Public Sector Accounting Board – Frequently Asked Questions

General:

1. What is PSAB?

PSAB stands for the Public Sector Accounting Board (PSAB). They are an independent body with the authority to set accounting standards for the public sector, which includes municipalities.

^ Top of Page

2. What are Accounting Standards?

Accounting standards are standards set by PSAB for financial accounting and reporting. These standards specify how transactions and other events are to be recognized, measured, presented and disclosed in government/municipal financial statements. The objective of such standards is to meet the needs of users of financial statements by providing the information needed for accountability and decision making. Accounting standards are the primary source of generally accepted accounting principles (GAAP). The CICA Public Sector Accounting (PSA) Handbook contains accounting standards applicable to federal, provincial, territorial and local governments.

^ Top of Page

3. When do I have to be compliant with PSAB Accounting Standards?

Local governments, which include municipalities and Inuit Community Governments, are to be compliant with PSAB Accounting Standards by March 31, 2009, per Local Government Gas Tax Agreements. This will be reported to the Department through local government Financial Statements which are due on June 30, 2009.

Requirements:

2008 Financial Statements; local governments are required to provide a note of its PSAB compliance efforts, particular regarding Tangible Capital Assets (TCA). See the Appendix distributed on January 19th regarding 2008 FINANCIAL STATEMENTS & 2009 BUDGET for a sample note disclosure.

2009 Financial Statements; local governments are required to complete the following, note all will not apply to each local government:

Establish Accounting Policies
Complete TCA Listing
Complete TCA Valuation
Identify all Controlled Entities and Government Partnerships
- Assess whether or not control exists
- Assess their compliance with PSAB GAAP and impact if not compliant
Identity all significant Controlled Entities and Government
Partnerships with your auditor’s assistance
Identify Potential Environment Liabilities
Identify all Accruals and Other Liabilities, such as severance, pension, landfill closure costs, etc
Record Asset Additions and Disposals for 2008 & 2009
Calculate and Record Amortization for 2008 & 2009
Record Environment Liabilities, Accruals, etc
Consolidate Controlled Entities

^ Top of Page

4. Where can I get more information on PSAB?

The best resource for keeping up-to-date on PSAB is the PSAB resource website (www.gov.nl.ca/mpa/for/psab/). This website contains reference materials, all correspondence from the Department on PSAB, FAQs, as well as much more!

You can also get information on PSAB by calling our toll free number 1-877-729-4393 or by email PSAB@gov.nl.ca.

^ Top of Page

Tangible Capital Assets:

5. Do we count small items such as picks, rakes, shovels?

Yes.
They will be reported and put in the General TCA section under the asset class of Machinery and Equipment.

Group Assets:
Group assets are defined as those assets that have a unit value below the capitalization threshold but have a material value as a group. Normally these assets are recorded as a single asset with one combined value. Although recorded in the financial systems as a single asset, each unit may be recorded in the asset sub-ledger for monitoring and control of its use and maintenance.

Examples could include computers, furniture and fixtures, small moveable equipment, signage, etc.

^ Top of Page

6. The TCA Valuation Manual has no reference to signage, i.e. stop signs, yield signs, speed signs, etc. Do we include this in our TCA Listing?

The TCA Valuation Manual was created to focus on larger dollar value TCA that municipalities would not normally have costing information for, such as infrastructure. Due to the low dollar value of signage and the amount within a municipality, it may not be included in your TCA Listing; however, it would depend on the municipality’s capitalization threshold or whether it is significant enough to record as a group asset (see above question).

^ Top of Page

7. What is not to be included in your TCA inventory?

The following capital assets are excluded:

Intangibles
Land and other assets acquired by right such as Crown lands
Works of art and historical treasures
Natural resources such as forests, water, and mineral resources

^ Top of Page

8. When do I record a TCA for a multi-year capital project?

Major capital projects are constructed or developed over more than one calendar year. For accounting purposes, the costs to date are recorded each year as work-in-progress. Amortization of the asset would start in the year that the asset is placed into service.

^ Top of Page

9. What adjustments would be recorded when an asset is still in use beyond its original useful life estimated for accounting purposes?

Assets may remain in service past their useful life that was estimated when the asset was acquired or constructed. For example, a vehicle may have an estimated life of five years but still be on the road after seven years. Generally the asset would remain on the books as fully amortized and the accumulated amortization would be recorded as well. If the recorded useful life is adjusted upwards for an asset, the remaining unamortized cost of the asset would be expensed over the new useful life.

^ Top of Page

10. Municipalities often replace a significant part of a major piece of equipment, such as replacing the motor on a grader. Would this be considered a betterment or repairs and maintenance?

If the motor had to be replaced because it broke down or was damaged, then it would be considered repairs and maintenance. Replacing the motor is simply maintaining the existing service capacity of the grader. You can not use the grader if it does not have a properly functioning motor.

If the grader was at the end of its estimated useful life and replacing the motor would allow the municipality to continue to use the grader for another 10 years, then it would be considered a betterment. The municipality has increased the service capacity (i.e. extended the useful life) of the grader.

^ Top of Page

11. Can volunteer labour and donated materials be capitalized as part of the cost of constructing a TCA?

The Public Sector Accounting Board (PSAB) is silent as to whether volunteer labour and donated materials can be capitalized as part of the cost of an asset. However, the Not for Profit section of the CICA Handbook states that volunteer labour and donated materials can be valued at their fair market value. It therefore appears to be acceptable to capitalize volunteer labour and donated materials as part of the cost of constructing a TCA.

^ Top of Page

12. Can I capitalize the interest on my capital loan?

The total historical cost of a TCA can include interest costs directly attributable to the acquisition, construction or development activity. Only interest owed to external parties, such as banks or debenture holders, can be capitalized. Internal finance charges cannot be capitalized as part of the costs of an asset. They must be recorded as an expense of the period.

Capitalization of interest costs end when there is no construction or when the TCA is put into use. A TCA would be considered to be put into use when the asset is being used by the municipality to provide goods and services to the public, or the public has access to the asset such as a new bridge or road.

^ Top of Page

13. What is our auditor’s role in terms of valuing TCA?

While it will be each municipality’s responsibility to develop the financial valuation of its TCA, these asset valuations will now become part of the municipality’s financial records and, therefore, subject to external audit. External auditors are charged with the responsibility of verifying the accuracy of the financial statements of municipalities. During the transition to full financial reporting of TCA, the external auditors will play a large role in working with municipalities’ accounting departments to ensure that the value of assets recorded are reasonable and acceptable.

^ Top of Page

Financial Statement:

14. What should be included in a set of PSAB compliant financial statements?

The PSAB compliant consolidated financial statements should include four statements; The Statement of Financial Position, Statement of Operations, Statement of Change in Net Financial Assets (Net Debt), and the Statement of Cash Flows. In addition, the consolidated financial statements should also include applicable Notes and Schedules, which are outlined in the Phase 3 Reference Manual and the 2010 Financial Statement Template.

^ Top of Page

15. What is the reporting significance of the Statement of Financial Position?

The Statement of Financial Position highlights four key figures that describe the financial position of a government;

its financial assets,
its non-financial assets,
its net debt position, and
its accumulated surplus or deficit.

^ Top of Page

16. What is the purpose of the Statement of Operations?

The Statement of Operations displays the cost of government services provided in the accounting period, the revenues recognized in the accounting period and the difference between them. The statement of operations should:

report the amount and types of revenues for the accounting period,
report the amount and types of expenses of the period,
account for the difference between the revenues and expenses as the measure of the surplus or deficit for the period and
report the accumulated surplus/deficit at the beginning and end of the period, unless these figures are reconciled with the surplus/deficit for the period on a separate statement.

The Statement of Operations should disclose the gross amount of revenues and expenses.

Revenues including gains should be recognized in the period in which the transactions or events occurred that gave rise to the revenues. For example, user fees should be recognized in the period the goods or services are provided. Gains are generally recognized when realized.

Transfers between funds are neither revenues nor expenses, as all transfers between funds should be eliminated. Similarly, all transactions between a municipality and its entities within the Municipal Reporting Entity should be eliminated on consolidation.

^ Top of Page

17. What does the Statement of Change in Net Financial Assets (Debt) provide?

The Statement of Change in Net Financial Assets (Net Debt) provides information regarding the extent to which expenditures of the accounting period were met by revenues recognized in the accounting period. The Statement of Change in Net Financial Assets (Net Debt) should:

report the extent to which the expenditures of the accounting period are met by the revenues recognized in the period,
report Net Financial Assets (Net Debt) at both the beginning and end of the accounting period and
report the acquisition of TCAs in the accounting period as well as other significant items that explain the difference between the surplus or deficit for the period and the change in Net Financial Assets (Net Debt) for the period. Other significant items include:
- Amortization of TCA
- NBV of disposed TCA
- Write downs of TCA
- Capitalized interest
- Consumption of non-financial assets like inventory and prepaids
- Expenditures to acquire non-financial assets like inventory and prepaids

A Government’s Net Financial Assets (Net Debt) position is a key indicator of it’s overall financial health and is calculated by deducting a government’s Net Financial Assets (Net Debt) from its liabilities. If a government’s financial assets are greater then it’s liabilities then it is called Net Financial Assets. If a government’s financial assets are less then it’s liabilities then it is called Net Debt. A Net Debt balance represents a lien against future operations while a Net Financial Assets balance means the government has resources available for future operations.

The Statement of Change in Net Financial Assets (Net Debt) is a derivative statement of the Statement of Financial Position and Statement of Operations. You should only prepare the Statement of Change in Net Financial Assets (Net Debt) after you have prepared the Statement of Financial Position and Statement of Operations. The reason being is that you require the:

Annual surplus/deficit for the year – Statement of Operations
Changes in your non-financial assets – Statement of Financial Position

^ Top of Page

18. What is the importance of the Statement of Cash Flows?

Information about the cash flows of a government enables users of its financial statements to assess:

the capacity of the government to generate cash, and
the need of the government for cash resources.

The Statement of Cash Flows should report:

how a government generated and used cash in the period,
the change in cash and cash equivalents in the period, and
the cash and cash equivalents at both the beginning and end of the accounting period.

The Statement of Cash Flows should also report cash flows during the period classified by:

Operating activities,
Capital activities,
Investing activities, and
Financing activities.

A government may report cash flows using either the direct method or the indirect method. Both are acceptable under PSAB however, very few governments use the direct method as it is more difficult to prepare. In this manual only the indirect method will be illustrated.

The Statement of Cash Flows, similar to the Statement of Net Financial Assets (Net Debt), is a derivative statement of the Statement of Financial Position and Statement of Operations. You should only prepare it after you have prepared the first two statements. The reason for this is that you require the:

Annual surplus/deficit for the year – Statement of Operations
Items not affecting cash – Statement of Operations
Changes in your non cash financial assets, liabilities, and non-financial assets – Statement of Financial Position

To prepare the Statement of Cash Flows the preparer must recognize which non cash items are sources of cash and which are uses of cash. Decreases in non-cash assets are sources of cash, while increases are uses of cash. Liabilities are completely the opposite so increases in liabilities are sources of cash while decreases in liabilities are uses of cash.

An operating surplus is a source of cash while an operating deficit is a use of cash. Some financial statement items like amortization, gains and losses, and accruals affect the operating results but do not affect the cash position of the government. The government’s cash from operations has to be adjusted for these items.

^ Top of Page

To Find Out More

For information and assistance, contact the Environment, Climate Change and Municipalities office nearest you.