1. Financial Budgeting and Reporting (2)
MODULE 5
Financial Budgeting and Reporting (2)
Lecturer:
Peter Moreira, MBA, CGA

2. ACCRUAL BUDGETING
Main Estimates presented to Parliament as information in support of budgetary and non budgetary spending authorities that will be sought through Appropriation bills
activities for the departments and agencies for which Minister is responsible grouped together to provide a total ministry presentation
ministries arranged alphabetically to make up the complete Main Estimates
Main Estimates components - Budgetary, Non Budgetary, Voted and Statutory Authorities

3. Budgetary
servicing public debt, operating/capital expenditures, transfer payments, payments to Crown Corporations
Non Budgetary
loans/investments/advances that represent changes in the composition of the financial assets of the government e.g. Canada Student Financial Assistance

4. Voted Authorities
expenditures for which parliamentary authority is sought through an annual appropriation bill (Appropriation Act)
authority to make expenditures to deliver various mandates under the administration of a Minister and contained in legislation approved by Parliament

5. Statutory Authorities
expenditures for which Parliament has given spending authority through other legislation (enabling) which sets out purpose and terms/conditions for expenditures e.g. contributions to employee benefit plans
statutory included in Main Estimates for information only

6. 2008/09 MAIN ESTIMATES Budgetary NonBud Total Voted 79,015 61 79,076
Statutory , ,390
220, ,466
Summary
government request to Parliament to spend
$220.6B for budgetary expenditures ($79B under program authorities and $141.6B for statutory items under previously approved enabling legislation)
$856M for non budgetary expenditures

7. ACCRUAL ACCOUNTING Status Accrual Accounting in Government
Government Wide
Departmental
Budgeting
Federal
Accrual -
Cash
Appropriations
Accounting (Reporting)
Summary f/s
Departmental f/s
DPRs

8. basis of presentation of departmental budgets, appropriations and performance reports is cash accounting
departments held accountable to Parliament on cash used against parliamentary appropriations whereas government financial reporting based on accrual accounting
accrual accounting
recognizes income when earned and expenses when incurred rather than when cash/equivalent is received/paid
records assets and existing and potential liabilities

9. Accrual accounting example
On March 31, 2009, government requires environmental remediation of a toxic site following a regulatory ruling and it is estimated to cost $100,000 over the next 10 years (work begins July 31, 2009 and costs $10,000 in 2009/10)
current accrual method of accounting government would record entire $100,000 cost of the clean-up as a liability in fiscal year it was identified (2008/09) and record $10,000 expense per year for the next ten years as the liability is retired
former method of accounting no liability would have been recorded in 2008/09 and $10,000 per year would have been recorded as expense for next ten years starting in 2009/10

10. Accrual budgeting/appropriation example
$100,000 environmental remediation costs
current method of departmental budgeting and appropriations would recognize in 2009/10 fiscal year only the $10,000 paid toward the clean-up that year
No amount would be charged to 2008/09 fiscal year budget or appropriation even though entire $100,000 cost would be reflected in government and department f/s for 2008/09

11. concepts of accrual accounting and accrual budgeting/appropriations difficult for parliamentarians to understand
government studying issue since 1998 without establishing a clear position
2006 OAG Presentation “Overview of Accrual-Based Budgeting and Appropriations” to Standing Committee on Government Operations and Estimates recommended that government must finalize its study of accrual-based budgeting and appropriations at the departmental level
Treasury Board Secretariat has continued to state that “this is a complex issue and needs extensive study before a decision can be made”

12. benefits accrual-based budgeting and appropriations
budgets, estimates and appropriations more closely related to costs and revenues anticipated during the year regardless of when paid or received
departmental managers more accountable for accrual financial information (budgeting/forecasting) than in past
more comparable information and better control/monitoring of actual performance
more focus long term consequences of current decisions

13. challenges accrual-based budgeting and appropriations
learning curve and change management investment in retraining financial managers
concept of accrual accounting, budgeting and appropriations is difficult to understand
still important for government to manage cash and for Parliament to play a role in approving timing of certain expenditures

14. OPERATING AND CAPITAL BUDGETING
senior governments in Canada currently use separate operating and capital budgets which are tied to separate appropriations in main estimates
Main Estimates (Part II) - Topic 3.6 The Executive Budget 2010/11 Main Estimates
Structure of the Main Estimates explains rules regarding segregation of "votes" between program, operating, capital, and grants and contributions expenditures votes, non-budgetary votes and special votes
Budgetary Main Estimates by Standard Object of Expenditure columns 8 and 9 contain $ for capital items
operating and capital expenditures are approved by separate votes of Parliament

19. GOVERNMENT DEFICITS, DEBT AND FISCAL SUSTAINABILITY
deficit created when government spending exceeds government revenues in fiscal year
federal shift toward full accrual accounting resulted in redefinition of surplus and deficit
"budgetary balance" refers to difference between revenues (taxes, EI premiums, fees) and expenditures (programs, transfers, public debt)
positive budgetary balance represents surplus while a negative budgetary balance represents deficit
2007/08 surplus $9.6B
2008/09 deficit $5.8B (EI payments up, income tax reductions as part of Economic Action Plan)

20. debt is total of all of the previous years actual budget deficits minus surpluses
federal government uses term federal debt rather than “accumulated deficit” to describe its accumulated financial position (2008/09 $463.7B, 2007/08 $457.6B)
most analysts agree that occasional deficits are an inevitable part of governing but debt should kept at a reasonable level

21. some experts consider achieving balanced budgets each year to be inefficient constraint on government activity
argument that
government revenues would normally decrease and expenditures increase in recessions while revenues would increase and expenditures decrease during economic booms
requiring balanced budget each year removes automatic stabilizers and may result in chaotic funding for public programs
while senior governments increasingly use balanced budget legislation a range of approaches are in place to try to address these concerns

22. most provinces and federal government have contained deficits in recent years (balanced budget legislation) however interest payments on debt are still significant portion of many budgets
2010/11 Main Estimates $33.7B allocated for public debt charges (12.9% of $261.2B budget, $31.9B 2009/10)
excessive government debt impacts economy by decreasing amount of funds available for other forms of investment and reducing net exports

23. ECONOMIC ACTION PLAN
EAP (January 2009) is set of initiatives aimed at providing needed boost to the economy and represents an investment in the future with impact on financial position of the Government largely felt in 2009/10 and 2010/11 fiscal years
reduces taxes
helps unemployed through enhanced EI benefits and training programs
avoids layoffs by enhancing the EI work-sharing program
creates jobs through massive injection of infrastructure spending
helps create the economy of tomorrow by improving infrastructure at colleges/universities and supporting research and technology
supports industries/communities affected by global downturn
improves access to and the affordability of financing for Canadian households and businesses

24. pressing need for G7 countries to monitor fiscal sustainability
2008/09 Canada had lowest net debt to GDP ratio in G7 (Can < 25%, UK, US, Fr, Ger = 25 to 50%, Jap and Italy > 75%)
rising longevity, falling fertility rates and retirement of baby boom generation will substantially raise age-related government spending in most advanced countries (health care and pensions)
increased worries over environmental degradation and its associated costs (global warming)
concerns over national security (terrorism)

25. Module Summary
Review the arguments for and against accrual budgeting in the public sector. (Level 1
Explain the differences between operating and capital budgets. (Level 2) Evaluate a government’s financial performance, including the calculation and interpretation of ratios that measure financial condition. (Level 1) Review deficits, debt, the accumulated surplus or deficit, and balanced budget legislation, and critique deficit and debt trends. (Level 1)