Chapter 7
Government assets and liabilities and source and application of funds

Introduction
Financial assets
Liabilities
Source and application of funds

Introduction

7.01 The unification convention, described in paragraph 5.02, and the acceptance of the supplier's basis of accounting, as set out in paragraph 4.05, is of special importance in the application of the FMS to the balance sheet and the statement of source and application of funds. As is the case with revenue and expenditure, the unification convention requires the FMS: to ignore the demarcations between a government and its special funds (boards, agencies and commissions other than government business enterprises (GBEs)); to consolidate the assets and liabilities in the various sets of accounts of a government and its special funds into a single set of unduplicated data for that government.

The acceptance of the supplier's basis of accounting, which, almost invariably, is some form of the modified cash or accrual basis, is due to a lack of information on which to adjust data to a common basis. Nevertheless, some modifications are made to the supplier's data, particularly in the area of assets and liabilities. For example, most governments now include fixed assets in their balance sheets and some governments also include inventories.

At the local government level the treatment of fixed assets is an outcome of the method of recording debt. Since debentures can only be issued to acquire fixed assets, the resulting purchases are equated with the debt incurred; repayments of the latter result in either a corresponding reduction in fixed assets or an increase in capital surplus. At the provincial level, fixed asset values, where recorded on the balance sheet, are less directly related to debt issues; normally such values are set at historic cost. At the federal level, fixed asset values were first recorded on the public accounts balance sheet at March 31, 2003 with the implementation of full accrual accounting. Thus, to achieve consistency for purposes of the FMS, the cost of acquiring fixed assets is treated as expenditure at the time of acquisition and is allocated to the appropriate function. Inventories are treated similarly to achieve consistency among all governments.

Also, with the move to full accrual accounting, a number of governments began to recognize certain liabilities for the first time such as future post employment benefits for which employees and former employees can benefit. In many instances these liabilities existed in the past but were not recognized on their balance sheet.  For FMS purposes, these newly recognized liabilities have been excluded from the FMS balance sheet to maintain comparability with prior periods.

7.02 To complete the conversion of government balance sheet data into statistics of financial assets and liabilities, the FMS embodies a number of other conventions, not all of which are universally employed in government accounting. Some examples are following:

(a) Financial assets and liabilities are reported gross, i.e., any netting by government of financial assets against liabilities (or vice versa) is nullified. For example, governments often establish sinking funds consisting of financial assets set aside for the payments of existing liabilities at their maturities. These sinking fund assets, which are commonly deducted from outstanding debt in government financial statements, are included as financial assets in FMS statistics while outstanding debt is reported at the gross amount.

The issue of securities by the government and the purchase of them by one of its investment funds are not netted against government gross securities outstanding.

Netting of valuation allowances such as a provision for doubtful accounts, does not conflict with the gross convention. Such valuation allowances, as their name indicates, are deductions from the stated value of assets to reduce the latter to their estimated realisable value. Netting in this instance does not result in offsetting assets against liabilities or vice versa, as in the treatment of sinking funds by governments; rather it produces a more accurate statement of asset values. Cash is shown gross and outstanding cheques are presented on the liability side.

(b) In the production of consolidated financial assets and liabilities of the federal, provincial and territorial and local governments, all financial assets of a government component that are liabilities of another government component are eliminated or netted to avoid double counting. A similar process is done in the production of consolidated provincial, territorial and local government financial assets and liabilities by province. 

However, the Canada total of consolidated provincial, territorial and local government assets and liabilities does not reflect the elimination or netting of assets and liabilities where an institutional unit of one province or territory invests in the securities/bonds of another province or territory.

Also, the issue of securities/bonds by a particular government and the purchase of them by an investment fund or an agency (institutional unit) of that same government are not eliminated in the production of asset and liability data for that particular general government or government.  For example, if the Workers Compensation Board of a province invested in the provincial government bonds of that same province then these are not eliminated in the production of the assets and liabilities for that provincial general government. However, they are eliminated in the production of consolidated assets and liabilities series for more than one level of government.

(c) Many governments establish reserves for designated future uses. For purposes of the FMS, such reserves are regarded as financial assets in FMS. They are not identified separately from the value of net financial wealth (excess of financial assets over liabilities).

7.03 As per conventional accounting, data on financial assets are presented in order of liquidity and highlights the major categories of financial assets and their components, (e.g., debtor, type of security and supplementary information). The framework for the liability data parallels that of the financial asset side. This framework is set out in Appendix D.

Financial assets

7.04 Cash on hand and on deposit - Cash and deposits consist of coins; bank notes; money orders; postal notes; cheques; accepted sight drafts; cash in transit; demand, notice and term deposit balances with banks and other financial institutions such as the Alberta Treasury Branches. Term deposits that are cashable on demand are classified under term deposits. This category distinguishes between Canadian and foreign currency. Foreign holdings are shown in Canadian dollar equivalents converted at current closing rate.

7.05 Receivables - Consists of all claims against debtor arising from the sale of goods and services. Also included are accrued revenue receivable, accrued government grants receivable, and residual interfund and inter-government adjustment that are required on consolidation of receivables (see paragraph 8.07).

There are six kinds of receivables: taxes, interest, trade accounts, from governments, from government business enterprises and from non-government. Where applicable, these are sub-divided by level of government. Taxes include all taxes receivable including arrears. Trade accounts are used for reporting amounts due from the sale of goods and services by governments. Non-government is a residual category for receivables by government from the general public other than taxes, interest and trade accounts.

7.06 Advances - Consists of loans, advances and other claims that cannot be sold or traded on the market. Governments make funds available directly to other governments, Crown corporations or other entities. The breakdown of this category relates to advances to: government sub-sectors, government business enterprises, individuals, corporations (private enterprises), and others, a residual category. Residual interfund and inter-government adjustments that are required on consolidation of advances are also included here (see paragraph 8.07).

7.07 Securities - Encompasses the holdings of all securities regardless of whether they are acquired as a consequence of public policy (e.g., to secure loans) or for investment purposes made through investment dealers (market securities). The category also includes some intergovernmental non-marketable securities.

Securities are broken down into domestic and foreign securities and are recorded at cost value. Domestic securities are classified into six categories: treasury bills, short term paper, bonds and debentures, shares, mortgages and agreements for sale and other securities including notes. These are further identified according to the issuer: government sub-sectors, GBEs, corporations and others. Foreign securities are shown in Canadian dollar equivalents converted at the current closing rate.

Shares are classified under the category GBEs only in cases where government owns over 50% of the entity's voting stock (see paragraph 3.10). All other holdings of corporation shares are classified under the sub-caption corporations.

7.08 Other financial assets - Encompasses financial assets, which cannot be assigned to more specific classification categories. It includes debit balances in suspense accounts and is also used for recording residual interfund and intergovernment adjustments that are required for the consolidation of other financial assets (see paragraph 8.07).

Liabilities

7.09 Bank overdrafts - Bank overdrafts include overdrawn accounts, lines of credit balances, and outstanding cheques.

7.10 Payables - Consists of claims by creditors arising from the purchase of goods and services. Accrued expenditure payable, accrued government grants payables and the residual interfund and intergovernment adjustments that are required on consolidation of payables are also included here. The basic structure of this category parallels the one set out for receivables (see paragraph 7.05). The individual items within the category are self-explanatory.

7.11 Advances - This heading parallels the corresponding classification on the financial asset side but with a fewer number of sub-categories, reflecting a smaller number of channels used by governments. No issuance of securities are reported in this category. Advances are identifiable as payable in Canadian or foreign currencies.

7.12 Coins in circulation - They are a liability of the federal government, which backs the value of all coins held by individuals and other sectors of the economy. This liability item of the federal government is not reported in the Public Accounts (PA), the figures are obtained from the Royal Canadian Mint. Notes are not reported in this category since they are a liability of the Bank of Canada.

7.13 Treasury bills - Includes both short and long-term government debt issued. Treasury bills do not pay interest, but are sold at a discount and mature at par (100% of face value).

7.14 Canada bills - Consists of Government of Canada's short term treasury bills sold strictly in the United States.

7.15 Short term paper - Consists of short term instruments other than treasury bills and Canada bills that are issued in Canadian and foreign currencies and traded in the money market.

7.16 Savings bonds - Canada Savings Bonds (CSBs) are recorded at their full par value while the interest accrued appears under the "payables" category. CSBs can be cashed by the owner at any time. They are not transferable and hence not marketable (i.e., they are not traded on bond markets). CSBs do not rise and fall in price and the redemption price of a CSB is the par value plus accrued interest. CSBs can only be purchased by or on behalf of Canadian individuals.

7.17 Bonds and debentures - Consists of a certificate evidencing a debt on which the issuer promises to pay the holder a specified amount of interest for a specified length of time, and to repay the loan on its maturity. Text table 7.1 illustrates the major investors (purchasers) of marketable and non-marketable bonds and debentures.

7.18 Other securities - Includes securities issued that cannot be classified in the above categories either because of the type of securities involved (e.g., mid and long term notes) or because of lack of precise information in source documents. The securities are identifiable as payable in Canadian and foreign currencies.

7.19 Deposits - Consists of trust deposits, the deposits of excess working funds of enterprises such as the amounts held by certain provincial governments for the account of their Treasury branches or equivalents, deposits of contractors held against their satisfactory performance of work and other miscellaneous deposits of indeterminate duration. This category is also used to record residual interfund and intergovernmental adjustments that are required on consolidation of "Deposits."

7.20 Liabilities to pension plans - Consist of the government's obligations as an employer as well as government's obligations toward participants, that is, its obligations as an employer and the share of benefits vested through the contributions of participants and independent employers paid into the Consolidated Revenue Fund. The unfunded portion of trusteed and non-trusteed pension plans is recorded whether or not the government includes them in its balance sheet. Non-trusteed pension plans liabilities are considered unfunded.

7.21 Other liabilities - This is a residual category for amounts that cannot be reported under a more specific category. As in the case of "Other financial assets" (see paragraph 7.08), this category is also used for recording residual interfund and intergovernmental adjustments that are required for the consolidation of "Other liabilities."

7.22 Net financial wealth (+) /net financial debt (-) (excess of financial assets over liabilities/excess of liabilities over financial assets) - Represents the accumulated surplus (or deficit) account in the FMS adjusted for the following: (see Appendix D, Part 3 for the linkage of revenue and expenditures accounts to financing accounts):

(a) Changes in the classification of entities. For example, when a special fund is reclassified as an enterprise, the difference between financial assets and liabilities attributable to that entity is eliminated from the accumulated surplus or deficit account. The reverse is true when an enterprise is reclassified as a government special fund.

(b) Adjustments to transactions of prior years to take into account changes in government accounting policies or practices.

(c) Changes in the actuarial value of unfunded liabilities that are accounted for in the balance sheet but not in expenditures.

(d) Changes in financial assets and liabilities values due to changes in foreign currency valuation.

(e) Changes in allowance for doubtful accounts.

Source and application of funds

7.23 The statement of source and application of funds provides a framework for the analysis of the funds available beyond the gross revenue framework and the use of these funds beyond the gross expenditure framework. All such statements, whether on business or on government, are similar in nature. They show the funds available from current operating surplus, from transactions involving increases in liabilities and decreases in assets, and the application of such funds, namely the covering of current operating deficits, increases in assets and decreases in liabilities. However, in form and detail, statements on government depart from those generally used by businesses. The former are oriented toward the identification of intergovernment transactions, transactions between government and GBEs, other domestic transactions and foreign transactions (see Appendix D, Part 3).

7.24 Since capital revenue and expenditures of government are included in gross revenue and expenditures and thus in the financial management surplus or deficit, they do not form separate items in the source and application of funds statements of government as usually done in similar statements of businesses.

7.25 In completing the table of source and application of funds, only net amounts are reported for each item. Thus, if borrowings through bonds and debentures issued are less in the period under review than repayments of earlier similar borrowings, the net excess of repayments only is reported as an application of funds for this category. Conversely, if borrowings are greater than repayments, that excess is reported as a source of funds.

7.26 Appendix D provides for the identification of various types of transactions which give rise to funds and to which application they are applied. These are:

(a) FMS surplus or deficit for the period - Accounts for the FMS surplus or deficit, as defined in paragraph 7.22; this is not to be confused with budgetary surplus and deficit.

(b) Changes in the classification of entities - Includes the adjustment resulting from such changes, as described in paragraph 7.22 (a).

(c) Changes in accounting policies and practices - Reflects adjustments as described in paragraph 7.22 (b).

(d) Changes in the actuarial value of unfunded liabilities - Reflects adjustments as described in paragraph 7.22 (c).

(e) Changes in borrowings - Provides for the identification of the financial instruments by which government borrowing takes place, namely advances, treasury bills, Canada bills, short term paper, savings bonds, bonds and debentures and other securities. It identifies domestic versus foreign borrowing and it indicates the role of each level of government and its enterprises as suppliers of funds.

(f) Changes in advances and in security holdings - Accounts for the source and application of funds resulting from the acquisition or the disposal of financial assets through advances, treasury bills, short term paper, bonds, debentures, shares, mortgages and other securities. Due to the importance of transactions among Canadian governments, the breakdown provides for the identification of each level of government and its enterprises in addition to transactions on the domestic and foreign markets.

(g) Changes in other assets and liabilities - Accounts for changes within the reference period in the other categories of assets and liabilities that represent sources or applications of funds. It includes cash on hand and on deposit, receivables, other financial assets, bank overdrafts, payables, coins in circulation, deposits due, liabilities to pension plans and other liabilities.

(h) Discrepancy - Theoretically the source and application of funds statement should account for all changes to the balance sheet occurring within an accounting period. In practice this is difficult to achieve within processing time schedules.

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