Policy on Allowances for Valuation of Assets and Liabilities
To ensure that the assets and liabilities reported on the financial statements of the Government of Canada present fairly the government's financial position, and the results of its operations.
For year-end financial statement purposes, it is the government's policy to establish and report valuation allowances as required:
- likely to be realized or collected; and
- for liabilities that are not or cannot be recorded or established at the departmental level.
This policy applies to all departments, agencies and other organizations that are required to use the Consolidated Revenue Fund and have recorded claims and/or that account for liabilities in the accounts of Canada.
- At each fiscal year-end, all financial claims that are recorded as assets on the Statement of Assets and Liabilities of Canada must be assessed. Allowances must be established for any amounts not considered to be ultimately collectible or realizable. Departments must provide the Treasury Board Secretariat with their assessments and the necessary information on their financial claims as required.
- Each year-end, departments must supply the Treasury Board Secretariat with details related to any liabilities of a material amount that are not or cannot be recorded in the departmental accounts because no relevant appropriation exists, or because recording deadlines have passed. The Treasury Board Secretariat uses that information to establish any allowance required.
- At year-end, the Treasury Board Secretariat reviews the assessments and information provided by departments, establishes the amounts of the allowances, and arranges for recording of the allowances in the accounts of Canada and in the Public Accounts, as applicable.
- Details of the individual items included in the allowances must not be disclosed if that would jeopardize the government's financial, commercial or economic interests. In such cases, they can be exempted from disclosure under section 18 of the Access to Information Act.
- Departments must retain details of the calculations used to establish the items to be included in the allowances in case the Office of the Auditor General wants to examine them.
- Except for assets denominated in foreign currencies, all asset balances and transactions must be recorded in the accounts and disclosed in the financial statements at cost.
- The allowances and the related changes during the fiscal year are disclosed in the Public Accounts. Details are disclosed by major asset or liability class, subject to confidentiality requirements imposed by this policy.
- Any deletion of assets, with the exception of accounts receivable for non-tax revenue, must be made by a charge to a budgetary appropriation of the administering department, and an offsetting credit to the asset account. When a financial claim recorded in the Statement of Assets and Liabilities is to be written off or forgiven, and this would result in a charge to an appropriation, the approval of Parliament is required.
- Deletions of accounts receivable for non-tax revenue must be made through the departmental memorandum accounts. Such deletions will have no impact on the budgetary appropriations or on the asset balances recorded in the accounts of Canada of the administering department.
- This policy does not preclude the establishment of allowances at times other than the fiscal year-end. Furthermore, the Treasury Board Secretariat may establish any valuation allowances deemed necessary to properly reflect the value of assets and liabilities reported in the government's financial statements.
While departments are expected to adhere to the procedural requirements, there can be flexibility in their application. However, departments are accountable if they deviate from them and, in so doing, must ensure that any alternative procedures accomplish the same objective with at least an equivalent degree of accuracy and reliability.
- Loans and advances to Crown corporations or to other domestic and external recipients, and accounts receivable for non-tax revenue items, must be assessed by departments on the basis of their collectibility. For these financial claims, allowances at year-end represent the amounts that are judged to be uncollectible or unlikely to be collected in due course.
- Other types of financial claims occur only in a limited number of departments or involve special problems in valuation. Such claims include investments in Crown corporations, loans to other governments, subscriptions in international organizations, Receiver General deposits and other investments. These items are assessed, as required, either directly by the Treasury Board Secretariat or in consultation with the departments involved.
- Information on liabilities at March 31 that are not recorded at the departmental level must be reviewed by the Treasury Board Secretariat for reporting in the financial statements. These liabilities consist of financial obligations to outside organizations and individuals as a result of transactions and events that occurred on or before March 31. In certain cases, guarantees and other contingent liabilities are of a nature and certainty that require their recording in the accounts of Canada through an allowance.
At year-end, the senior financial officers of departments, agencies and other organizations must provide to the Treasury Board Secretariat a preliminary assessment of the collectibility and value of the loans, investments and advances, and accounts receivable that they administer. They must also report to the Treasury Board Secretariat any liabilities of a material amount affecting their accounts that are not or cannot be recorded in the accounts of Canada through their departmental entries.
This policy is issued under the authority of subsection 63(2) of the Financial Administration Act and should be read in conjunction with the following:
- "Treasury Board Guide on Financial Administration", section 10.8 on Loans and advances and section 10.10 on Deletion of debts.
- Treasury Board Manual, Comptrollership Volume, chapter 5-5 on Payables at year-end.
This chapter cancels chapter 5-7 of the "Financial Management" volume dated August 1, 1993; and
this policy supersedes section 10.11 and Appendix 10.C of the Treasury Board "Guide on Financial Administration", consolidated revision, April 1991.
Enquiries concerning this policy should be directed to your departmental headquarters. For interpretation of this policy, departmental headquarters should contact:Comptroller Sector
Treasury Board Secretariat
Telephone: (613) 957-7233
Facsimile: (613) 952-9613
Appendix A - Guidelines
1. Classes of allowances for the valuation of assets
The following are the designated classes and guidelines for valuation of year-end balances of financial claims. Additional amounts may be established as allowances at the discretion of the Treasury Board Secretariat.
Loans, investments and advances to Crown corporations
Loans and advances
Amounts that are doubtful or uncollectible are to be included in the related valuation allowance. For pass-through loans and advances to Crown corporations which are lending institutions, the amounts to be included are those that are or may be uncollectible.
The following considerations should be taken into account in determining allowance requirements for investments:
- a comparison over time of the return on the investment with the government's cost of borrowing,
- the corporation's ability to realize a return on investment through disposal of non-operating assets, and
- any permanent impairment of shareholder's equity as determined from the accounts of the corporation at the date of valuation and other available information.
Loans, investments and advances to parties other than Crown corporations
This class includes loans, investments and advances shown in the financial statements under the following sub-categories:
- provincial and territorial governments;
- national governments, including developing countries;
- international organizations;
- Veterans' Land Act Fund;
- joint and mixed enterprises; and
An amount must be included in the year-end allowance in respect of loans and advances to governments (the first two sub-categories listed above) if authorization has been received to delete the item pending appropriate legislation. A valuation adjustment may also be considered where there is significant variation from the existing terms and conditions of a loan or advance or when significant concessionary terms are used.
Guidelines for the last four sub-categories above are:
Loans and advances
Amounts to be included in the related valuation allowance are to be determined on the basis of collectibility. Any amounts considered to be doubtful or uncollectible must be included in the valuation allowance. A valuation adjustment will also be considered for claims with significant concessionary terms.
Investments and subscriptions
Amounts to be included in the related valuation allowance are to be determined on the basis of recoverability, i.e. whether the amounts paid out will be recovered in the event of either a break-up of the organization or the Government of Canada's withdrawal from it.
If the investment value recorded in the accounts exceeds Canada's share of the corporation's recorded net worth, the amount of the excess must be included in the allowance up to the amount of the investment recorded in the government's accounts.
A subscription is assessed as an equity investment by the Government of Canada in the organization. If the amount recorded in the accounts exceeds Canada's interest in the organization's net worth, as shown by its most recent financial statements, the excess must be included in the allowance up to the amount of the subscriptions recorded in the government's accounts. Only paid-in capital should be used in calculating Canada's interest in the net worth of these organizations. Notes payable issued by the Government of Canada to cover subscriptions should be deducted in calculating both the net worth of the organizations involved and Canada's recorded interest in them.
Exchange Fund Account
The Exchange Fund Account is valued at each year-end and net income is paid into the Consolidated Revenue Fund in accordance with the legislative provisions of the Currency Act. No other valuation action is required.
Amounts to be included in the allowance should be based on the best estimate of all or any amounts that may not be collected. Estimates can be made on the basis of knowledge of individual accounts or on the basis of past experience using percentage loss calculations.
Foreign currency deposits
The Receiver General deposit accounts held in foreign funds are converted to Canadian dollar equivalents at the year-end rates of exchange. No other valuation action is required.
The Treasury Board Secretariat establishes allowances in respect of potential debt or debt service relief measures for financially troubled countries under multilateral agreements. These allowances are included, as appropriate, in the allowance for valuation of assets and the allowance for borrowings of agent Crown corporations.
2. Criteria for assessment of the collectibility of financial claims
Amounts due from parties other than Crown corporations
The valuation of financial claims should be made on the basis of whether each claim or group of claims is collectible in accordance with the agreed terms of repayment, using conventionally established criteria, e.g.:
record of repayment of the claim or group of claims
Evaluation of collectibility should be made on the basis of one or more of the following factors: the aging of accounts; defaulted or partial payments; legal actions in process or pending; assignment to collection agencies; the debtor's disappearance or death; disputed items; or other evidence or reasons.
evaluation of the debtor's ability to pay
Factors to be used in this evaluation should include one or more of the following: debtor's current credit rating; assessment of the financial statements; assessment of relevant local, national or international political and economic situations; and any other relevant factors.
Amounts due from Crown corporations
The collectibility of loans and advances made to Crown corporations by the government should be based on whether or not there is a reasonable certainty that the corporation can repay the outstanding amounts out of operations during the term of the agreement without recourse to parliamentary appropriations for making such repayment. This involves examining the corporation's projected cash flow, commitments, future earnings, market prospects, and other relevant factors to determine whether it can finance operations and projected capital purchases, and make principal and interest payments. The amounts that cannot be repaid according to this analysis are to be considered uncollectible.
Financial claims containing conditional forgiveness clauses
The Government of Canada often provides loans or advances that contain forgiveness clauses with respect to interest or principal or both. To the maximum extent possible, the amounts that are expected to be forgiven should be included in the calculation of the allowance at each year-end.
3. Classes of allowances for valuation of liabilities
The following are the designated classes and guidelines for the valuation of year-end liabilities.
The Treasury Board Secretariat will establish, for accounting purposes, an allowance to record any shortfall or surplus in the accounts, as determined on an actuarial basis.
Allowance for employee benefits
The amounts related to unpaid but earned annual vacation leave and the actuarial estimate of employee benefits payable upon termination of employment that are not covered by the Payables at Year-End (PAYE) policy are reviewed by the Treasury Board Secretariat and reported in the allowance as required.
Allowance for borrowings of agent Crown corporations
Represents borrowings that are not expected to be repaid by agent Crown corporations. The Treasury Board Secretariat estimates the amounts by taking into consideration the financial position of the entities, in particular their ability to repay their borrowings from internally generated funds.
The Treasury Board Secretariat also establishes allowances in respect of potential debt or debt service relief measures for financially troubled countries under multilateral agreements. These allowances are included, as appropriate, in the allowance for valuation of assets and the allowance for borrowings of agent Crown corporations.
Allowance for Payables at Year-End (PAYE)
Consists of liabilities that cannot be charged to an appropriation or entered into departmental accounts by a department before the year-end deadlines established by the Receiver General. Differences between payable balances reported in the accounts of Canada and the departmental records should be analyzed and reported to the Treasury Board Secretariat as applicable. Departments should refer to the most recent Receiver General directive on PAYE for further details.
Appendix B - Definitions
For the purpose of this policy
- Accounts (comptes)
- are the accounts of Canada except where specified otherwise;
- Accounts receivable (comptes débiteurs)
represent financial claims arising from past or potential budgetary revenue transactions. These claims do not include amounts already recorded as Loans, Investments and Advances. Accounts receivable are classified into two distinct categories:
- tax revenue receivable: represents financial claims arising through the tax system; and
- non-tax revenue receivable: represents financial claims arising from revenue accrued for fees charged, goods delivered or services rendered by a government body on or before March 31, expenditure overpayments, other recoverable payments, and interest capitalized, deferred, due and accrued;
- Advances (avance)
- are financial claims acquired by making payments to outside entities. Advances are normally repayable without interest and are of a short-term nature. However, in certain cases, advances can be repayable over several years, with interest, according to a predetermined agreed repayment schedule;
- Allowance (provision)
- is used in the same sense as "reserve" in the Financial Administration Act and means the amounts calculated under the terms of this policy. It represents estimated losses on the realization of financial claims or estimated financial obligations of the government that would not otherwise be recorded in the financial statements;
- Assets (actif)
- mean the financial claims acquired by the Government of Canada on outside organizations and individuals as a result of events and transactions recorded on or before the accounting date;
- Crown corporation (société d'État)
- means a parent Crown corporation or a wholly owned subsidiary as defined in the Financial Administration Act and includes the corporations listed in Schedule III to that Act as well as the Bank of Canada, the Canada Council, the Canadian Broadcasting Corporation, the Canadian Film Development Corporation, the Canadian Institute for International Peace and Security, the Canadian Wheat Board, the International Development Research Centre, and the National Arts Centre Corporation;
- Investments (dotation en capital)
- represent owner's equity acquired by the purchase of shares, the conversion of loans or advances to equity, or the contribution of capital;
- Liabilities (passif)
- are defined as financial obligations of the government to outside organizations and individuals as a result of events and transactions that occurred on or before the accounting date;
- Loans (prêt)
- are financial claims acquired by making payments to outside entities. Loans are repayable with interest according to a predetermined agreed repayment schedule, and are usually of a long-term nature;
- Memorandum accounts (compte pour mémoire)
- represent accounts maintained internally by government bodies to control financial claims and, as such, are not recorded in the accounts of Canada;
- Pass-through loans (prêt intermédiaire)
- are loans made to a Crown corporation lending institution for relending to a specific outside party and for which the corporation administers payment and collection.