Beechy, Trivedi, MacAulay Advanced Financial Accounting, Seventh Edition

Chapter 11 Public Sector Financial Reporting

35) Describe the major differences in characteristics that exist when comparing a large government agency
to a large public company.
Answer: General characteristic comparison:
The objective of governments is to provide services to the public and to redistribute wealth using
social programs. Making a profit is the primary objective for business corporations.
Governments can make laws and regulations and set monetary and fiscal policies; large businesses do
not have this ability.
Governments incorporate their budgets into the account structure since the budgets must be
approved to allow for the funds to be spent; corporations use budgets only as an indicator.
Governments have a very broad user group including the public, civil service, other governments,
and creditors. Business corporations have a limited user group.
Governments generate most of their revenues from taxes, which provide a relatively stable base for
the entity. Business corporations may have very volatile revenues due to competitive pressures and
economic cycles.
Governments have a large amount of debt due to their capacity to borrow.
Tangible assets owned by governments are viewed as representing a future service capability so that
the net book value of these assets represents the unexpired service potential of these assets. Business
corporations generally view tangible assets as a source of future cash flows. Consequently, spending on
capital assets by governments is not driven by return on investment but often by other objectives such as
stimulating economic activity.
Difficulty: Moderate

36) Clearly distinguish between a government business organization and a non-business government
organization.
Answer: In contrast with normal government departments and agencies, a government business
organization is one that:
is a separate legal entity with the power to contract in its own name and can sue and be sued;
has been delegated the financial and operational authority to carry on a business;
sells goods and services to individuals and organizations outside of the government reporting entity
as its principal activity; and
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.
Most governmental entities have none of these characteristics, in that contracts are entered into on behalf
of the Crown, financial and operational authority are centralized, and the governmental entities do not
have sales in the normal sense of the word and are not self-sustaining with monies received from outside
the public purse.
Difficulty: Moderate

37) The Public Sector Accounting Board suggested several objectives for the financial statements of
federal, provincial, and territorial governments. List and briefly explain each of the four objectives and
how these objectives are met with the various financial statements issued by governments.
Answer: Financial statements of federal, provincial, and territorial governments have the following
objectives:

1. To provide accounting of financial affairs and resources under the control of the government. This
objective ensures that all controlled entities (agencies, organizations, and enterprises) are included in the
government's financial statements.
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2. To demonstrate government's ability to finance activities, meet liabilities, and provide future services.
The SFP provides information for users to assess the government's ability to pay its debt, its capacity to
deliver services based on the amounts invested in tangible assets, and the economic resources available
(accumulated surplus/deficit).
3. To account for sources, allocation, and use of government resources; to evaluate how activities affect
net debt; and to show how activities are financed and cash requirements met. Users need to understand
how and why changes in net debt, accumulated deficits/surplus, and cash arise. The statements of
operations, remeasurement gains and losses, changes in net debt, and cash flows provide the details of
these changes that have occurred during the year.
4. To display the state of government's finances and evaluate it in accordance with legislative
requirements. The statement of operations and the statement of net debt should include the budget and
actual amounts to allow for easy comparison.
Difficulty: Moderate

38) Research surveys have suggested that there are several qualitative characteristics that are desirable in
published financial reports of governmental units. Explain why comparability is so important to users
and what this means for users.
Answer: The four major qualitative characteristics desired of governmental financial reports are 1)
comparability among governments, 2) consistency between years, 3) completeness, and 4) timeliness.

Comparability among governments is particularly important because users need to be able to determine
the scope of the reporting entity and the particular elements of the financial statements (revenues,
expenditures, assets, and debt, especially unfunded liabilities and contingencies). In particular, users want
to define the reporting entity and what "control" means for governments and related agencies, entities,
and so on. Also, how governments classify and measure revenues, expenses, assets, and liabilities should
be consistent. Finally, users want debt to include contingent debt.
Difficulty: Easy

39) According to PSAB, when and how is revenue measured in government entities? Explain how
transfers made through the tax system and tax concessions are different and how PSAB suggests these be
treated.
Answer: PS 3510 recommends that tax revenue be recognized when all three of the following conditions
are met:
1. The offsetting assets (cash or receivable) meet the definition of an asset.
2. Taxes have been authorized by legislature or council.
3. The taxable event as occurred.

Transfers through the tax system are amounts paid to entities by a reduction in the entity's taxes, but the
entity will receive the benefit even if it pays no taxes. An example of this is child tax benefits. PSAB
recommends that these types of benefits be recognized as an expense.
Tax concessions are amounts that affect the amount that an entity currently or previously owed. They
result in reduced taxes for the entity and reduced tax revenues for the government. An example of this is
a property tax credit. Tax concessions should be netted against tax revenues.
Difficulty: Moderate

40) In general, there are three types of government organizations. Identify and describe these three types
and the accounting standards that are followed by each type of entity.
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Answer: The three types of government organizations are:

Government business enterprises (GBEs): These organizations are separate legal entities that can be sued
and may sue. They operate a business and engage in external exchange transactions. These entities are
capable of maintaining their own operations and paying obligations. They are publicly accountable and
are required to follow the CICA Handbook Part I, which is IFRS.
Government not-for-profit organizations (GNFPOs): These organizations have the following four
characteristics:
have NFP counterparts in the private sector;
have no transferable ownership interests;
are operated exclusively for a not-for-profit purpose; and
members and contributors do not receive any financial returns.
These types of organizations have a choice to follow the PSA Handbook with or without the NFP sections.
Other government organizations (OGOs): Any organization that does not fall into either of the above two
categories (GBE or a GNPO) is an "other government organization." OGOs base their accounting on
PSAB. However, in some situations IFRS might be more appropriate. Factors to consider in deciding on
the appropriate standards to follow include: (1) whether the OGO possesses any characteristics of a GBE;
(2) the nature of the OGO's operations, assets, and mandate; and (3) how dependent the OGO is on
government funding.
Difficulty: Moderate

41) PSAB defines a government organization as one that is "controlled by the government". Explain what
is meant by "control" and how this is assessed for governments. Explain how controlled entities are
reported.
Answer: Control is determined by examining persuasive evidence in addition to seven other potential
indicators, if required. Persuasive evidence of control may be indicated if the government has:
1. the power to appoint a majority of the members of the governing body;
2. control and access over the assets of the organization;
3. majority number of votes; or
4. single authority to dissolve the organization.
Dependency on government funding or regulatory powers by the government does not necessarily
indicate control. If the control is over OGOs or other governments, then consolidation is required.
The cost basis is used for investments made in entities that are not controlled by the government but
represent portfolio investments.
Where the government has control of a GBE, the investment is reported on a modified equity basis.
Difficulty: Moderate

42) One of the largest sources of revenue for governments is government transfers. Government transfers
represent non-exchange revenue. Explain what "government transfer" is and why it is a non-exchange
transaction. How are government transfers reported? Be sure to address reporting from the transferor and
the recipient perspectives, separately.
Answer: A government transfer is the provision of either monetary or tangible assets by one government
entity to another. Since there is no transfer of goods or services in return, and no expectation of
repayment or financial return, the transaction is a non-exchange transfer.

Restrictive terms may be imposed by the transferor, which may set eligibility criteria for who may receive
the transfer or what must be done to receive the transfer. Or the restrictive term may be a stipulation,

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which outlines how the transfer will be used and what must be done to keep the transfer.

Transferor accounting The transferring government will recognize the transfer as an expense when it is
authorized and the eligibility criteria have been met. This is the same requirement for both operating and
capital transfers.

Recipient accounting Operating transfers are recognized as revenue when the transfer has been fully
authorized and the eligibility criteria have been met. If both criteria have been met, but cash has not yet
been received, then a receivable will be recognized at this time. If stipulations are attached, then revenue
is not recognized until the stipulations have been met. In this case, the revenue may be deferred until the
stipulations are met.
Difficulty: Difficult

43) One of the objectives of government reporting is to allow users the ability to assess the government's
finances. A statement of changes in net debt is required. Describe what is meant by "net debt" and why
this is an important indicator of the government's financial position. What information does this
statement provide?
Answer: Net debt is the total of the government's liabilities less the total of its financial assets. It is
important as an indicator of the government's ability to service and repay its current debt, which impacts
the government's ability to deliver its programs and services in the future. Net debt is seen as "claims that
could reduce future services." The accumulated deficit or surplus is the combined value of the
government's net debt and its total tangible capital assets. Total tangible assets, representing prepaid
future service potential, also gives users an indication of the government's ability to deliver services and
programs in future years. The statement of changes in net debt reconciles the deficit/surplus for the
period with the change in net debt. It starts with the deficit or surplus for the period, subtracts the cost of
non-financial assets acquired and adds back any amortization of tangible capital assets to arrive at net
debt.
Difficulty: Easy

44) Tangible capital assets owned by governments are viewed differently than tangible capital assets
owned by business enterprises. Explain this difference and describe how tangible capital assets are
reported for governments.
Answer: Public tangible capital assets are used for providing services. There is no requirement for the
tangible capital assets to generate a return. The objective for public tangible capital assets is on
stimulating economic activity. The tangible capital assets are seen in terms of their future or unexpired
service potential and not in terms of future cash flows that they can generate.
These types of assets often are owned because they came with the territory, rather than being outright
purchased. In these cases, since there is no cost, they are not recognized on the financial statements.
However, accounting standards recommend that governments disclose the existence and nature of these
assets.
For reporting purposes, tangible capital assets are capitalized and depreciated. However, users also need
to understand the physical condition of the assets, which has direct implications on their future service
potential. As a consequence, the impairment testing for these assets looks at the assets' ability to continue
to provide future services, and the carrying value should represent the unexpired service potential of the
assets. Since traditional accounting information does not provide this, PSAB recommends that
governments disclose in the notes the condition of their various categories of assets. This is voluntary
disclosure and not required.
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Chapter 11 Public Sector Financial Reporting
Difficulty: Difficult

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