handbook are equally applicable to government organizations that follow the PSA Handbook as they are for governments, an Exposure Draft was issued for comment in February 2013. The comment period ended May 3, 2013. Respondents, although raising specific issues, were generally supportive of the proposed amendments to the Introduction. Major issues raised by respondents to the Exposure Draft included: (a) the need for transitional provisions for a government organization now classified as a government component; (b) the appropriateness of allowing non-business government partnerships, between two or more public sector entities, the ability to follow either the standards for governments in the PSA Handbook or the standards for publicly accountable enterprises in Part I of the CPA Canada Handbook Accounting, based on users needs; and (c) the need for transitional provisions for a non-business government partnership and a government business partnership with only public sector entity partners. .04 PSAB concluded that the above changes to the Exposure Draft represent a "significant change", requiring re-exposure. A limited number of other changes to the Exposure Draft are also included in the Re-exposure Draft. These changes are not discussed in this Issues Analysis because they are considered editorial in nature. The following issues were considered by PSAB but did not result in substantive changes to the proposals in the Exposure Draft: (a) the need to separate government components from government organizations;

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(b) the appropriateness of separating government components from government organizations on the basis as to whether an entity is a separate entity with the power to contract in its own name and that can sue and be sued; (c) the need for the PSA Handbook to apply to organizations that are not controlled by a government; (d) the appropriateness of directing government components to apply only the standards for government in the PSA Handbook; (e) the appropriateness of the standards for government in the PSA Handbook for government components; (f) the need to clarify what was meant by these standards may be supplemented; (g) the need to clarify the definitions of a government partnership and a government business partnership; (h) the need to define government; (i) the need to amend other PSA Handbook sections; (j) the need to retain transitional provisions for various types of government organizations; and (k) the role of the PSA Handbook in relation to general purpose and special purpose financial statements.

Major issues
Transitional provisions for a government component
.06 In the Issues Analysis accompanying the Exposure Draft, it was recognized that the proposals with respect to government organizations and government components could result in the need for some government not-for-profit organizations (GNFPO) and other government organizations to have to transition to the standards for governments in the PSA Handbook (see paragraph .15 of the Issues Analysis). Some respondents did comment that the Exposure Draft did not specifically address the basis of transitioning and time table that would apply for these organizations. Current guidance in the PSA Handbook includes: (a) ACCOUNTING CHANGES, paragraph PS 2120.13, which allows retroactive or prospective adoption of the PSA Handbook when

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moving from a non-generally accepted accounting principles (GAAP) basis of accounting; and (b) FIRST-TIME ADOPTION BY GOVERNMENT ORGANIZATIONS, paragraph PS 2125.02, which requires government organization to retroactively adopt the PSA Handbook when transitioning from another basis of GAAP. .08 While FIRST-TIME ADOPTION BY GOVERNMENT ORGANIZATIONS, Section PS 2125, was intended for government organizations transitioning from Part V of the CPA Canada Handbook Accounting to the PSA Handbook, it focused on those aspects of the PSA Handbook that would be onerous for an organization to adopt retroactively. PSAB discussed the current basis of accounting being followed by government components. These entities could be classified as either an other government organization or a GNFPO and, therefore, would be currently following either the PSA Handbook with or without Section PS 4200 to PS 4270 (the PS 4200 series), or the standards for publicly accountable enterprises in Part I of the CPA Canada Handbook Accounting). They would be transitioning from a GAAP basis. PSAB confirmed that retroactive application in accordance with the exemptions and exceptions offered under Section PS 2125 would be most appropriate for government components transitioning to the standards for governments in the PSA Handbook and consistent with prior direction provided by the Board. Regarding the timing of transition, typically when a new Handbook Section is issued, two budget cycles are provided before the Section needs to be adopted. However, the time period for adoption can be longer (for example, LIABILITY FOR CONTAMINATED SITES, Section PS 3260) depending on the onerous nature of adopting the new Section. For adoption of the PSA Handbook (either transitioning from the standards for publicly accountable enterprises in Part I of the CPA Canada Handbook Accounting or the PSA Handbook with the PS 4200 series), PSAB proposed a three-budget cycle transition period be provided considering the more onerous nature of adopting an entire standard. Earlier adoption is permitted.

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Standards for non-business government partnerships

.11 Some respondents indicated support for providing non-business partnerships with only public sector entity partners the choice of following either the standards for governments in the PSA Handbook or the standards for publicly accountable enterprises in Part I of the CPA Canada Handbook Accounting, similar to the choice provided to other

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government organizations. Another respondent indicated support for providing non-business partnerships with only public sector entity partners, the choice of following either the PSA Handbook with or without the PS 4200 series .12 The PS 4200 series was brought into the PSA Handbook to ease transition for GNFPOs. Bringing in the PS 4200 series was meant only to be temporary until the Joint Not-for-Profit Task Force and PSAB could review these Sections and amend, delete, or merge these Sections in the remainder of the PSA Handbook. As the PS 4200 series is temporary, it was felt that these Sections should only be available to GNFPOs that were following the 4400 series in Part V of the CPA Canada Handbook Accounting. It is not considered appropriate to make the PS 4200 series available to other entities as these Sections are temporary and will be changing. Allowing government partnerships (except for government business partnerships) with only public sector entity partners the choice to follow the PS 4200 series would require government partnerships to transition to the PS 4200 series and then transition to the PSA Handbook without the 4200 series in the near future. This is not considered to be desirable by PSAB. When PSAB was determining the basis of GAAP for other government organizations, there was recognition that the standards for governments in the PSA Handbook would generally be most appropriate for these organizations. PSAB recognized that some former government businesstype organizations (commercial in nature but with sales within the government reporting entity) would now be classified as other government organizations. It was concluded that other government organizations be given the ability to follow the standards for publicly accountable enterprises in Part I of the CPA Canada Handbook Accounting. Allowing government partnerships (except for government business partnerships) with only public sector entity partners the choice to follow the standards for governments in the PSA Handbook or the standards for publicly accountable enterprises in Part I would be consistent with the direction provided to other government organizations. At the partners reporting entity level, government partnerships (except for government business partnerships) are accounted for by proportionate consolidation. Allowing government partnerships (except for government business partnerships) with only public sector entity partners the choice to follow Part I would result in consolidating adjustments for the partners. This is consistent with other government organizations that follow Part I and are consolidated into their controlling entity. PSAB considered the implications of requiring all non-business partnerships with only public sector entity partners to follow the standards

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for governments in the PSA Handbook. While recognizing the PSA Handbook is generally applicable for such partnerships, PSAB concluded that the choice between the standards for governments in the PSA Handbook and the standards for publicly accountable enterprises in Part I of the CPA Canada Handbook Accounting was appropriate. These partnerships still need to be reflected in the public sector partners financial statements in accordance with the PSA Handbook. These partnerships may have recently transitioned to Part I and directing these partnerships to the PSA Handbook would have required a further transition. Offering a choice is consistent with the direction provided to other government organizations. .15 The Re-exposure Draft reflects the following direction regarding the standards to be followed for a non-business government partnership with only public sector entity partners: For purposes of preparing general purpose financial statements, government partnerships between two or more public sector entities, except for government business partnerships, would normally apply the standards for governments in the PSA Handbook. When these standards do not meet their financial statement users' needs, the standards applicable to publicly accountable enterprises in Part I of the CPA Canada Handbook Accounting should be considered.

Transitional provisions for a non-business government partnership and a government business partnership
.16 Consistent with the earlier discussion, non-business government partnerships and government business partnerships with only public sector entities may need to transition. PSAB discussed the current basis of accounting being followed by nonbusiness government partnerships and government business partnerships. These entities could be following either the PSA Handbook with or without the PS 4200 series, private enterprise standards, International Financial Reporting Standards (IFRSs) or some other standard. Government partnerships (except for government business partnerships) transitioning to the standards for governments in the PSA Handbook would be transitioning from one GAAP basis to another. PSAB confirmed that retroactive application in accordance with the exemptions and exceptions offered under FIRST-TIME ADOPTION BY GOVERNMENT ORGANIZATIONS, Section PS 2125, for government partnerships (except for government business partnerships) would be most appropriate. This is consistent with the prior direction provided by the Board and consistent with its proposal for government components. The

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transitional basis for government business partnerships and non-business government partnerships that determine the standards for publicly accountable enterprises in Part I of the CPA Canada Handbook Accounting to be most appropriate is addressed in IFRSs. Regarding the timing of transition, PSAB proposed a three-budget cycle transition period be provided for non-business government partnerships and government business partnerships consistent with its proposal for government components. Earlier adoption is permitted.

Other issues
Government organizations and government components
The need to separate government components from government organizations
.18 Some respondents to the Exposure Draft indicated there is no compelling reason for establishing the government component category considering the PSA Handbook to be equally applicable for government components. There was a concern that government component financial statements could diverge from those of governments and government organizations. They based their views on the premise that the reporting objectives provided in FINANCIAL STATEMENT OBJECTIVES, Section PS 1100, were equally applicable for government components as for other government organizations. Establishing separate reporting objectives for government components would create difficulty in maintaining a general purpose framework on which the PSA Handbook is based. The decision to separate government components from governments and government organizations was not because they have different reporting objectives. It was to recognize that the PSA Handbook may not address all of the financial reporting needs of government components. For example, accountability is an important reporting objective for both governments and government components but there are different issues that arise for government components. PSAB reconfirmed its decision to separate government components from government organizations.

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The power to contract in its own name

.22 A respondent to the Exposure Draft suggested that certain entities may have the power to contract in their own name and to sue and be sued but because they access funding from a consolidated revenue fund or similar,

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these entities are integral parts of government and should be classified as a government component. The respondent proposed that an additional criterion in the definition of a government organization, which excludes entities whose operations are funded through direct access to the consolidated revenue fund or similar, is required. .23 Making this change to the proposed definition of a government organization and government component would result in the source of funding of an entity dictating its type of public sector entity. This change would result in all entities whose operations are funded through direct access to the consolidated revenue fund or similar being categorized as a government component, even though they may be a separate entity with the power to contract in its own name and that can sue and be sued. PSAB members confirmed their continued support for separating government components from government organizations on the basis of whether the entity is a separate entity with the power to contract in its own name and that can sue and be sued, which is meant to capture the greater autonomy and independence of operation of a government organization relative to a government component.

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Organizations that are not controlled by a government

.25 Another respondent indicated certain organizations are created by government under public statutes but are not considered to be controlled by the government based on the indicators of control in the PSA Handbook. The respondent suggested the definition of a government organization be expanded to include those organizations created by the government for public purposes. Yet another respondent indicated the definition of a government organization could be expanded to include entities that operate under a governments legislation that do not meet the definition of a controlled organization. The current definition of a government organization is an organization controlled by government. Control is a fundamental concept in the PSA Handbook. For example, GOVERNMENT REPORTING ENTITY, paragraph PS 1300.07, indicates: The government reporting entity should comprise the organizations that are controlled by the government. FINANCIAL STATEMENT OBJECTIVES, paragraph PS 1100.16, indicates: Financial statements should provide an accounting of the full nature and extent of the financial affairs and resources which the government controls, including those related to the activities of its agencies and enterprises. PSAB confirmed the need to be controlled by government (or another public sector entity) is a fundamental element of a government

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organization. Entities not controlled by public sector entities are not precluded from following the PSA Handbook if they determine it to be the most appropriate accounting framework.

The PSA Handbook for government components

.28 Respondents indicated a government component that has the characteristics of a business enterprise should have the choice, similar to that given to other government organizations, to follow either the standards for publicly accountable enterprises in Part I of the CPA Canada Handbook Accounting or the standards for governments in the PSA Handbook. This choice would be based on considering which standards best meet the needs of the financial statement users. While a government component could sell goods and services to individuals and organizations outside of the government reporting entity as its principal activity, it is still part of government. By definition, a government component is not an independent, autonomous entity. PSAB confirmed its view that as the PSA Handbook is appropriate for the government as a whole, it should be appropriate for its parts. A respondent indicated paragraph .15 of the Exposure Draft be revised to indicate that for government components where the PSA Handbook is not silent, but where the guidance therein, if applied strictly and literally, would yield an incorrect or misleading result, the PSA Handbook guidance may be adapted to better meet the circumstances. The respondent believes that government components have different financial reporting objectives that affect their reporting requirements. The intention of paragraph .15 in the Exposure Draft was not to change the accounting policies currently being followed by government components. It was to recognize that the PSA Handbook was not specifically developed to address all of the financial reporting needs of government components. Where the PSA Handbook does not cover an issue relevant to a government component, a government component would refer to an other source of GAAP in accordance with GENERALLY ACCEPTED ACCOUNTING PRINCIPLES, Section PS 1150.

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What was meant by these standards may be supplemented

.32 A number of respondents expressed confusion regarding what was meant by paragraph .15 in the Exposure Draft, which indicates: these standards may be supplemented where the PSA Handbook is silent. These respondents expressed the view that GENERALLY ACCEPTED ACCOUNTING PRINCIPLES, Section PS 1150, should apply when the PSA Handbook is silent on a matter for a government component as it

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does for all types of public sector entities when they apply the Handbook. These respondents indicated that a reference to Section PS 1150 should be included in the Introduction rather than making a reference to these standards being supplemented. .33 PSAB agreed that GENERALLY ACCEPTED ACCOUNTING PRINCIPLES, Section PS 1150, would apply when the PSA Handbook is silent for all types of public sector entities, not just government components, when they apply the standards. Accordingly, in relation to the application of the PSA Handbook for all public sector entities, PSAB has included in paragraph .11 of the Re-exposure Draft the following sentence: When applying the CPA Canada Public Sector Accounting (PSA) Handbook, where the standards are silent on an issue, public sector entities should apply GENERALLY ACCEPTED ACCOUNTING PRINCIPLES, Section PS 1150. And deleted the following sentences from paragraph .15: Where the PSA Handbook is silent, these standards may be supplemented with policies that reflect their nature as being part of a larger integrated entity. This applies when government components are directed to prepare general purpose financial statements.

Government partnerships (including government business partnerships)

Clarification of their definitions
.34 In the Exposure Draft, the definitions of a government partnerships and government business partnership were brought into the Introduction and only amended to reflect the ability of a government organization to be a partner in a government partnership. The objective of defining a government partnership and government business partnership is to capture those entities that a public sector entity (government or government organization) does not control but has shared control over. It was noted by respondents that the proposed definition of a government partnership in the Exposure Draft may not capture: (a) a partnership between a government component and a party or parties outside of the reporting entity; or (b) a partnership between two or more entities within a government reporting entity. .36 By definition, a government component cannot contract in its own name and a government partnership is a contractual arrangement. Therefore, it

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is not expected that a government component would enter into a government partnership and government components are not reflected in the definition of a government partnership. .37 Two government organizations (under the same government reporting entity) may enter into a government partnership. Each of the government organizations should reflect its interest in the partnership in its financial statements. The proposed wording of the definition for a government partnership was A government partnership is a contractual arrangement between the government or a government organization and a party or parties outside of the reporting entity The proposed definition does capture a government partnership between two government organizations (under the same government reporting entity) as the reporting entity in this example is either of the government organizations, not the government reporting entity. PSAB reviewed the wording of the definition of a government partnership in paragraph .09 of the Exposure Draft and concluded it was appropriate. It was also noted that characteristic (d) for the definition of a government business partnership in paragraph .10 of the Exposure Draft was not entirely consistent with the current definition of a government business partnership in GOVERNMENT PARTNERSHIP, Section PS 3060. PSAB has amended characteristic (d) of the definition of a government business partnership in the Re-exposure Draft to be consistent.

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Other matters
Definition of government
.39 Some respondents indicated a need to define government and/or local government, and to retain the list of levels of government currently in the scope paragraph in the Introduction. Currently, there is no definition of government in the Introduction, although FINANCIAL STATEMENT CONCEPTS, paragraph PS 1000.02, indicates: "Government" refers to the elected and appointed policymakers and administrators who together perform the executive function and are the preparers of financial statements. Proposed paragraph .02 in the Exposure Draft did not refer to the levels of government as explained in paragraph .26 of the Issues Analysis. Rather, it indicated: PSAB is also proposing to remove the references to the types of governments that the PSA Handbook applies to. Retaining the reference to federal, provincial, territorial and local governments in existing paragraph .03 of the Introduction could potentially limit which structures are considered governments.

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PSAB considered the need for a definition of government but considered it be better addressed in the Conceptual Framework project that is currently being carried out.

Amendments to other PSA Handbook Sections

.42 Some respondents identified changes that may be required to Sections in the PSA Handbook as a result of the establishment of the government component category. Phase 1 of this project is to update the types of public sector entities that comprise the scope of the public sector in the Introduction to the PSA Handbook. In the Exposure Draft, it was indicated: The proposed changes to the Introduction would also require a number of editorial changes to be made throughout the PSA Handbook. PSAB will undertake this review subsequent to finalizing these amendments to the Introduction. The implications of the changes to the Introduction to be addressed in Phase 2 of this project are further discussed in paragraph .29 of the previous Issues Analysis. Changes to the PSA Handbook proposed in Phase 2 will be exposed. PSAB appreciates the comments provided by respondents relating to Phase 2 of this project and reconfirmed the direction of this project.

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Retention of transitional provisions for various types of government organizations

.44 A respondent questioned the appropriateness of keeping the existing transitional provisions in footnotes in the Introduction rather than in the body of the text. Transitional provisions for various types of government organizations have been included in the footnotes in the Introduction in the past due to the temporary nature of such guidance. Footnotes 2 and 4 in the Exposure Draft related to the transition of types of government organizations for periods beginning on or after January 1, 2011. PSAB concluded it was now appropriate to remove these footnotes as these government organizations will have already completed their transition.

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General purpose and special purpose financial statements

.46 A respondent proposed the removal of the concept of general purpose financial statements in paragraphs .11-.13 in the Exposure Draft suggesting inclusion would no longer allow a public sector entity to issue general purpose financial statements in accordance with a compliance framework without receiving a qualified opinion.

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The concept of general purpose financial statements is already included in paragraph .08 of the existing Introduction and FINANCIAL STATEMENT CONCEPTS, paragraph PS 1000.11. The objective of paragraphs .11-.13 in the Exposure Draft is to contrast general purpose and special purpose financial statements and to explicitly indicate the PSA Handbook is to be followed by certain public sector entities when they choose to issue general purpose financial statements. PSAB confirmed their intention with these paragraphs. A similar description of general purpose and special purpose financial statements is also included in the CPA Canada Handbook Assurance. The PSA Handbook is a financial reporting framework designed to meet the common financial information needs of a wide range of users. The CPA Canada Handbook Assurance also discusses when there may be circumstances where a special purpose framework is based on a financial reporting framework established by a recognized standard setter, but does not comply with all the requirements of that framework. These financial statements are to be considered special purpose financial statements. Preparers and auditors of public sector entities are reminded to consider whether the financial statements prepared by public sector entities are general purpose or special purpose when the statements are not prepared in compliance with all of the requirements in the PSA Handbook. The broad distribution of special purpose financial statements does not make these financial statements general purpose. Some respondents questioned the need to describe special purpose financial statements in the Introduction while another respondent suggested that public sector entities should be encouraged to follow the PSA Handbook when preparing special purpose financial statements. As previously noted, a similar description of special purpose financial statements is also included in the CPA Canada Handbook Assurance. PSAB confirmed it is not their role to address the preparation of special purpose financial statements. PSAB noted it was beneficial to explicitly indicate the PSA Handbook is not designed for the preparation of special purpose financial statements.

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