Financial Information Strategy Accounting Manual

The objectives of this Manual are to:

• provide general information and guidance on accrual accounting;
• assist departmental staff in understanding differences among accrual accounting, accounting for authorities and reporting by objects;
• assist departmental staff in recording both routine and complex transactions particular to government, from the accrual, authorities and object of expenditure perspective. This is important since all accounting transactions must be recorded to indicate: a) accrual accounting basis; b) appropriations or other authorities basis; and, c) object of expenditure basis; and,
• assist departments with respect to recognition and disclosure requirements for the production of their departmental financial statements on a full accrual basis.

It should be noted that the Manual does not purport to cover all possible accounting transactions and Scenario s. This is considered to be neither desirable nor possible because of the number of permutations and combinations that can exist. This is especially so for the use of authority codes because they depend to a great extent on specific departmental legislation and other authorities including Estimates. As a result, the Manual cannot be considered authoritative.

The transactions presented must be considered in light of this and may not be the only possible way of handling a specific transaction. Thus, the Manual only provides general direction on the majority of transactions that Departments will encounter. However, the transactions covered together with the explanations should provide departmental personnel with the necessary guidance to handle most transactions. In circumstances where this is not possible, the advice of TBS should be sought.

To use this Manual effectively, departmental personnel should refer to:

• the Chart of Accounts Manual
• the FIS Transition Protocol

Recommendations for the inclusion of other types of transactions in the Manual should be made to the Government Accounting Policy Division of TBS, Telephone (613) 957-2527, Facsimile (613) 952-9613.

This Manual will be useful to all government departments as defined in Section 2 of the Financial Administration Act (FAA). "Department" means

1. any of the departments named in Schedule I of the FAA.
2. any of the divisions or branches of the public service of Canada set out in column I of Schedule I.1 of the FAA.
3. a commission under the Inquiries Act that is designated by order of the Governor in Council as a department for the purposes of the FAA.
4. any departmental corporation (Schedule II)

The contents of this manual do not override legislation, regulations or Treasury Board policy relating to financial administration. When there are any conflicts between this manual and legislation or regulations or policy, the latter will apply.

With the full implementation of the Financial Information Strategy on 1 April 2001, departments will be required to account for economic events specific to their department on: a) an accrual accounting basis; b) an authority basis to identify the appropriations or other authorities; and, c) an objects of expenditure basis. Although there may be similarities amongst these three requirements, there are many differences. Consequently, they will be considered separately.

The underlying bases of accounting differ to some extent between accrual accounting and appropriation accounting. Currently appropriations are on a partial accrual basis. Consequently, reporting in financial statements will need to be on both a full accrual accounting and partial accrual accounting bases. Under the partial accrual basis now used for amounts reported in the Estimates, some expenses are accrued but not all; respendable revenues are on a pure cash basis; and, non-financial assets are expensed on acquisition. For example, Payables at Year End (PAYE) are accrued, as are salaries, while other items like employee benefits are not accrued. Transactions that get recorded on an accrual accounting basis may or may not affect appropriations and vice versa. In these cases, the appropriate coding and journal entries must be made to ensure that appropriations are not improperly affected. Departments will also be required to record transactions on an object of expenditure basis. It is best to consider these three elements i.e., accrual, authority and objects as separate and distinct since there are many circumstances where there is not a direct correlation amongst or between them.

1.4.1 Accrual Accounting

Accrual accounting recognizes transactions when the underlying economic event occurs, not just when cash is received or paid. In accrual accounting, transactions are classified as assets, liabilities, equity, revenues or expenses.

The objective of accrual accounting is to ensure that events that affect a department's financial statements are recorded in the periods in which they occur, rather than in the periods in which the department uses its appropriation. Accrual accounting means recognizing revenue when earned (rather than when cash is received) and recognizing expenses when incurred (rather than just when paid). Over the long run, trends in expenses and revenues, since they reflect the underlying economic consequences of operating decisions for a time period are generally more meaningful than trends in payments and cash receipts or charges to an appropriation.

The accrual basis provides users with information about such matters as the resources controlled by the department, the cost of its operations and other information useful in assessing its financial position and changes in it over a particular time period, and in assessing whether a particular organization is operating economically and/or efficiently.

It should be noted that Financial Reporting Accounts (FRAs) were developed as separate accounts in the Chart of Accounts to code transactions for accrual accounting purposes.

1.4.2 Accounting for Appropriations and other Authorities

An appropriation is an authority of Parliament to pay money out of the Consolidated Revenue Fund (CRF).

Therefore, an appropriation is required before moneys can be spent by the government. Some authorities are given in the form of annually approved limits through appropriation acts. Other authorities come from other legislation in the form of statutory spending authority for specific purposes (for example, employee benefits).

Appropriation authority is the means by which Parliament controls the outflows of money from the CRF. However, there are a number of transactions which are charged to a current year appropriation but which do not affect the CRF until a later date or not at all, such as:

1. certain goods received or services rendered prior to or on March 31 of a fiscal year, but not paid for until after that date;
2. charges made by one government department on another; and
3. write-off, forgiveness, etc. of loans, investments or advances.

As a general rule, transactions are recorded against an appropriation on an "expenditure basis". However, there are certain expenditures which are not charged to an appropriation until a payment is required e.g. various allowance or provision accounts currently set up by Treasury Board Secretariat such as employee benefit costs for accrued vacation pay, severance pay, etc.

Currently, accounting for the use of appropriations provides parliamentarians with control over most expenditures of the Government, for both amount and purpose. However, it does not give a complete financial picture of the government since it lacks information on assets and some liabilities and skews information on program costs. For example, if a department purchases a building, the department will record the full expenditure against a particular appropriation in the year acquired notwithstanding that the building will provide benefits over a number of years.

1.4.3 Reporting by Objects

To measure the impact of government transactions on the economy, expenditures are classified according to the type of resources (goods and services) acquired, revenue earned or the transfer payments made. Identification of detailed economic objects, combined with information from other sectors of the economy, makes possible economic analysis, on a national basis, of the effects of government spending. The economic objects are the base code for the object classification and are required for government-wide statistical purposes. They may be used by departments as departmental line objects, but departments may need more detail for their own purposes.

To accommodate the need for differing degrees of detail, several levels of classification by object are used. In descending order of aggregation, they are: categories, sub-categories; reporting objects; economic, source and class objects; and departmental (line) objects. Standard objects, which are the highest level for Parliamentary reporting, can be related to specific categories or sub-categories.

In order to understand the primary differences between accrual accounting and accounting for the use of appropriations, terminology becomes increasingly important. It is necessary to distinguish between certain terms, to ensure that all users are consistent when describing a transaction, preparing a journal entry or providing rationale for various accounting treatments.

1.5.1 Expenditures versus Expenses versus Disbursements

As per the Canadian Institute of Chartered Accountants Public Sector Accounting Handbook (PS) 1500.88, expenditures are the cost of goods and services acquired in the accounting period whether or not payment has been made or invoices received and include transfer payments due where no value is received directly in return.

Examples would include the payment of grants, contributions, the acquisition or construction of capital assets, and the acquisition of operating supplies etc.

Expenses, as per PS1500.93 are the cost of resources consumed in and identifiable with the operations of the accounting period.

Expenses include the costs associated with:

• the purchase of goods and services;
• government transfers;
• grants, contributions and donations (non-repayable); and
• consumption of an asset e.g. amortization of a capital asset, consumption of inventory or prepaid expenses.

Expenses do not include:

• the acquisition or construction of a capital asset;
• the repayment of debt; and
• investments in other entities (both loans and capital injections)

To further clarify the difference, an expenditure refers to the acquisition of a good or service whereas an expense refers to the use of the good or service acquired. For example, the acquisition cost of a tangible capital asset would be an expenditure and the amortization of the cost of that asset would be an expense in the Statement of Operations for the period. Conceptually, the cost of an asset is deferred and recognized as an amortization expense over the period when the assets are used in delivering government programs.

A disbursement is an outlay of cash. Such disbursements may be in the form of cheques, warrants or through the electronic transfer of funds.

1.5.2 Revenues versus Receipts

Revenues, from an accrual accounting perspective, are defined as increases in economic resources, either by way of inflows of or enhancements to assets or reductions of liabilities, resulting from the ordinary activities of a department. As per PS 1500.83-84, revenues should be accounted for in the period in which the transactions or events occurred that gave rise to the revenues. For example, user fees should be recorded in the period the goods or services are provided, sales and excise taxes should be recorded in the period when the sales are made, and transfer payments for shared cost agreements should be recorded in the period the costs are incurred. Items not practicably measured until cash is received would be accounted for at that time. Accounting for all of government's revenues ensures that related financial assets are accounted for in the period they are created.

Revenues include amounts earned from:

• taxes;
• the provision of goods and services; and
• interest.

Revenues do not include

• receivables inflows e.g. payments received for accounts receivables or loans;
• refunds of expenditures; and
• custodial receipts e.g. deposit and trust accounts, etc.

Revenue earned which is not yet collected in the year would be an accounts receivable.

Receipts refer to moneys received, whether through cash, cheque or by electronic transfer of funds.

The purpose of this section is to provide an overview of accrual accounting in the government environment.

Accounting standards

"Departments" will follow generally accepted accounting principles (GAAP) as defined in the Canadian Institute of Chartered Accountants Public Sector Accounting (PS) Handbook. Specifically, departments will use the "expense basis" of accounting as referred to in the handbook (PS1500.93). Subject to modifications or interpretations by the Treasury Board Accounting Standards (TBAS), the PS Handbook will be the authoritative reference manual. In situations where a specific item is not covered in the PS Handbook, then the Canadian Institute of Chartered Accountants (CICA) Handbook will be used.

This FIS Accounting Manual refers to accounting standards where they are relevant. These are part of GAAP. Where appropriate, the text contains a brief description of the requirements of the standards, together with details of any additional or alternative accounting treatments. The relevant accounting standards should be consulted for a full understanding of their requirements.

As mentioned in section 1.2, not every possible Scenario is covered in this Manual. Furthermore, the PS and CICA Handbooks may not be explicit enough in certain circumstances. Therefore, it may be necessary to consult alternative sources to determine the most appropriate treatment for a particular transaction. An intermediate or advanced accounting textbook would be a most valuable source of information, since a variety of Scenario s would be described in sufficient detail to aid departments. As well, the Canadian Institute of Public Real Estate Companies (CIPREC) Handbook can serve as a useful guide to help departments with real property issues.

In addition, there will be specific guidance, which will be the responsibility of, and be developed by, departments themselves. This means that each department should have an accounting guideline that is sufficiently detailed to deal with its own unique circumstances.

Each department, as defined by Section 2 of the FAA, will produce annually a full set of financial statements as at March 31 that can withstand the test of audit. These statements will consist of a Statement of Financial Position, a Statement of Operations, and a Statement of Cash Requirements, together with required Notes and Schedules.

The financial statements, accompanied by a Statement of Management Responsibility and Auditor's Report, (if required by legislation or policy), must be available to the Receiver General for Canada by June 15^th of each year. Departments will publish these financial statements in their Departmental Performance Report.

To the extent possible, department specific financial information now contained in the Public Accounts will be included in either the departmental financial statements or the supplementary financial information attached thereto. All financial information required on a government-wide basis would continue to be included in the Public Accounts.

The going concern principle is applied on the expectation that a department will continue to operate for the foreseeable future and there is no intention to curtail its operation.

The implications of this going concern principle are critical. The historical cost principle (described below) would be of limited usefulness if it were not for the going concern principle. For example, amortization policies are only justifiable and appropriate if we assume continuity of the department.

The determination of the measurement base on which an item is to be recognized in financial statements has been one of the most difficult problems in accounting. A number of bases exist on which an amount for a single item can be measured e.g. replacement cost, net realizable value (net amount that would be received from selling an asset), present value of future cash flows, market value, original cost (less amortization, where appropriate) etc.

Generally, under existing GAAP, transactions and events are recognized in financial statements at the amount of cash or cash equivalents paid or received or the fair value ascribed to them when they took place; i.e., historical cost. By using historical cost as the basis for record-keeping, financial statements will contain objective and verifiable information. Historical cost provides financial statement users with a stable and consistent benchmark that they can rely on to establish historical trends.

This concept is especially critical since there is a great deal of controversy about valuation of real property and other tangible assets carried by departments for many years. The historical cost is not always available or relevant to the users of the financial statements and must be supplemented by other financial information relevant to the decision making.

The matching principle requires that revenue and expenses be accrued; that is, they are recognized as they are earned or incurred, not just when they are received or paid or when they affect an appropriation.

Under the matching principle, inclusion or exclusion of an item of revenue or expenses will depend on the period to which it relates, the period in which it was received or performed, or the period in which it was consumed, used or lost, subject in all cases to materiality considerations.

In general accounting literature, the matching principle normally refers to the matching of revenue and expenses. However, with minor exceptions, departments do not generate major amounts of non-tax revenue but are funded through appropriations. As such, the matching principle must take on a slightly different interpretation. Consequently, revenues should be recognized when the goods and/or services have been rendered and expenses should be matched to program delivery outputs of services to the public.

For example, in the case of tangible capital assets, a systematic and rational allocation policy is used to approximate the matching principle. This type of expense recognition involves making assumptions about the benefits that are being received as well as the cost associated with those benefits. The cost of a long-lived asset is allocated over the accounting periods during which the asset is used because it is assumed that the asset contributes to the generation of program outputs throughout its useful life.

There should be consistency of accounting treatment of like items within each accounting period and from one period to the next. This is particularly important if users are to compare successive years' accounts, for example, to identify trends in revenue and expenses. Changes in accounting policies and practices should generally only be made when those changes will result in fairer presentations of financial results. Any changes that have a significant impact on departmental and or consolidated results should only be made after prior discussion with TBS.

Consistency does not mean that different organizations must apply the same accounting methods. This may be thought to improve comparability between departments. However, requiring such uniformity may result in dissimilar circumstances between departments being reported as being similar. For example, amortization policies should be developed on the basis of what best reflects the consumption of the asset in its particular operating environment. There may be different operating environments in each department.

Materiality is a term used to describe the significance of financial statement information to users. It is a matter of judgement in the particular circumstances. An item, or an aggregate of items, is material if it is probable that its omission or misstatement would influence or change a decision. In short, it must make a difference or it need not be disclosed. It is difficult to provide firm guidelines to help judge when an item is or is not material because materiality depends on the relative size of the item compared to the size of other items and the nature of the item itself.

In determining whether an item or an aggregation of items is material, the following factors should be considered:

• the size of the item;
• nature of the item - for example, irregularities or illegal acts by departmental personnel would be material even if the amounts were small; and,
• cumulative effects - the total effect of individual amounts on the financial statements taken as a whole.

It should be noted that specific disclosures in annual financial statements required by legislation must be complied with regardless of the amounts involved.

Care should be taken in reporting immaterial items since reporting them could otherwise impair the clarity and understandability of the financial statements and notes.

Financial statements should present the economic substance of transactions and events even though their legal form may suggest a different treatment. As such, departments must ensure that transactions and events affecting their entity are presented in the financial statements in a manner that is in agreement with the actual underlying transactions and events. Thus, transactions and events are accounted for and presented in a manner that conveys their substance rather than necessarily their legal or other form. For example, a) capital leases should be accounted for by the lessee as an acquisition of an asset and an assumption of an obligation, since the lease transfers substantially all of the benefits and risks of ownership related to the leased property from the lessor to the lessee. b) repayable contributions may appear to be an expense for the period but some of them are in fact loans. Therefore those, which meet the definition of a loan according to the PS Handbook, should be accounted for as a loan receivable. Depending on the terms of the agreement, some of them may need to be treated as concessionary loans.

Introduction

From a departmental perspective, "cash" includes cash on hand, cash in transit, and cash on deposit.

It should be noted that the main focus of the "cash" component would be that of a typical department's day-to-day handling of public money to the credit of the Receiver General for Canada. Cash related entries specific to the Receiver General for Canada and foreign currency cash will not be addressed in this manual.

References

• PS 1500.49-.51
• TBAS 1.1, 1.2
• Receiver General Manual-Chapter 5 "Bank Facilities System (BFS) and Departments", Chapter 10 "Departmental and Central Accounting Entries under Full FIS"

Scenario A - Department receives money for services rendered

The Department receives a $25,000 cheque in the mail from a customer for services rendered by the Department.

Journal Entries

1) Department receives cash in from customer ***

	AMT($)	FRA	AUTH	OBJ
DR Cash in Hands of Depts awaiting deposit to RG	25,000	11125	R300	5299
CR Revenue or Accounts Receivable etc.	25,000	*	*	*

FRA coding rationale: (PS 1500.49-51) - The Department records the cash as being in hand awaiting deposit to a Chartered Bank. The credit entry offset is to either a revenue item or against accounts receivable.

Authority coding rationale: The authority code is "R300-All other assets and liabilities". Although there is no impact on the authority side for "cash", the system requires that a code be used.

Object coding rationale: To record the net impact on Cash Accounts, 5299 would be used.

2) Cash Deposited by the Department in a Chartered Bank ***

	AMT($)	FRA	AUTH	OBJ
DR Deposits in Transit to RG	25,000	11123	R300	5299
CR Cash in Hands of Depts awaiting deposit to RG	25,000	11125	R300	5299

FRA coding rationale: (TBAS 1.1, PS 1500.49-51) - The Department deposits the cash in a Chartered Bank and records the cash as being in transit to RG. The credit entry offset is to reflect the transfer from "in hands" to that of being "in transit" to the RG.

Authority coding rationale: The authority code is "R300-All other assets and liabilities". Although there is no impact on the authority side for "cash", the system requires that a code be used.

Object coding rationale: To record the net impact on Cash Accounts, 5299 would be used.

3) Department receives notification from the RG confirming that cash has been sent from the Chartered Bank to the Bank of Canada.

	AMT($)	FRA	AUTH	OBJ
DR Cash Deposit Control Account	25,000	62DDD**	0000	0000
CR Deposits in Transit to RG	25,000	11123	R300	5299

FRA coding rationale: (PS 1500.49-51) - The Department records the cash as being received by the RG resulting in the offset debit entry being reflected in the Cash Deposit Control Account.

Authority coding rationale: The authority code is 0000 for the "Cash Deposit Control Account" and "R300-All other assets and liabilities" for Deposits in Transit to RG. There is no impact on the authority side for "cash" but the system requires that a code be used.

Object coding rationale: All RG interface Control Accounts are zero filled (0000), with the exception of I/S Control Accounts, at the object level. To record the net impact on Cash Accounts, 5299 would be used.

Scenario B - Department books cash at time of Deposit to Chartered Bank

*** Note: If the Department books cash at time of deposit to a Chartered Bank then the entry would be a combination of the Scenario A 2) DR entry and the Scenario A 1) CR entry identified above.

Journal Entries

1) Department books cash at time of deposit ***

	AMT($)	FRA	AUTH	OBJ
DR Deposits in Transit to RG	25,000	11123	R300	5299
CR Revenue or Accounts Receivable etc.	25,000	*	*	*

2) Department receives notification from the RG confirming that cash has been sent from the Chartered Bank to the Bank of Canada.

See journal entry in Scenario A 3)

Scenario C - Department receives overpayment by supplier

The Department receives a $500 cheque in the mail from a supplier with a note indicating it had been overpaid by this amount.

Journal Entries

1) Department receives $500 from a supplier, it is discovered this is an overpayment.

	AMT($)	FRA	AUTH	OBJ
DR Cash in Hands of Depts awaiting deposit to RG	500	11125	R300	5299
CR GST - refundable advance account	32.70	13392	G111	8171
CR Operating expenses	467.30	513XX	¥	¤

FRA coding rationale: (PS 1500.49-51) - The Department records the cash as being in hand awaiting deposit to a Chartered Bank. The credit entry offset is to Operating expenses since this amount had been originally charged as an expense. The GST - refundable account is charged for portion of GST which was overpaid.

Authority coding rationale: The authority code is "R300-All other assets and liabilities". There is no impact on the authority side for "cash" but the system requires that a code be used. Since GST does not affect a departmental appropriation, it is recorded to a special authority, G111.

¥ If the money is received in the same year as the overpayment was made, it would be necessary to credit the correct appropriation, e.g. B11A - operating vote or B12A - program vote. However, if the money is received in a year after it was charged to the appropriation then the credit entry should be made to "D311-Other statutory non-tax revenue - refund of a prior years expenditures".

Object coding rationale: To record the net impact on Cash Accounts, 5299 would be used. The GST must be reflected by using "8171-Payment of GST on purchases".

For the credit side, the appropriate economic object would be used depending on the nature of the good or service in question. Note: if the authority code used is D311 and your system cannot handle the use of an expense object code with a revenue authority code, object "4711 - Refunds of expenditures pertaining to purchased operating goods" may be used.

2) See journal entry (2) in Scenario A above.

3) See journal entry (3) in Scenario A above.

Departmental Financial Statement Presentation and Disclosure Requirements

The expectation is that all cash would be cleared and deposited at year-end. Therefore, with possible minor exceptions, there should be no cash shown in the Department's Statement of Financial Position as at 31 March (TBAS 1.2).

Receivables are financial assets in the form of claims held against customers and others for money, goods, or services. Receivables include accounts receivables, loans receivables and accountable advances.

Receivables should be valued at net realizable value, which is the net amount expected to be received in cash, which is not necessarily the amount legally receivable. Determining net realizable value requires an estimation of uncollectible receivables. When it is deemed that receivables are not collectible, they are to be written off. Readers should refer to Section 3.2.4 on Debt Deletions.

Receivables are classified as a financial asset on the Statement of Financial Position.

3.2.1 Accounts Receivable

Introduction

Accounts receivable are classified as short-term receivables that are normally, but not necessarily, expected to be collected within a year. This section does not include receivables for tax revenue, as tax revenue transactions are not covered in the Accounting Manual.

Accounts receivable may include trade and non-trade receivables. The former represents amounts owed by customers for goods sold and services rendered as part of normal business operations. The latter arises from a variety of transactions including return on investments (dividends), interest income, and refund of overpayments and recoveries.

Accrued receivables should be set up for estimated amounts for goods or services rendered but not recorded at the end of each month, for any material amounts. These should be subsequently reversed when definitive amounts are known, at which time an accounts receivable would be set up, or at the beginning of the next month depending on a department's system.

Allowance for Doubtful Accounts

Accounts receivable should be valued at net realizable value, which is the net amount expected to be received in cash, which is not necessarily the amount legally receivable. Determining net realizable value requires an estimation of uncollectible receivables

An allowance for bad debts can either be established as a percentage of accounts receivable or by setting up an aging schedule.

References

• CICA 3020
• Debt Write-off Regulations, 1994 (pursuant to section 25(1) for the FAA)

Scenario A - Sale of Goods

The department sells information products to an outside party for $500. (Assume the Department does not have respendable revenue or vote netting authority). Examples for vote netting are shown in Scenario B of the section on Revenues.

Journal Entries

1) Department sell information products to an outside party for $500. They have not paid for the goods at this point.

(Assumption: Sale takes place in Ontario. See section on Sales Tax for rules on sales tax with respect to sales in other provinces.)

	AMT($)	FRA	AUTH	OBJ
DR Accounts receivable	575	11221	R300	5399
CR PST payable	40	21151	R300	6299
CR GST payable	35	21134	R300	6299
CR Sales of goods and information products	500	42315	(*)	4546

See Scenario A Journal entry 1 for FRA, Authority and Object Rationales in the Revenue Section of the manual.

The entries for the settlement for GST payable can be found in the section related to Sales Tax.

The entries related to the settlement of PST payable (which is treated like any trade payable) can be found in the Accounts Payable Section of the manual.

2) Invoice paid in full

	AMT($)	FRA	AUTH	OBJ
DR Cash in Hands of Depts awaiting deposit to RG	575	11125	R300	5299
CR Accounts receivable	575	11221	R300	5399

FRA coding rationale: At this point the outside party has paid the department thereby reversing the accounts receivable and increasing the Department's "Cash in hands of Depts. (awaiting deposit to RG)" holdings.

Authority coding rationale: There is no effect on appropriations with respect to the settlement of the accounts receivable therefore R300 is used.

Object coding rationale: To record the net impact on Cash Accounts, 5299 would be used. To indicate the net impact on accounts receivable"5399-Net Change to Accounts Receivable" is used.

Scenario B - Establish an Allowance for Doubtful Accounts

Using past experience, a Department can estimate the percentage of its outstanding receivables that will likely become uncollectible, without identifying specific accounts. The percentage of receivables may be applied using one composite rate that reflects an estimate of the uncollectible receivables or by setting up an aging schedule and applying a different percentage based on past experience to the various age categories.

Based on an aging schedule the Department sets up an Allowance for Doubtful accounts for $10,000.

Journal Entries

1) Set up of Allowance for Doubtful Accounts

	AMT($)	FRA	AUTH	OBJ
DR Bad debt expense	10,000	51732	F122	3462
CR Allowance for doubtful accounts	10,000	11229	F412	7021

FRA coding rationale: When allowances for doubtful accounts are recorded, a bad debt expense is recorded at the same time. The allowance for doubtful accounts is a valuation account (i.e. contra asset) and is subtracted from the gross amount of the accounts receivable on the "Statement of Financial Position".

Authority code rationale: Since the establishment of an allowance for doubtful accounts does not impact appropriations, F codes are used. "F122-Allowances set up for bad debt expenses" is used for the Bad debt expense and "F412-Changes to allowances for doubtful accounts" is used for Allowance for doubtful accounts.

Object rationale: There is no effect on objects when the allowance for doubtful accounts is set up. Bad debt expense is a non-cash expense, therefore it falls under standard object 12 and sub-category 34. The economic object used for bad expense is 3462. For non-cash items related to assets and liabilities, sub-category 70 is used. 7021 is used for Allowance for doubtful accounts.

Scenario C1 - Write-off of Trade Accounts Receivable

An accounts receivable for $300 is deemed as uncollectible and is written off.

Journal Entries

1) Record the write-off of $300 accounts receivable

	AMT($)	FRA	AUTH	OBJ
DR Allowance for doubtful accounts	300	11229	F412	7021
CR Accounts receivable - non-tax revenue	300	11221	R300	5399

FRA coding rationale: An account receivable should be written off as soon as it is known to be uncollectible. The balance is removed from the books by debiting Allowance for Doubtful Accounts and crediting Accounts receivable - non-tax revenue

Authority code rationale: There is no effect on appropriations. Since the expenditures related to the products that were sold were originally charged to a budgetary vote (operating, program, capital vote etc), there is no requirement to get it off the books via a budgetary appropriation since it has already been charged to a budgetary appropriation. Consequently, there is no effect on appropriations. R300 is used for accounts receivable and "F412-Changes to allowances for doubtful accounts" is used for Allowance for doubtful accounts. Notwithstanding that an appropriation is not required, Treasury Board approval may still be required. See section 25 of the FAA and sections 4 and 5 of the Debt Write-off Regulations.

Object rationale: Since there is a net change to accounts receivable, "5399-Net Change to Accounts Receivable" would be used. For non-cash items related to assets and liabilities, sub-category 70 is used. 7021 is used for Allowance for doubtful accounts.

Scenario C2 - Collection of a Trade Accounts Receivable written off

Six months later a collection is made on the receivable that is written off ($300).

Journal Entries

1) Record collection of receivable

	AMT($)	FRA	AUTH	OBJ
DR Accounts receivable - non-tax revenue	300	11221	R300	5399
CR Allowance for doubtful accounts	300	11229	F412	7021

FRA coding rationale: The first step is to re-establish the accounts receivable. Debiting the account receivable and crediting the allowance for doubtful accounts accomplishes this.

Authority code rationale: There is no affect on appropriations. Therefore, R300 is used for accounts receivable and "F412-Changes to allowances for doubtful accounts" is used for Allowance for doubtful accounts.

Object rationale: Since there is an adjustment to accounts receivable, "5399-Net Change to Accounts Receivable" would be used. 7021 is used for Allowance for doubtful accounts.

	AMT($)	FRA	AUTH	OBJ
DR Cash in Hands of Dept awaiting deposit to RG	300	11125	R300	5299
CR Allowance for doubtful accounts	300	11221	R300	5399

FRA coding rationale: The cash holdings of the department are increased due to the customer remittance. The accounts receivable is reduced by an equivalent amount.

Authority code rationale: There is no affect on appropriations. Therefore, R300 is used for accounts receivable and Cash in Hands of Department awaiting deposit to RG.

Object rationale: To record the net impact on Cash Accounts, 5299 would be used. The net change to account receivable due to a payment by a customer is coded to 5399-"Net Change to Accounts Receivable ".

Departmental Financial Statement Presentation and Disclosure Requirements

Accounts receivable are to be recorded in the Statement of Financial Position under the heading Financial Assets grouped into Receivables. Receivables are stated at amounts expected to be ultimately realized i.e. net of the allowance for doubtful accounts.

3.2.2 Loans Receivable - General

Introduction

Accrual Accounting Perspective

A loan receivable is a financial asset of a government (the lender) represented by a promise by a borrower to repay a specific amount, at a specified time or times, or on demand, usually with interest but not necessarily.

The terms of a loan agreement describe when a loan is due. The terms may specify a calendar date or dates for repayment, or may describe the particular time(s) or circumstance(s) which will determine repayment. For example, repayment may be contingent on future events, such as commodity prices or operating results. (PS 3050.07)

Recognition

A loan receivable should be recognized on a government's statement of financial position when:

1. the government assumes the risks associated with, and acquires the right to receive, payment of principal and any related payments of interest; and
2. the amount of the loan can be reliably measured.

This normally coincides with the disbursement of funds, exchange of other assets, or assumption of liabilities. (PS 3050.26)

A loan receivable should be removed from a government's statement of financial position when it has been repaid, the risks and rewards associated with the loan have been transferred, the right to repayment has expired or been waived, or it is written off. (PS 3050.28)

For the purposes of Write-offs and Allowances, there are two types of loans receivables:

1. Those that are charged to a non- budgetary appropriation (G and H appropriation)
2. Those that are charged to a budgetary appropriation (B appropriation) e.g. unconditional repayable contributions

Write-offs

For accrual accounting purposes, when the amount of a loss is known with sufficient precision, and there is no realistic prospect of recovery, the loan receivable should be reduced by the amount of that loss. (PS 3050.38)

For authority accounting purposes, loans receivables that were charged to a non-budgetary appropriation would require a charge to a budgetary appropriation when the loan is to written off (see Scenario B). Whereas, loans receivables that were originally charged to a budgetary appropriation are not charged to an appropriation at the time of write-off.

Allowances

It should be noted that Departments will not set-up an allowance for uncollectible loans receivables (for those loans charged to a non-budgetary appropriation). This will be done centrally by Treasury Board Secretariat. However, as requested, Departments will provide TBS all the necessary information required to determine the provision even though they will not record the transaction in their books.

In the case of loans receivables charged to budgetary appropriation, departments will be responsible for setting up an allowance for those loans they deem to be uncollectible.

References

• Policy on Transfer Payments
• TBAS 3.2 Transfers (Grants and Contributions)
• PS 3050
• Debt Deletion section of the Manual
• Debt Write-off Regulations, 1994 (pursuant to section 25(1) for the FAA)
• FAA act , sections 23, 24 and 25

Scenario A

Department makes a loan of $500,000 to an organization to finance the construction of exhibition buildings. The loan bears interest at a rate of 6% per annum, and is repayable in monthly instalments at the end of every month over a 5-year period. (There are no concessionary terms related to this Scenario ).

Journal Entries

1) Loan of $500,000 is issued

	AMT($)	FRA	AUTH	OBJ
DR Loans Receivable	500,000	13341	H/G*	5010
CR Accounts Payable	500,000	21111	R300	6299

FRA Coding Rationale: The loan is recorded on the books at its face value.

Authority Coding Rationale: H/G* Regular loan receivables are charged to non-budgetary appropriations. In this case H201 would be appropriate but, depending on the situation the appropriation charged could be either a non-statutory Loan vote HXXX, or a Statutory Loan vote GXXX.

Object Rationale: "5010 - Acquisition of loans with cash" should be used for establishing the loan receivable. "6299 - Net Increase or Decrease to Other Liability accounts" should be used to indicate the establishment of the accounts payable.

2) Accrue interest receivable and recognize interest revenue

	AMT($)	FRA	AUTH	OBJ
DR Accrued Interest Receivable	2,500	11234	R300	5399
CR Other ROI from outside govt (Interest Revenue)	2,500	42129	E500	4804

FRA Coding Rationale: As interest is earned on the loan the loan amount it is recognized periodically as revenue for the period. In this case, interest revenue and interest receivable is recorded monthly. However, depending on the department's materiality level the interest may be recorded less frequently. The amount of interest calculated in the first month is as follows: $2,500 =$500,000 x (6%/12months).

Authority Coding Rationale: There is no impact on authorities with respect to interest receivable, therefore R300 would be used. Interest revenue from loans will be recorded in E500.

Object Rationale: "4804 - Interest on loans and advances from other domestic private sector enterprises" would be used to record interest revenue from the loan. To indicate the net impact on the accrued interest receivable "5399 - Net Change to Accounts Receivable is used.

3) Record periodic repayments of the loan

	AMT($)	FRA	AUTH	OBJ
DR Cash in Hands of Depts awaiting deposits to RG	9,666.40	11125	R300	5299
CR Loans Receivable	7,166.40	13341	H/G*	5015
CR Accrued Interest Receivable	2,500.00	11234	R300	5399

FRA Coding Rationale: As loan repayments are made, the cash holdings of the Department are increased. This is reflected by a debit to the Cash in Hands of Departments awaiting deposit to RG. The outstanding amount of the loan receivable is also reduced. When the interest is paid, the accrued interest receivable is reversed. The amount of loan repayment is: $9,666.40 = $7,166.40 (principal portion) + $2,500 (interest portion). These amounts are derived using a loan calculation program.

Authority Coding Rationale: H/G*, the repayment of the loan should be credited back against the appropriation it was originally charged in order for departments to complete the Source and Disposition of Authorities in Volume II Part I of the Public Accounts. Crediting the repayment back to the original loan appropriations does not give departments the authority to respend that amount for further loans. Any authority to issue further loans from the repayments would have to be determined from the specific loan authority granted to the department by the government. If there is no impact on authorities as the loan gets repaid, R300 can be used for both the loans receivable and the accrued interest receivable. Since there is no impact on the authority side for cash, R300 is used.

Object Rationale: The Department records the cash as being received by the RG resulting in the offset debit entry being reflected in the Cash Deposit Control Account. As the loan is repaid "5015 - Settlement of loans with cash" is used. To indicate the net impact on the accrued interest receivable "5399 - Net Change to Accounts Receivable is used. To record the net impact on cash accounts "5299 - Net Increase or Decrease in Cash Accounts" should be used.

Scenario B - Write-off of a loan receivable

The Department has determined that $50,000 of the loan issued will not be collectible, and will therefore have to be written off. The department has obtained the appropriate approval to write-off the loan.

Journal Entries

1) Loan write-off

	AMT($)	FRA	AUTH	OBJ
DR Bad debt expense	50,000	51732	B161	3215/3217
CR Loans Receivable	50,000	13219	F319	5021

FRA coding rationale: A loan receivable should be written off as soon as it is known to be uncollectible. The balance is removed from the books by debiting Bad Debt Expense and crediting Loans Receivable. A charge is made directly to Bad Debt Expense since the department does not set up an allowance for doubtful loans with respect to those loans

Authority code rationale: Since the loan receivable was originally charged to a non-budgetary appropriation, a write-off would require a charge to a budgetary appropriation. In order to write-off the loan receivable, a charge to "B161-Debt write-offs" would be made. However, this code would only apply to non-statutory loans that are given out. B162 would be used if the debt was forgiven. As well, Parliamentary approval would be required to write-off the debt. With respect to write-offs the credit side of the transaction is coded with an "F" code. For further information, please refer to 3.2.4 on Debt Deletions.

Object rationale: The economic object to use is "3215- Deletion and write-off of loans, investments and advances" if the loan is written-off or "3217- Forgiveness of loans, investments and advances" if it is forgiven. The write-off of a loan would require that "5021- Write-off of loans" be used.

Departmental Financial Statement Presentation and Disclosure Requirements

Loans receivable should be disclosed under the heading Financial Assets in the Department's Statement of Financial Position.

In describing the accounting policies selected by a government and applied to its loans receivable, Departments should disclose:

1. the basis of initial valuation on the statement of financial position;
2. the policy with respect to valuation allowances, write-offs and recoveries; and
3. the policy for the recognition of interest revenue. PS 3050.54

Departmental financial statements should disclose the nature and terms of significant classes of loans receivable, including:

1. the recorded cost, the related valuation allowance and the net recoverable value;
2. general terms and conditions of the loans receivable, such as:
   1. repayment terms;
   2. interest terms;
   3. a description of forgiveness and other conditions attached to the loans; and
   4. security held for the class of loans; and
3. the amount of loans receivable outstanding in foreign currencies, the currencies in which such amounts are receivable, the Canadian dollar equivalents, and the basis of translation. PS 3050.56

3.2.2.1 Unconditional Repayable Contributions

Introduction

Unconditional Repayable Contributions (URCs) are contributions that must be repaid without qualification. The contribution agreement contains specific repayment terms that set out the time and amount of payment(s) due.

Unconditionally repayable contributions (URCs) are, in substance, loans. Consequently, they shall be accounted for in accordance with PS 3050 Loans Receivables and will be classified and reported as "Loans, investments and advances - transfers".

In cases where the URC has significant concessionary terms, such as a low or no interest rate, it shall be accounted for in accordance with PS 3050.20.

• "Significant" for this purpose is defined to be when the grant portion is greater than 25% of the contribution. The grant portion would be recognized as a transfer expense. (Please note: If this condition is not met, then the loan would be recorded at its face value and no concessionary terms would be recorded.)
• The recorded value of the loan at the date of issue should be its face value discounted by the amount of the grant portion. The amount of the loan discount should be amortized to revenue in a rational and systematic manner over the term of the loan. (PS 3050.24)
• The Consolidated Revenue Fund Lending Rate in effect for a similar term on the date the contribution agreement is concluded will be used as the discount rate in determining the present value of the loan.

Appropriate valuation allowances shall be recorded for URC receivable by the Department to reflect collectibility and risk of loss. As well, Departments will record write-offs of uncollectible loans.

References

• Policy on Transfer Payments .
• TBAS 3.2 Transfers (Grants and Contributions)
• PS 3050

Scenario A - Unconditional Repayable Contributions - Concessionary Terms

The Department gives an unconditional repayable contribution (URC) to Doe's Widget Manufacturing Co. of $192,000 (this is for subsidy assistance) on June 1, 2001. The terms of the agreement are that the company must repay the full amount in 48 equal monthly payments of $4000 commencing 1 June 2004 at zero percent interest. The Department has determined that the terms of the loan result in a grant portion that is greater than 25% of the repayable contribution.

Journal Entries

1) To record disbursement of $192,000 Doe's Widget Manufacturing Co on June 1, 2001.

	AMT($)	FRA	AUTH	OBJ
DR Loans Receivable - URC	192,000.00	13381	B15A*	2151
DR Transfer Payment Expense	48,279.90	51159	F999	3453
CR Unamortized Discount on Transfers	48,279.90	13388	F322	3453
CR Accounts Payable	192,000.00	21111	R300	6299

FRA Coding Rationale: As per PS 3050.24, the loan is recorded at its face value discounted by the amount of the grant portion. The face value ($192,000) is made up of two parts, the principal and the interest foregone. The interest is equal to the unamortized discount, which also represents the grant portion of the contribution in this Scenario. The unamortized discount of $48,279.90 is calculated by discounting the loan payment of $192,000 using the Consolidated Revenue Fund Lending Rate, assumed to be 6%. Since $48,279.90 is greater than 25% of the repayable contribution of $192,000 (i.e. $48,000), the grant portion must be recorded as a transfer payment expense.

$192,000 represents the future value of the loan since this is the total amount the recipient must repay ($4,000 x 48 payments). Therefore, this amount must be discounted to determine the net present value of the loan. Due to the structure of the loan payments, the discounting is somewhat complicated.

• The first step is to discount the 48 monthly repayments of $4,000 back to the point where loan payments begin (June 1, 2004).
• The second step is to discount the value calculated in the first step to the point in time when the money was loaned out to the recipient (June 1, 2001).
• The third step is to take the difference in face value of the loan and the discounted amount of the loan to come up with the unamortized discount.

Step 1

It is assumed that the loan repayments of $4,000 are made at the beginning of each month. Therefore, a factor that represents the present value of an annuity due would be used, (PVIFA Due). The factor used in this part of the calculation would be 42.7932 (PVIFA Due for 48 periods at.005%).

• .005% = 6% divided by 12 months. Since payments are made monthly, it is necessary to use a monthly rate of interest.
• The following amount would result: $171,172.80 = $4,000/month X 42.7932 (PVIFA Due, 48 periods,.005%)

Step 2

1. It is necess ary to discount the sum of the discounted payments ($171,172.80) back to when the loan was issued on June 01, 2001. A factor that represents the present value of a single sum (PVIF) is used: PVIF, 3 periods at 6% =.83962.

The following amount would result:

$143,720.10 = $171,172.80 x.83962 (PVIF 3 periods at 6%)

Step 3

The amount of the unamortized discount would be the difference between the face value of the loan and the discounted value of the loan.

The following amount would result:

$48,279.90 = $192,000.00-$143,720.10

The unamortized Discount on Transfers represents the grant portion and is a contra asset to the Loans Receivable - URC account. These two items are netted to produce the requisite balance required for the statement of financial position. The interest free portion of the loan is concessionary and is more in the nature of a grant, therefore that portion should be recognized as an expense. As a result, the $48,279.90 is debited to Transfer Payment Expense. Since the face value of the loan is what the Department is lending to the company, $192,000 is recorded as a payable.

Authority Coding Rationale: In this example an URC payment is charged to a budgetary vote that being B15A(*) - Grant and Contribution vote but depending on the department's vote structure, B11A - Program Vote could be used as well. Since accounts payable has no impact on appropriations, R300 is used. The concept of the concessionary terms resulting in a grant portion is strictly an accrual concept. This does not impact authorities, therefore F codes are used for both the Transfer Payment Expense and Unamortized Discount on Transfers.

Object Rationale: "6299 - Net Increase or Decrease to Other Liability accounts" should be used to indicate the establishment of the accounts payable. "2151 - Recoverable subsidy payments to industry" is used at this point to indicate the disbursement of the transfer payment. The concept of the concessionary terms resulting in a grant portion is strictly an accrual concept. This does not impact authorities, therefore the same object code is used for the expense and the unamortized discount, "3453 - Recognition of unamortized expenses related an asset".

2) To record the amortization of discount as at year-end March 31, 2002

	AMT($)	FRA	AUTH	OBJ
DR Unamortized Discount on RC	5,747.60	13388	F322	7099
CR Amortization of Discount on RC	5,747.60	42161	F251	7099

FRA Coding Rationale: In accordance with PS 3050.24, the amount of the loan discount should be amortized to revenue in a rational and systematic manner over the term of the loan. For administrative ease, it is suggested that the unamortized discount be amortized on a straight-line basis over the term of the loan. The amount in the contra asset account (Unamortized Discount on RC) is reallocated to the "Amortization of Discounts on Repayable Contributions" account, which serves as the revenue account. The loan covers a period of seven years or 84 months (36 months with no payments plus 48 months of payments). The unamortized discount on the repayable contribution would be amortized over the period of the loan. The monthly rate would be $574.76 ($48,279.90 / 84 months). At 31 March 2002, an amount of $5,747.60 (10 months x $574.76) would be amortized.

Authority Coding Rationale: This is strictly an accrual entry. There is no impact on authorities, therefore only F codes are used.

Object Rationale: This is strictly an accrual entry. There is no impact on objects, therefore the same object code is used on both sides of the entry, "7099 - Net increases or decrease in Other transactions".

3) To record the monthly payment to Department starting June 01, 2004.

	AMT($)	FRA	AUTH	OBJ
DR Cash in the Hands of Depts Awaiting deposit to RG	4,000	11125	R300	5299
CR Loans Receivable - URC	4,000	13381	E500	2151

FRA Coding Rationale: As the loan is paid back the Cash in the Hands of Depts awaiting deposit to RG is debited and the loan receivable is reduced by the corresponding amount.

Authority Coding Rationale: As the loan gets repaid the repayments hit the miscellaneous non-tax revenue authority, E500, as these amounts are credited as revenues for authority purposes. Since there is no impact on the authority side for cash, R300 is used.

Object Rationale: As the loan is paid back the objects need to reflect the repayment, "2151 - Recoverable subsidy payments to industry" is used, as this is a repayment of an amount. To record the net impact on cash accounts "5299 - Net Increase or Decrease in Cash Accounts" should be used.

Scenario B - Establish an Allowance for Doubtful Loans

Using past experience, a Department can estimate the percentage of its outstanding loans that will likely become uncollectible. The percentage of loans receivables may be applied using one composite rate that reflects an estimate of the uncollectible loan receivables. (Please note, this Scenario is completely independent from Scenario A)

The Department has estimated that $50,000 will be uncollectible with respect to these unconditional repayable contributions.

Journal Entries

1) Set up of Allowance for Loans that will not be repaid

	AMT($)	FRA	AUTH	OBJ
DR Bad debt expense	50,000	51732	F122	3462
CR Allowance for Doubtful Loans	50,000	13389	F412	7021

FRA coding rationale: When allowances for doubtful loans are recorded, a bad debt expense is recorded at the same time. The allowance for doubtful loans is a valuation account (i.e. contra asset) and is subtracted from the gross amount of the Loans receivable on the "Statement of Financial Position".

Authority code rationale: Since the establishment of an allowance for doubtful loans does not impact appropriations, F codes are used. "F122 - Allowances set up for bad debt expenses" is used for the Bad debt expense and "F412 - Changes to allowances for doubtful accounts" is used for Allowance for doubtful loans.

Object rationale: There is no impact on objects when the allowance for doubtful accounts is set up. Bad debt expense is a non-cash expense, therefore it falls under standard object 12 and sub-category 34. The economic object used for bad expense is 3462. For non-cash items related to assets and liabilities, sub-category 70 is used. 7021 is used for Allowance for Valuation of financial claims.

Scenario C - Write-off of a URC

The Department has a URC with concessionary terms on their books with a value of $20,000 and unamortized discount of $2,000. This loan is considered uncollectible and is written off.

Journal Entries

1) Record the write-off of $20,000 URC

	AMT($)	FRA	AUTH	OBJ
DR Allowance for Doubtful Loans	18,000	13389	F412	7021
DR Unamortized Discount on RC	2,000	13388	F322	7099
CR Loans Receivable-URC	20,000	13381	R300	5021

FRA coding rationale: An URC should be written off as soon as it is known to be uncollectible. The balance is removed from the books by debiting Allowance for Doubtful Loans, crediting Loans Receivable - URC and debiting any remaining Unamortized Discount on Transfers.

Authority code rationale: There is no effect on appropriations. Since the URC contribution was originally charged to a budgetary vote (grant and contribution or program vote), there is no requirement to get it off the books via a budgetary appropriation since it has already been charged to the budgetary appropriation. Consequently, there is no effect on appropriations. Therefore, R300 is used for loans receivable-URC, "F322 - Unamortized Discount on repayable contributions" is used for the unamortized discount on Transfers" and F412 - Changes to allowances for doubtful accounts" is used for Allowance for doubtful loans. Notwithstanding that an appropriation is not effected, Treasury Board approval may still be required. See section 25 of the FAA and sections 4 and 5 of the Debt Write-off Regulations.

Object rationale: "5021 - Write-off of loans" is used to indicate write-off of a loan receivable. For non-cash items related to assets and liabilities, sub-category 70 is used. 7021 is used for Allowance for valuation of Financial claims and 7099 is used for Unamortized Discount on Transfers.

Departmental Financial Statement Presentation and Disclosure Requirements

Loans receivable should be disclosed net of unamortized discount and allowance for bad loans under the heading Financial Assets in the Department's Statement of Financial Position.

In describing the accounting policies selected by a government and applied to its loans receivable, Departments should disclose:

1. the basis of initial valuation on the statement of financial position;
2. the policy with respect to valuation allowances, write-offs and recoveries; and
3. the policy for the recognition of interest revenue.(PS 3050.54)

Departmental financial statements should disclose the nature and terms of significant classes of loans receivable, including:

1. the recorded cost, the related valuation allowance and the net recoverable value;
2. general terms and conditions of the loans receivable, such as:
   1. repayment terms;
   2. interest terms;
   3. a description of forgiveness and other conditions attached to the loans; and
   4. security held for the class of loans; and
3. the amount of loans receivable outstanding in foreign currencies, the currencies in which such amounts are receivable, the Canadian dollar equivalents, and the basis of translation. (PS 3050.56)

3.2.3 Accountable Advances

Introduction

This section is provided as a guide for the accounting of Accountable Advances issued pursuant to section 38 of the FAA and the Accountable Advance Regulations. It does not apply to payments made in advance in accordance with section 34(b) of the FAA.

The accounting treatment shown hereunder does not apply to DND since it has its own Working Capital Advance Appropriation. For DFAIT, the accounting treatment does not apply to its own loan votes L11 or L12.

Accountable advances are broken into two categories, each of which is accounted for differently.

1. Standing Advances, and;
2. Temporary Advances other than Standing Advances.

Generally, Standing Advances include advances for such things as petty cash, change funds and standing advances for travel whereas Temporary Advances are primarily temporary advances for individual trips.

Standing Advances are recorded directly against PWGSC Loan Vote L15b Appropriation Act No. 3, 1990-1. Since departments use a PWGSC appropriation/authority to issue Standing Advances, they must first seek PWGSC approval to use this authority.

Temporary Advances which departments issue during the year are charged to their operating or program appropriation. Those advances still outstanding at year-end are credited back against the operating or program appropriation and are charged against a special "H" authority in order to carry them over to the next year. The entry is reversed in the New Year. The only temporary advances that should be carried over for authority purposes are those which are for travel either in the New Year or which span both fiscal years.

References

• FAA-Section 38
• Accountable Advance Regulations

Scenario A - Issuance of Standing advance

An employee is issued a standing advance of $5,000. Subsequently, expenses of $3,978.56 are incurred, at which time, a claim is submitted for reimbursement. It is later decided that the amount of the standing advance is excessive and is reduced to $4,000.

Journal Entries

1) A standing advance is issued to an employee for $5,000.00 by way of an RG cheques.

	AMT($)	FRA	AUTH	OBJ
DR Standing advances	5,000	13315	H181	5030
CR Accounts payable	5,000	21111	R300	6299

FRA Rationale: In order to record and control the amount advanced to the employee, the financial asset account "Standing advances" is debited. It is basically a type of receivable, which is included under Loans, Investments and Advances.

Authority Rationale: Since the authority to charge these payments comes from the PWGSC Working Capital Loan Vote L15b, authority code H181 is used. As accounts payable do not affect an appropriation, R300 is used.

Object Rationale: "5030 - Acquisition of other advances with cash" is used since the object classification identifies the nature of the transaction (i.e. to provide an advance to an employee - an outside party). The appropriate objects to identify the type of goods or services acquired will be charged when the advance is reimbursed. "6299 - Net Increase or Decrease to Other Liability Accounts" is used to establish an accounts payable.

2) The employee incurs expenses of $3,978.56 and submits a request for reimbursement.

	AMT($)	FRA	AUTH	OBJ
DR Operating expenses	3,718.28	51321	B11A/B12A	xxxx
DR GST refundable advance	260.28	13392	G111	8171
CR Accounts payable	3,978.56	21111	R300	6299

FRA Rationale: Since standing advances are operated on the Imprest System, any reimbursement of disbursements from the Standing Advance is reflected as an operating expense. The reimbursement to the holder replenishes the Standing advance to its original amount. Since the employee paid GST on his purchases, this amount should be recorded to the GST refundable advance account. Any PST paid is included with operating expenses.

Authority Rationale: The expenses, claimed by the Standing Advance holder, are a legitimate charge against a departmental appropriation. Depending on the vote structure of the particular department, B11A or B12A is appropriate. There could be other Authority Codes used for different Scenario s e.g. if the expenses were to be recorded against a Specified Purpose Account (SPA). Since GST is not to be charged to a departmental appropriation, it is set up as an advance under a special authority G111.

Object Rationale: The objects to be used depend on the nature of the expenses incurred when the standing advance was reimbursed to its original amount. Departments should code the total of all individual transactions under $100 in the same manner as the policy for purchases procured by acquisition cards. "6299 - Net Increase or Decrease to Other Liability Accounts" is used to establish or increase an accounts payable. Since there is GST/HST on the purchases, the GST must be reflected by using "8171 - Payment of GST on purchases"

3) It is decided that the amount of the standing advance is excessive and is reduced to $4,000

	AMT($)	FRA	AUTH	OBJ
DR Cash in Hands of Depts awaiting deposit to RG	1,000	11125	R300	5299
CR Standing advances	1,000	13315	H181	5035

FRA Rationale: Since the amount that the person is responsible for has been reduced, the financial asset account "Standing Advances" must be reduced and is thus credited to reflect the payment from the holder.

Authority Rationale: Since the authority for Standing Advance flows through the PWGSC Working Capital Loan Vote, L15b, this account must be credited. This is done by using authority code H181. The Cash in Hands of Depts awaiting deposit to RG does not affect an appropriation so R300 is used.

Object Rationale: To record the net impact on Cash Accounts, 5299 would be used. "5035 - Settlement other advances with cash" is used to record either the full or partial reduction of a Standing Advance.

Scenario B - Issuance of Trip advance

1) An employee is issued a trip advance of $1,000. Subsequently, the following independent scenarios occur:

2a) claim is submitted for $1,107.10;

2b) a claim is submitted for $ 937.89;

2c) the advance is still outstanding at year-end but travel is completed; and,

2d) the advance is still outstanding at year-end because the travel will not be completed until the New Year.

1) An employee is issued a trip advance for $1,000.00 by way of a RG cheque.

	AMT($)	FRA	AUTH	OBJ
DR Accountable advances	1,000	13314	B11A/B12A	5032
CR Accounts payable	1,000	21111	R300	6299

FRA Rationale: In order to control and record the amount advanced to the employee, the financial asset "Accountable Advance" must be debited.

Authority Rationale: Depending on the vote structure of the department, the trip advance would be charged against the department's program vote B11A or the operating vote B12A at the time the advance is made. Since accounts payable do not affect an appropriation, R300 is used.

Object Rationale: "5032 - Acquisition of travel advance" is used since the object classification identifies the nature of the transaction (i.e. to provide a travel advance). Once the claim for reimbursement has been processed the advance will be reclassified to the appropriate object that identifies the type of goods or services acquired. "6299-Net Increase or Decrease to Other Liability Accounts" is used to establish or increase an accounts payable.

2a) The employee submits his claim for settlement. The expenses claimed amount to $1,107.10
(including GST of $72.43).

	AMT($)	FRA	AUTH	OBJ
DR Operating expenses	1,034.67	51321	B11A/B12A	0201
DR GST refundable advance	72.43	13392	G111	8171
CR Accountable advances	1,000.00	13314	B11A/B12A	5032
CR Accounts payable	107.10	21111	R300	6299

FRA Rationale: The actual operating expenses must be recorded for the period. The accountable advance is no longer outstanding, so it is reversed. Since the department owes the individual the balance of $107.10, the amount must be accrued and recorded as a payable. Since the employee paid GST on his purchases, this amount should be record the GST refundable advance account. Any PST paid would be included as part of the operating expenses.

Authority Rationale: In this case, the operating expenses are greater than the accountable advance given to the individual. This difference must be charged to the appropriate vote or other authority code e.g. SPAs. This can be achieved by netting operating expenses and accountable advances, and coding both with the same vote either B11A or B12A (depending on the department's vote structure). If the expense is to be charged to another authority code e.g. SPA, then the appropriation must be credited for the full advance and the full expense charged to the other authority. Since GST is not to be charged to a departmental appropriation, it is set up as an advance under a special authority G111.

Object Rationale: "0201-Travel -public servants " is used since operating expenses in this Scenario relate to travel for public servants. However, other economic objects under reporting object "020" could be used depending on the nature of the item. "5032- Acquisition of travel advances" is used to reflect the settlement of the travel advance. "6299-Net Increase or Decrease to Other Liability Accounts" is used to establish or increase an accounts payable. Since there is GST on the purchases, the GST must be reflected by using "8171 - Payment of GST on purchases".

2b) Expenses amount to $937.89 (including $61.36 of GST). The employee submits his claim for settlement along with a cheque for the amount owing.

	AMT($)	FRA	AUTH	OBJ
DR Operating expenses	876.53	51321	B11A/B12A	0201
DR GST refundable advance	61.36	13392	G111	8171
DR Cash in Hands of Dept. awaiting deposit to RG	62.11	11125	R300	5299
CR Accountable advances	1,000.00	13314	B11A/B12A	5032

FRA Rationale: Operating expenses - see journal entry Scenario B 2a) above.

Since the individual spent less than the $1,000 (accountable advance), an amount of $62.11 is collected from the employee.

Authority Rationale: Since the amount of the advance was previously charged to departmental appropriations, there is a requirement to reduce the net charge to the appropriations. To achieve this effect on authorities both the debit and credit should be to the same code. In this case, it is suggested that the authority code originally used for the advance i.e. B11A or B12A be used. Cash in Hands of Dept awaiting deposit to RG does not effect appropriations, therefore "R300 - All other assets or liabilities" is used.

Object Rationale: 0201-Travel -public servants " is used since operating expenses in this Scenario relate to travel for public servants. However, other economic objects under reporting object "020" could be used depending on the nature of the travel or relocation. To record the net impact on Cash Accounts, 5299 would be used. "5032 - Acquisition and settlement of travel advances" is used to the settlement of the travel advance.

2c) The advance is still outstanding at year-end but the travel has been completed.

	AMT($)	FRA	AUTH	OBJ
DR Operating expenses	1,000	51321	F116	0201
CR Accrued liability	1,000	21113	R300	6299

FRA Rationale: Since the advance is outstanding and the exact amount of the settlement is not known, an accrued liability is established for the estimated amount. This entry will be reversed in the New Year.

Authority Rationale: Since the accountable advance was already charged against the applicable appropriation when it was given, no additional charge to an appropriation should be recorded to avoid a double charge. As a result F116 is used, (an F code has no affect on appropriations). Accrued liabilities do not affect appropriations so R300 is used.

Object Rationale: "0201 - Travel/public servants" is used since these operating expenses relate directly to expenses incurred by a departmental employee for government travel purposes. However, other economic objects under reporting object "020" could be used depending on the nature of the item. "6299 - Net Increase or Decrease to Other Liability Accounts" is used to show an increase in accrued liabilities.

2d) The advance is still outstanding at year-end since the travel will not be completed until the New Year.

	AMT($)	FRA	AUTH	OBJ
DR Accountable advances	1,000	13314	H182	5049/5032
CR Accountable advances	1,000	13314	B11A/B12A	5049/5032

FRA rationale: There is no effect from an accrual accounting perspective. Therefore, a debit and credit is made to the same account for same amount.

Authority Rationale: Since the amount of the advance is still outstanding at year-end, the amount should not be charged to the operating or program vote B11A/B12A of the department in that year. Consequently, it must be removed and moved to a special authority, H182 - "Payments for accountable temporary advances (e.g. trip advances at year-end)". It should only reflect the advances paid out in the old year for travel to be completed in the New Year. It is to be reversed in the new year.

Object rationale: There is no effect on objects. Therefore the same object is debited and credited for the same amount. In this case either "5049- Other adjustments to advances" or "5032 - Acquisition and settlement of travel advances" may be used.

3) The advance carried over in journal entry 2c) must be reversed in the new fiscal year.

	AMT($)	FRA	AUTH	OBJ
DR Accrued liability	1,000	21113	R300	6299
CR Operating expenses	1,000	51321	F116	0201

FRA rationale: This is a straight reversal of entry 2c) and therefore the same FRAs are used.

Authority rationale: There is no impact on appropriations or authority since the appropriations were charged in the previous year when the advance was given.

Object rationale: The purpose of this entry from an object perspective is to reverse the entry made in the old year, as per 2c). To record the net impact on Other Liabilities, "6299 - Net Increase or Decrease to Other Liability Accounts" is used.

4) The advance carried over in journal entry 2d) must be reversed in the new fiscal year.

	AMT($)	FRA	AUTH	OBJ
DR Accountable advances	1,000	13314	B11A/B12A	5049
CR Accountable advances	1,000	13314	F116	5049

FRA rationale: Since the Accountable advance account would have been rolled over automatically as part of the opening balances, this entry must reflect a Nil effect. Consequently, the debit and credit are to the same account for the same amount.

Authority rationale: The purpose of this entry is to charge the departmental program (B11A) or operating (B12A) vote since this advance should be settled in the current year. Although "H182" was used to record the advance in the old year, it should not be used in the new year entry. Instead, the credit is to "F116" since these advances will be accounted for at a later date when the claim is submitted for reimbursement.

Object rationale: There is no effect on objects. However, adjustments to advances which are neither the issuance nor the settlement of advances are recorded against 5049 "Other adjustments to advances".

Departmental Financial Statement Presentation and Disclosure Requirements

Standing advances and temporary advances are recorded in the government's chart of accounts as "Standing advances to employees" or "Accountable advances (temporary advances)". They are recorded on the departmental Statement of Financial Position as part of financial assets and may be combined for presentation purposes.

3.2.4 Debt Deletions

Introduction

Debt write-off involves deleting uncollectible debts owing to the Crown but not extinguishing the legal right of the Crown to collect the debts. The purpose of write-offs is to reduce the costs of maintaining records of accounts receivable that are valueless or uncollectible. Forgiveness and remission is a process that extinguishes a debt, releases the debtor from all liability, waives the Crown's right to reinstate the debt, and permits both the Crown and the debtor to remove the debt form their accounts. The major difference between the two is that forgiveness is used for non-budgetary transactions such as loans whereas remission is applied to budgetary expenditures only.

No write-off or forgiveness of a debt can occur without an appropriate authority.

• If a debt results from a budgetary expenditure (i.e. accounts receivable, repayable contribution) then the debt can be written off under departmental authority.
• If a debt results from a non-budgetary expenditure (i.e. loan receivable) then the write-off and forgiveness of the debt requires a charge to a budgetary vote and parliamentary authority.

There are two Scenario s with respect to debt deletions, those that do not require a charge to an appropriation and those that do.

No charge to a Budgetary Vote Required for Write-Off of Debt

Anything charged to a budgetary vote can be written off under ministerial authority except those debts identified in Section 5 of the Debt Write-off regulations. In these cases approval of TB is required but no charge to budgetary vote is required.

Charge to a Budgetary Vote Required for Write-Off of Debt

For those departments that issue advances through there own Working Capital Advance Appropriations such as DND and DFAIT, the accountable advance would have arisen as a result of the original transaction having been charged to a non-budgetary vote. For example an individual submits a travel claim for an amount, which is less than the amount advanced, which was charged to an accountable advance account (an asset account). If the amount was not collected on the settlement of the claim there is amount owing by the claimant which should be set up in departmental books as an accounts receivable. In order to write this amount off, the approval of TBS would be required as well as a charge to an appropriation. This is because the payment for which recovery is being suspended has never been charged a budgetary vote. It should be noted that since this Scenario is only relevant to a few departments this will not be explored in any further detail.

Generally speaking:

Non-Budgetary votes are those for expenditures that are to be recorded on the Statement of Assets/Liabilities of the Government of Canada as some kind of asset and are identified by the letter L in the Estimates. Examples include loans, accountable advances and investments in Crown Corporations.

Budgetary Votes are those for expenditures which are charged to either a program vote, operating vote, capital vote or grants & contribution (G&C) vote.

References

• Debt Write-off Regulations, 1994 (pursuant to section 25(1) for the FAA)
• FAA act, sections 23, 24 and 25

Scenario A - Write off of an Accounts Receivable

See the Accounts Receivable section of the manual.

Scenario B - Write-off of a Conditional Repayable Contribution

Same as a write-off for an Account Receivable. See Accounts Receivable section of the manual.

Scenario C - Write-off of a Loan Receivable

See the Loans Receivable - General section of the manual

Scenario D - Write-off of an Unconditional Repayable Contribution

See the Unconditional Repayable Contributions section of the manual.

Introduction

Two types of inventories are used by departments:

1- Consumable Inventories are items of tangible property that are to be consumed in a future year directly or indirectly in the delivery of program outputs. They include all items such as equipment, spare parts and material that are held in stores and warehouses for issue at a later date to be used in future program delivery. They also include inventories held for resale within the Government of Canada. Consumable inventories exclude purchases that meet the capitalization criteria specified in TBAS 3.1 Capital Assets.

2- Inventories held for resale are physical items that will be sold (or used to produce a product which will be sold, e.g. raw materials) in the future in the ordinary course of business to parties outside of the Government reporting entity.

The majority of departments will have consumable inventories. There may be some revolving funds and a handful of departments that have inventories for resale.

Determining Inventory Quantities

The physical quantities in inventory may be determined by means of a periodic inventory system or a perpetual inventory system.

(a) Periodic Inventory System

An actual physical count of goods on hand is taken at the end of each period for which financial statements are to be prepared. The goods are counted, weighed or measured, then extended at unit costs to derive the inventory valuation. When a periodic inventory system is used, end-of-the period entries are required for (a) transferring opening inventory to expense and (b) recording the ending inventory.

For inventories held for resale, where the inventory records are maintained on a periodic inventory system, typically a purchases accounting is used to record acquisition. The balance in the inventory account (which represents the beginning inventory) is unchanged during the period. At the end of the accounting period a closing entry is made that debits the Inventory account for the ending inventory amount and credits the Inventory account for the beginning inventory amount. Cost of goods sold is determined by using the following calculation: Beginning Inventory + Net Purchases - Ending Inventory.

For consumable inventories, acquisitions of inventory throughout the year may be charged to an expense account. At the end of the year, the ending inventory would be recorded with an equivalent reduction in expenses.

It would not be practical for departments with sizeable inventories to do a physical count every year for the purpose of determining ending inventory. Where amounts are significant, central agencies need to know the expenses associated with inventory usage more frequently than annually. It is strongly recommended that departments maintain their records on a perpetual inventory system (see below)

(b) Perpetual Inventory System

It is particularly useful (a) to control and safeguard inventory and (b) to facilitate preparation of monthly statements. Furthermore, it is considered to be one of the essential characteristics of a good cost accounting system.

Purchases are debited directly to the inventory control account and concurrently entered into the detailed inventory records. As items of inventory are issued, the transaction is recorded in the accounts so that it carries a perpetual or continuing balance of the goods that should be on hand at each date.

Physical counts are usually made at least annually or on a continuous rotation basis (using sampling) when large inventories are involved to verify if there is any loss or error in the record keeping.

Discrepancies in Inventory Count

Regardless of the inventory control and records in place, loss and errors are always present. When a difference exists between the count and the perpetual inventory account balance, an entry is needed for reconciliation.

Note that in the periodic inventory system, the Inventory Over and Short account does not exist because there are no accounting records available against which to compare the physical count. Consequently, overages and shortages are buried in cost of goods sold (for inventories held for resale) or operating expenses (for consumable inventories).

References

• TBAS 3.4 Inventories
• CICA Handbook Sections 1520.04, 3030.05-.06, 3030.09-.10
• PS 1500-47, 1500.49

Scenario A - Purchasing and Issuing Inventory Under a Perpetual Inventory System

Department purchases spare parts for vehicles for $50,000. Freight charges of $500 are included on the invoice. Assuming the Department uses a perpetual system, purchases & issues are recorded directly in the inventory account as they occur.

Journal Entries

1) To record the purchase of inventories

	AMT($)	FRA	AUTH	OBJ
DR Inventories held for consumption	50,000	15110	B11A/B12A*	1267
DR Inventories held for consumption	500	15110	B11A/B12A*	0210
DR GST Refundable Advance Account	3,535	13392	G111	8171
CR Accounts payable	54,035	21111	R300	6299

FRA coding rationale: The purchase of consumable inventories is recorded as a debit to Inventories -Consumables. Delivery cost should be capitalized as part of the cost of the inventories. At this point the Department is being charged GST on the purchase of inventories, and must pay it. However, the Department will eventually recover this amount from Canada Customer and Revenue Agency (CCRA) and should record it as "13392 GST/HST Refundable advance accounts". The cost of the consumable inventories plus 7% GST would be set up as an accounts payable in the period since costs were incurred but not yet paid. Note: if the inventory had been held for resale, FRA "15120 - Inventories held for resale" would be used instead of 15110.

Authority coding rationale: B11/B12* Since this is a legitimate charge against an operating appropriation, it would be recorded against either B11A or B12A depending on whether the department has a program vote (B11A) or an operating vote (B12A). Please note that if the entity is a revolving fund the charge to the appropriation would be to A5XX. Since GST is not to be charged to a departmental appropriation, it is set up as an advance under a special authority, G111. There is no impact on authorities for the accounts payable so the code to be used would be "R300-All other assets and liabilities"

Object coding rationale: Object 1267 is used in this example since spare parts were purchased for the Department's vehicles. The appropriate object is used depending on the nature of the purchase. "0210 - Transportation of things not elsewhere specified" is used to record the freight charges. If a department's system cannot handle the use of more than one object code per asset, the freight charges may be charged to the same code as the asset. Since there is GST/HST payable, the GST must be reflected by using, "8171 - Payment of GST on purchases". " 6299 - Accounts Payable/Accrued Charges" is used to establish the accrual of the amount owing.

2) To record inventory issuances of $10,000 from inventory

	AMT($)	FRA	AUTH	OBJ
DR Operating Expense	10,000	51321	F112	3452
CR Inventories held for consumption	10,000	15110	F312	3452

FRA coding rationale: The charge to 51321 - "Operating Expense" reflects the consumption of inventories used for program delivery and the reduction of 15110 - "Inventories held for consumption" is required to remove the items that have been consumed. Note if the inventory had been held for resale, the appropriate FRA would be "15210 - Inventories for resale" for the credit entry and "51324 - Cost of goods sold" for the debit entry.

Authority rationale: There is no impact on the authorities with respect to issuance of inventory since the appropriations was charged when the inventory was purchased in journal entry 1). Therefore, F codes are used in this transaction. "F112 - Inventory charged to program expenses" would be used for operating expenses. "F312 - reductions from (increases to) inventory balances" is used for the inventory account.

Object coding rationale: There is no impact on the objects with respect to the issuance of inventory since the objects were impacted at the time inventory was purchased in Journal entry 1). "3452 - Usage of inventory" is used on both sides of the entry.

Scenario B - Purchasing and Issuing Inventory Under a Periodic Inventory System

Department purchases spare parts for vehicles for $50,000. Freight charges of $500 are included on the invoice. Assuming the Department uses a periodic system, purchases & issues are recorded directly in the inventory account as they occur.

Journal Entries

1a) To record the purchase of consumable inventories

	AMT($)	FRA	AUTH	OBJ
DR Operating Expense	50,000	51321	B11A/B12A*	1267
DR Operating Expense	500	51321	B11A/B12A*	0210
DR GST Refundable Advance Account	3,535	13392	G111	8171
CR Accounts payable	54,035	21111	R300	6299

FRA coding rationale: The purchase of consumable inventories is recorded as a debit to operating expenses. Alternatively, the inventories account (FRA 15110) could be debited to record the purchase of inventories.

Authority rationale: Same as Scenario A, entry 1).

Object coding rationale: Same as Scenario A, entry 1).

1b) To record the purchase of inventories held for resale

	AMT($)	FRA	AUTH	OBJ
DR Cost of goods sold	50,000	51325	B11A/B12A*	1267
DR Cost of goods sold	500	51325	B11A/B12A*	0210
DR GST Refundable Advance Account	3,535	13392	G111	8171
CR Accounts payable	54,035	21111	R300	6299

FRA coding rationale: The purchase of inventories held for resale is recorded as a debit to cost of goods sold. Alternatively, the inventories account (FRA 15210) could be debited to record the purchase of inventory.

Authority rationale: Same as entry 1a).

Object coding rationale: Same as entry 1a).

2) To record the issuance of inventories

No entry performed.

3a) To adjust consumable inventory balance after an inventory count; inventory balance determined to be $5,000 (assume opening balance was $2,000)

	AMT($)	FRA	AUTH	OBJ
DR Inventories held for consumption	5,000	15110	F312	3452
CR Operating Expense	3,000	51321	F112	3452
CR Inventories held for consumption	2,000	15110	F312	3452

FRA coding rationale: The ending balance of inventory is recorded as an asset while the opening balance is removed (alternatively entry could be done on a net basis). The operating expense is reduced to reflect inventory items previously expensed but not actually consumed. In the case where purchases of inventory were recorded to the inventory account (FRA 15110) instead of operating expense, the same FRAs would be used but the direction of the transactions would change. The inventory account would be credited and the operating expense debited to reflect the inventories consumed during the period.

Authority rationale: Same as Scenario A, entry 2).

Object coding rationale: Same as Scenario A, entry 2).

3b) To adjust inventory held for resale balance after an inventory count; inventory balance determined to be $5,000 (assuming opening inventory balance $2,000)

	AMT($)	FRA	AUTH	OBJ
DR Inventories held for resale	5,000	15210	F312	3452
CR Cost of goods sold	3,000	51325	F112	3452
DR Inventories held for resale	2,000	15210	F312	3452

FRA rationale: The ending balance of inventory is recorded as an asset while the opening balance is removed (alternatively entry could be done on a net basis). The cost of goods sold is reduced to reflect inventory items previously expensed but not actually sold. In the case where purchases of inventory were recorded to the inventory account (FRA 15210) instead of cost of goods sold, the same FRAs would be used but the direction of the transactions would change. The inventory account would be credited and the cost of goods sold debited to reflect the inventories sold during the period.

Authority rationale: Same as Scenario A, entry 2).

Object coding rationale: Same as Scenario A, entry 2).

Scenario C - Inventory Count is lower than records indicate - Write-off required

A department performs a physical count of its inventory under a perpetual inventory system and determines that there are fewer inventory items present than there should be according to the records. In this case the department must write off the portion of the inventory that is no longer available to it. Note that shortages would not be detected under a periodic inventory system as a current record of the inventory balance is not maintained. Any lost inventory would be charged to cost of goods sold (for inventories for resale) or operating expense (for consumable inventories) as part of the year-end adjustment to record the ending inventory balance.

A physical count determined that the count was lower than the perpetual inventory records balance by $1,000.

Journal Entries

1) To record the write-off

	AMT($)	FRA	AUTH	OBJ
DR Losses on write-offs and write-downs	1,000	51733	F112	3452
CR Inventories held for consumption	1,000	15110	F312	3452

FRA coding rationale: Since there were fewer items found as a result of the inventory count, a loss (expense) will result. When a discrepancy is found between the inventory count and inventory records, the perpetual inventory records must be adjusted for the shortages (loss). If the inventory had been held for resale, the appropriate FRA would be 15210.

Authority rationale: This is strictly and accrual accounting entry, there is no impact on authorities, therefore F codes are used.

Object coding rationale: This is strictly and accrual accounting entry, there is no impact on objects, therefore 3452 is used on both sides of the transaction.

Scenario D - Inventory Count is higher than records indicate - Record Overage

When the department performs a physical count of its inventory, occasionally there is more inventory present than there should have been according to the Perpetual Inventory account balance. Such overages are usually the result of a record keeping error. Note that overages would not be detected under a periodic inventory system as a current record of the inventory balance is not maintained. Any excess inventory would be result in a reduction to cost of goods sold (for inventories for resale) or operating expense (for consumable inventories) as part of the year-end adjustment to record the ending inventory balance.

A physical count determined that the count was higher than the perpetual inventory account balance by $800.

Journal Entries

1) To record the overage

	AMT($)	FRA	AUTH	OBJ
DR Inventories held for consumption	800	15110	F312	3452
CR Operating expense	800	51321	F112	3452

FRA coding rationale: Since there were more items found as a result of the inventory count, a reduction in operating expenses would be recorded. The perpetual inventory records must be increased to reflect the overage. If the inventory had been held for resale, the debit entry would be to FRA "15210 - inventories held for resale" with the credit entry to FRA "51325 - Cost of goods sold".

Authority rationale: This is strictly and accrual accounting entry, there is no impact on authorities, therefore F codes are used.

Object coding rationale: This is strictly and accrual accounting entry, there is no impact on objects, therefore 3452 is used on both sides of the entry.

Scenario E - Inventory Obsolescence - Write-off required

A physical count determined that the items worth $2,000 were obsolete.

Journal Entries

1) To record inventory obsolescence for both periodic and perpetual inventory systems

	AMT($)	FRA	AUTH	OBJ
DR Losses on write-offs and write-downs	2,000	51733	F112	3452
CR Inventories - consumable	2,000	15110	F312	3452

FRA Coding Rationale: When inventory is determined to be obsolete, it should be written off. To record inventory obsolescence, the inventories account must be reduced by the dollar amount of the obsolescence and a loss recorded. If the inventory was held for resale, the credit entry would be to FRA 15210.

Authority rationale: This is strictly and accrual accounting entry, there is no impact on authorities, therefore F codes are used.

Object coding rationale: This is strictly and accrual accounting entry, there is no impact on objects, therefore 3452 is used on both sides of the entry.

Departmental Financial Statement Presentation and Disclosure Requirements

Inventories are to be classified as a non-financial asset on the Statement of Financial Position. If a department has a significant value of inventories held for resale, it may choose to report these as a financial asset.

Introduction

Prepayments

Prepayments are comprised of contract payments before the receipt of the goods and /or services, advance payments under the terms of contribution agreements, prepaid expenses and deferred charges.

Contract Payments

Contract advances made prior to the receipt of goods and services shall be charged to expense in the period in which all the eligibility criteria have been met or the goods and services received as applicable.

Advance Payments under Contribution Agreements

In accordance with the Policy on Transfer Payments, advance payments of the government's share of allowable expenditures under a contribution agreement may be made where it is essential to the achievement of the program objectives and is specifically provided for in the agreement. As the disbursement is for expenses to be incurred in the future, the payment is recorded as a prepayment and is recognized as an expense once the eligible costs have been incurred.

Prepaid Expenses and Deferred Charges

A prepaid expense or a deferred charge is an allocation to current and/or future periods of past costs where benefits will occur in the current and/or future periods. The distinction between the two is the duration of the benefits to be realized; prepaid expenses provide future benefits over a shorter period of time than do deferred charges.

It should be noted that all research and development costs will be expensed in the period in which they are incurred. Costs related to in-house developed software will be accounted for in accordance with the provisions of Treasury Board Accounting Standard 3.1.1 on Software and not as a component of research and development costs.

Amortization

Government departments have many expenses that they incur on a regular basis. Rent, utilities, subscriptions, payments in lieu of taxes and many other expenses must be paid monthly, or on some other cyclical basis. When expenses are prepaid, an asset is recognized for the amount paid. This is charged to expenses gradually as the prepaid expense is consumed.

Where appropriate, amortization of any deferred charge or prepaid expense will be charged as an expense on a systematic and rational basis related to use.

Write-offs

The balance of any prepaid expense or deferred charge shall be written off to expense in the period that no future benefits remain.

References

• TBAS 3.3 Prepayments
• TBAS 3.1.1 Software
• CICA 3040, 3070, 3450
• Section 34(b) of the FAA

Scenario A - Prepaid Expenses

A government department rents space in an office building for $25,000 per month. However, the owner of the building demands that all tenants of the building prepay at least a year's rent. At the time the department pays the owner the desired amount of prepaid rent, there are four months left in the fiscal year.

Journal Entries

1) To record the cost of the prepaid rent.

	AMT($)	FRA	AUTH	OBJ
DR Prepaid Expenses- Rent	300,000	14110	B11A/B12A	0511
DR GST refundable advance	21,000	13392	G111	8171
CR Accounts Payable	321,000	21111	R300	6299

FRA Coding Rationale: Since the department paid for a years' rent, it must record an asset for the amount that it paid. "14110 - Prepaid Expenses" is used to record the asset. A payable is set up for the amount owing. GST is payable on rent (excludes rent paid to PWGSC) or is included as part of rent charges and hence should be recorded to the GST refundable advance account.

Authority Coding Rationale: It is assumed that the rent expense will be charged to the Operating Vote (B12A), but it could also be charged to the Program Vote (B11A) depending on the Department's vote structure. Since Accounts Payable does not affect appropriations, R300 is used. Since GST is not to be charged to a departmental appropriation, it is set up as an advance under a special authority, G111.

Object Coding Rationale: The objects are affected when the transaction is made, so "0511 Rental of office buildings" is used to record the prepaid rent, because the rent is for an office building. "6299 - Net Increase or Decrease to Other Liability Accounts" is used to establish an account payable for the amount owing. The GST must be reflected by using, "8171 - Payment of GST on purchases"

2) To record the rent consumed by the end of the fiscal year.

	AMT($)	FRA	AUTH	OBJ
DR Rent Expense	100,000	51321	F119	3459/0511
CR Prepaid Expenses	100,000	14110	F313	3459/0511

FRA Coding Rationale: At year-end, the department must record an expense equivalent to 4 months of rent $100,000 (4 months x $25,000) and reduce the prepaid expense (asset) by an equivalent amount. Please note if the monthly rent is material to the operations of the Department the expense could be recorded on a monthly basis. In this case the Rent expense would be debited for $25,000 every month with a corresponding credit to Prepaid expenses.

Authority Coding Rationale: This is a strictly an accrual transaction, there is no impact on the appropriations. Therefore, F codes are used.

Object Coding Rationale: This is strictly an accrual transaction with no impact on the objects as they are impacted in the previous transaction. Standard object 12 does not impact good, services or transfer payments therefore, either "3459 - Amortization of other asset accounts" or "0511 Rental of office buildings" may be used on both sides of the entry.

Scenario B - Advance Payment under a Contribution Agreement

On April 1, the Department makes an advance payment to an individual for research and development in the amount of $50,000. The contribution is to cover eligible expenses that will be incurred over the next 4 months.

Journal Entries

1) To record the prepayment.

	AMT($)	FRA	AUTH	OBJ
DR Prepayments of Transfers	50,000	14120	B15A/B11A	2041
CR Accounts Payable	50,000	21111	R300	6299

FRA Coding Rationale: Since the payment was made in advance of the period for which the eligible costs are to be incurred, the payment must be recorded as an asset. A payable is set up for the amount owing.

Authority Coding Rationale: In this example, the grant could be charged to either B15A(*) - Grant and Contribution vote or B11A - Program Vote. Since Accounts Payable does not affect appropriations, R300 is used.

Object Coding Rationale: "2041 Transfer Payments to persons for research and development (incl. Scholarships)". "6299 - Net Increase or Decrease to Other Liability Accounts" is used to establish an account payable for the amount owing.

2) Eligible costs are incurred

	AMT($)	FRA	AUTH	OBJ
DR Transfer Payment Expense	50,000	51119	F119	3459/2041
CR Prepayments of Transfers	50,000	14120	F313	3459/2041

FRA Coding Rationale: Once the eligibility criteria are met an expense is recorded and the prepayment (the asset) is reduced.

Authority Coding Rationale: This is strictly an accrual transaction. Since the applicable appropriation was previously charged when the payment was made, there is no further effect on appropriations. Consequently, "F" codes are used.

Object Coding Rationale: This is strictly an accrual transaction with no impact on the objects as they are impacted in the previous transaction. Standard object 12 does not impact good, services or transfer payments therefore, either "3459-Amortization of other asset accounts" or "2041 Transfer Payments to persons for research and development (incl. Scholarships)" is used on both sides of the entry.

Alternative Journal Entries

Departments may also account for a prepayment by recording the full charge as an expense and then calculating the prepayment at each month or year-end.

1) To record the transfer payment.

	AMT($)	FRA	AUTH	OBJ
DR Transfer payment expense	50,000	51119	B15A/B11A	2041
CR Accounts payable	50,000	21111	R300	6299

2) To record the prepayment at month-end or year-end

	AMT($)	FRA	AUTH	OBJ
DR Prepayments of transfers	50,000	14120	F999	3459/2041
CR Transfer payment expense	50,000	51119	F999	3459/2041

FRA, Authority and Object coding rationale same as above.

Scenario C - Payments made in advance of receiving goods.

The Department enters into a contract for goods where by they are required to make a payment in advance of receiving those goods in accordance with section 34(b) of the FAA. The amount of the prepayment is $21,400 (including GST).

Journal Entries

1) To record the prepayment.

	AMT($)	FRA	AUTH	OBJ
DR Prepaid expense	20,000	14110	B11A/B12A*	1xxx
DR GST refundable advance	1,400	13392	G111	8171
CR Accounts Payable	21,400	21111	R300	6299

FRA Coding Rationale: Since the department paid for goods in advance, it must record an asset for the amount that it paid. "14110-Prepaid Expenses" is used to record the asset. A payable is set up for the amount owing. GST is recorded to the GST refundable advance account.

Authority Coding Rationale: It is assumed that the prepaid expense will be charged to the Operating Vote (B12A), but it could also be charged to the Program Vote (B11A) depending on the Department's vote structure. Since Accounts Payable does not affect appropriations, R300 is used. Since GST is not to be charged to a departmental appropriation, it is set up as an advance under a special authority, G111.

Object Coding Rationale: The objects are affected when the transaction is made, depending on the nature of the good the appropriate code would be used. "6299-Net Increase or Decrease to Other Liability Accounts" is used to establish an account payable for the amount owing. The GST must be reflected by using "8171-Payment of GST on purchases"

2) Goods are received.

	AMT($)	FRA	AUTH	OBJ
DR Operating Expense	20,000	51119	F119	3459
CR Prepaid Expenses	20,000	14110	F313	3459

FRA Coding Rationale: Once the goods are received the department must record an expense $20,000 and reduce prepaid expense (asset) by an equivalent amount.

Authority Coding Rationale: This is a strictly an accrual transaction. Since the applicable appropriation was previously charged when the payment was made, there is no further effect on appropriations. Consequently, "F" codes are used.

Object Coding Rationale: This is strictly an accrual transaction with no impact on the objects as they are impacted in the previous transaction. Standard object 12 does not impact good, services or transfer payments therefore, "3459-Amortization of other asset accounts" is used on both sides of the entry.

Departmental Financial Statement Presentation and Disclosure Requirements

Prepaid expenses, deferred charges and prepayments will be reflected on the Statement of Financial Position as non-financial assets under the heading Prepayments. Major items should be shown separately. Please note that this in variance with the current PS 3410 which records transfer payments in advance as a financial asset.

Capital Assets are tangible assets that are purchased, constructed, developed or otherwise acquired and:

1. are held for use in the production or supply of goods, the delivery of services or to produce program outputs;
2. have a useful life extending beyond one fiscal year and are intended to be used on a continuing basis; and,
3. are not intended for resale in the ordinary course of operations.

For the government, capital assets have the following characteristics:

1. beneficial ownership and control clearly rest with the government;
2. the asset is used to achieve government objectives; and,
3. risks and benefits of ownership clearly rest with the government (as is the case of capital leases).

For government accounting purposes capital assets generally include all assets treated as capital assets under Public Sector Accounting Board recommendations and generally accepted accounting principles in Canada, having an initial cost of $10,000 or more. Departments may choose a lower threshold value.

The cost of property, equipment and other capital assets including betterments is essentially a long-term prepayment of an expense in advance of the use of an asset. As the economic service life of the asset expires, the cost of the asset is systematically allocated to operations as an expense called "amortization".

References

• TBAS 3.1 Capital Assets
• TBAS 3.1.1 Software
• PS 3150
• CICA 3060

3.5.1 Tangible Capital Assets

Introduction

Tangible capital assets are a significant economic resource managed by governments and a key component in the delivery of many government programs. Tangible capital assets include such diverse items as land, heritage buildings, military assets, infrastructure assets, purchased computer software, in-house developed software, computer hardware, assets acquired by capital leases or by donations, etc.

Betterments versus Repairs

The cost incurred to enhance the service potential of a capital asset is a betterment. Service potential may be enhanced when there is an increase in the previously assessed physical output or service capacity, associated operating costs are lowered, the useful life is extended, or the quality of output is improved. The cost incurred in the maintenance of the service potential of a capital asset is a repair, not a betterment.

Write-down

A department would write down the cost of a tangible capital asset when it can demonstrate that the reduction in future economic benefits is expected to be permanent. Conditions that may indicate that the future economic benefits associated with a tangible capital asset have been reduced and a write-down is appropriate include:

1. a change in the extent to which the asset is used;
2. a change in the manner in which the asset is used;
3. significant technological developments;
4. physical damage;
5. removal of the asset from service;
6. a decline in or cessation of, the need for the services provided by the asset;
7. a decision to halt construction of the asset before it is complete or in usable or saleable condition;
8. a change in the law or environment affecting the extent to which the asset can be used.

PS 3150.36

References

• TBAS 3.1 - Capital Assets
• TBAS 3.1.1 - Software
• TBAS 1.2
• CICA 3060
• PS 3150

Scenario A - Purchase of a Tangible Capital Asset

The Department purchased and received a vehicle for $23,500 on January 31, 2000. Delivery costs are an additional $500. Total GST is $1,680. Payment does not take place until the following fiscal year, April 15, 2000. The vehicle has a useful life of 10 years with no estimated residual value.

Journal Entries

These entries assume the vehicle is charged directly to the asset FRA. See alternative entry if amounts are to be initially charged to an operating expense and then re-allocated to a capital asset FRA.

1) To record the purchase and receipt of the vehicle on January 31, 2000.

	AMT($)	FRA	AUTH	OBJ
DR Vehicle	23,500	16133	B14A(*)	1261
DR Vehicle	500	16133	B14A(*)	0210
DR GST Refundable Advance	1,680	13392	G111	8171
CR Accounts payable	25,680	21111	R300	6299

FRA coding rationale: The Department must capitalize this asset as a debit to the capital asset (vehicle) account, since it is above the $10,000 threshold. Delivery costs should be capitalized as part of the laid down cost of the asset. At this point the Department is being charged GST on the vehicle, and must pay it to the vendor. However, as the Department will eventually recover this amount from Canada Customs and Revenue Agency (CCRA), they should record it as an asset in "13392 GST/HST Refundable advance accounts". Since the Department has not paid for the vehicle, a liability must be recorded for the amount owing.

Authority coding rationale: (*) In this example it is assumed this purchase would be charged to the capital vote. However, depending on the department and the asset purchased, the following authority codes could be used: B11A - Program Vote, B12A Operating Vote, or A131 Spending of amounts equivalent to proceeds from disposal of surplus Crown assets. Since GST is not to be charged to a departmental appropriation, it is set up as an advance under a special authority, G111. There is no impact on authorities for the accounts payable so the code to be used would be "R300-All other assets and liabilities"

Object coding rationale: As economic objects are recorded on an expenditure basis, the economic object is recorded at this point. Economic object 1261 is used in this example since the purchase was a motor vehicle. The appropriate economic object is used depending on the nature of the purchase. Economic object "0210-Transportation of things not elsewhere specified" would be used to record freight. However, where a department's system cannot handle the use of more than one economic object for an asset, the cost of freight may be coded to the same object code as the asset. Since there is GST/HST payable, the GST must be reflected by using, "8171-Payment of GST on purchases". "6299-Net Increase or Decrease to Other Liability Accounts" is used to establish the accrual of the amount owing.

Alternative set of entries: Departments may choose to record the purchase as an operating expense and reallocate amounts to an asset FRA. This method involves two entries: 1) recording the purchase as operating expense with all objects, 2) reallocating the amounts for all objects to an asset class.

First entry: To record the purchase and receipt of the vehicle on January 31, 2000.

	AMT($)	FRA	AUTH	OBJ
DR Operating Expenses	23,500	51321	B11A/B12A	1261
DR Operating Expenses	500	51321	B11A/B12A	0210
DR GST Refundable Advance	1,680	13392	G111	8171
CR Accounts payable	25,680	21111	R300	6299

Coding rationale - there is no change in the coding from entry 1, except for the use of the operating expense FRA instead of the asset FRA.

Second entry: To reallocate amounts for all objects.

	AMT($)	FRA	AUTH	OBJ
DR Vehicle	23,500	16133	B11A/B12A(*)	1261/3425
DR Vehicle	500	16133	B11A/B12A(*)	0210/3425
CR Operating Expenses	500	51321	B11A/B12A	0210/3425
CR Operating Expenses	23,500	51321	B11A/B12A	1261/3425

Coding rationale - (*)There is no impact on the authority code unless it is moved to a capital appropriation (B14A). Object Coding: Departments may either use "3425 - Reallocation of expenditures/costs within a department" for all lines of the transaction or the asset and freight object codes used in entry 1. If more than one object is used, the same object must be used in the same amount for both the debit and credit sides of the entry. Note: if the transaction involves revenue credited to the vote, the economic object to use is "3717 - Recoveries of expenditures/costs within a department" for the credit side of the entry and "3425 - Reallocation of expenditures/costs within a department" for the debit side of the entry.

3) To record the amortization expense and the accumulated amortization at February 28, 2000.

	AMT($)	FRA	AUTH	OBJ
DR Amortization Expense	200	51433	F111	3451
CR Accumulated Amortization	200	16233	F311	7061/7099

FRA coding rationale: It is necessary to allocate the cost of the asset as an expense in a rational and systematic manner over those periods expected to benefit from the use of the asset. Using straight-line amortization, the monthly charge to amortization expense and accumulated amortization would be $200 ($24,000/10yrs = $2,400/year; $2,400/12mths = $200/month).

Authority coding rationale: Expenditures for the acquisition were charged to an appropriation in the previous journal entry, therefore the appropriations are not affected in this journal entry. To assist with departmental reconciliations, F codes are used for these non-appropriated amounts. "F111 - Expenditures previously charged to appropriations/Amortization expenses for capital assets" is used for amortization expense and "F311 - Non-appropriated amounts added to or deducted from asset balances/ Increases (decreases) to accumulated amortization of capital assets" is used for accumulated amortization.

Object coding rationale: As these are non-cash (non-expenditure) items, they have no effect on economic objects." 7061 - Accumulated amortization on capital assets" is used to capture accumulated amortization. Alternatively, "7099 - Net increase or decrease in other transactions" may also be used. "3451 - Amortization expense for capital assets" is used to capture amortization expense.

4) To record payment of vehicle on April 15, 2000.

See section on Accounts Payable for related entries.

Scenario B - Betterment

A betterment should be capitalized if the amount exceeds the department's threshold for betterments. The maximum threshold for betterments is $10,000. A department may choose a lower threshold. If the amount of the betterment is less the department's threshold for betterments, then the department should expense it.

The Department owns a building with an original cost of $250,000 and a useful life of 40 years. After 20 years the Department decides to do a major renovation that will increase the amount of usable space. The renovation work is contracted to one company and has a cost of $75,000. At this point the net book value of the building is $125,000 ($250,000/40yrs = $6,250/yr) ($6,250/yrx20yrs = 125,000) ($250,000-$125,000 = $125,000)

Journal Entries

1) Record the betterment

	AMT($)	FRA	AUTH	OBJ
DR Buildings	75000	16112	B14A(*)	1340
DR GST Refundable Advance	5250	13392	G111	8171
CR Accounts Payable	80,250	21111	R300	6299

FRA coding rationale: Since the renovation is a betterment, it is added to the cost of the building i.e. capitalized as part of the building cost. The new value of the building is $200,000 ($125,000+$75,000). The amortization expense on the building will now increase to $10,000 ($200,000/20 years).

Authority coding rationale: (*) In this example it is assumed this purchase would be charged to the capital vote. However, depending on the department and the asset purchased, the following authority codes could be used: B11A - Program Vote, B12A Operating Vote, or A131 Spending of amounts equivalent to proceeds from disposal of surplus Crown assets. There is no impact on the authority side for the accounts payable but as the system requires that a code be used, it would be "R300 - All other assets and liabilities"

Object coding rationale: As economic objects are recorded on an expenditure basis, the economic object is recorded at this point, and not when the cash (disbursement) is paid out. Economic object 1340 is used (in this example) since the renovation was on a building. If the details of the renovation expenditures are provided on the contractor's invoices and the department's system can accommodate the use of more than one economic object per asset class, it would be preferable to use the different economic object codes depending on the nature of the purchase (as done in Scenario C). "6299 - Net Increase or Decrease to Other Liability Accounts" is used to record the accrual of the amount owing.

Scenario C - Betterment - Work Managed by Department

Same details as in Scenario B except the department is contracting the work. The cost of the betterment include: wages, freight, architect fees, rentals of machinery; materials, equipment and fixtures. An alternative entry involving the detailed re-allocation of all objects is shown for the second and third entries.

1) Record the $25,000 of expenses incurred during the first month

	AMT($)	FRA	AUTH	OBJ
DR Operating expense	10,000	51321	B11A/B12A	0101
DR Operating expense	3,000	51321	B11A/B12A	0421
DR Operating expense	500	51321	B11A/B12A	0533
DR Operating expense	7,900	51321	B11A/B12A	1141
DR Operating expense	2,000	51321	B11A/B12A	1219
DR Operating expense	1,600	51321	B11A/B12A	1246
DR GST Refundable Advance	1,750	13392	G111	8171
CR Accounts Payable	26,750	21111	R300	6299

FRA coding rationale: The expenses are charged to operating expenses rather than being charged directly to the building asset account.

Authority coding rationale: It is assumed the expenses would be charged to B11A - Program Vote or B12A Operating Vote. Since GST is not to be charged to a departmental appropriation, it is set up as an advance under a special authority, G111. There is no impact on authorities for the accounts payable so the code to be used would be "R300-All other assets and liabilities"

Object coding rationale: The economic object code matching each type of purchase is recorded.

2) At month-end, transfer expenses to work-in-process account

	AMT($)	FRA	AUTH	OBJ
DR Work in process	25,000	16319	F152	3425
CR Operating expense	25,000	51321	F152	3425

FRA coding rationale: At month-end the expenses incurred are transferred to a work in process asset account. As the work has not yet been completed, the expenses may not be charged to the building account as amortization should not be recorded against the expenses until the work is substantially complete.

Authority coding rationale: These expenses have already been charged against an authority hence there is no effect on appropriations. "F152 - Reallocation of capital asset expenditures" is used.

Object coding rationale: Object information was recorded at the time the expenses were incurred, hence "3425 - Reallocation of expenditures/costs within a department" is used on both sides of the entry. Note: if revenue credited to the vote is involved, then the object code on the credit side would change to "3717 - Recoveries of expenditures/costs within a department".

Alternatively, a department may choose to record the details by object. In this case the transaction would be as follows:

	AMT($)	FRA	AUTH	OBJ
DR Work in process	10,000	16319	F152	0101
DR Work in process	3,000	16319	F152	0421
DR Work in process	500	16319	F152	0533
DR Work in process	7,900	16319	F152	1141
DR Work in process	2,000	16319	F152	1219
DR Work in process	1,600	16319	F152	1246
CR Operating expense	10,000	51321	F152	0101
CR Operating expense	3,000	51321	F152	0421
CR Operating expense	500	51321	F152	0533
CR Operating expense	7,900	51321	F152	1141
CR Operating expense	2,000	51321	F152	1219
CR Operating expense	1,600	51321	F152	1246

If this alternative is used, the same object code must be used for the same amounts on both the debit and credit sides of the entry.

3) Once all work complete, (assume final costs were $75,000):

	AMT($)	FRA	AUTH	OBJ
DR Buildings	75,000	16112	F152	3425
CR Work in process	75,000	16319	F152	3425

FRA coding rationale: Once all renovation work has been completed,the costs are transferred from a work in process asset account to a capital asset account. These costs will now be amortized along with the remaining costs of the building. However, if the betterment had a significantly different useful life than that of the building, it should be amortized separately.

Authority coding rationale: : It is assumed that there is no impact on authorities hence "F152- Re-allocation of capital asset expenditures" is used. However, a department may choose the reallocate the expenses from an operating authority to a capital authority, in which case B11A/B12A and B14A would be used.

Object coding rationale: Object information was recorded at the time the expenses were incurred, hence "3425 - Reallocation of expenditures/costs within a department" is used on both sides of the entry. Note: if revenue credited to the vote is involved, then the object code on the credit side would change to "3717- Recoveries of expenditures/costs within a department".

Alternatively, a department may choose to record the details by object. In this case the transaction would be as follows:

	AMT($)	FRA	AUTH	OBJ
DR Buildings	10,000	16112	F152	0101
DR Buildings	3,000	16112	F152	0421
DR Buildings	500	16112	F152	0533
DR Buildings	7,900	16112	F152	1141
DR Buildings	2,000	16112	F152	1219
DR Buildings	1,600	16112	F152	1246
CR Work in process	10,000	16319	F152	0101
CR Work in process	3,000	16319	F152	0421
CR Work in process	500	16319	F152	0533
CR Work in process	7,900	16319	F152	1141
CR Work in process	2,000	16319	F152	1219
CR Work in process	1,600	16319	F152	1246

If this alternative is used, the same object must be used for the same amounts on both the debit and credit sides of the entry.

Scenario D - Disposal via Sale of Tangible Capital Asset

On May 1, 2000, the Department purchased informatics-hardware for $32,000 with an estimated service life of five years and an estimated residual value after five years of $2,000. The Department uses straight-line amortization and decides to sell the asset on November 1, 2004, for $8,000.

Alternative entries using a suspense account for proceeds from asset sales, and involving two entries in each case are shown below.

Journal Entries

1a) Record the disposal of the asset and related gain in November 2004.

	AMT($)	FRA	AUTH	OBJ
DR Cash in the hands of the dept awaiting deposit to RG	8,000	11125	R300	5299
DR Accumulated Amortization - informatics hardware	27,000	16222	D321	4843
CR Informatics hardware	32,000	16122	D321	4843
CR Gain from disposal of equipment	3,000	42411	D321	4843

FRA coding rationale: The Department must record the proceeds received ($8,000) by debiting Cash in the hands of the department awaiting deposit to the RG. The equipment and related accumulated amortization must be written off the books. In this case the net of these three items results in a gain which will be credited to the non-tax revenue FRA. The accumulated amortization is $27,000 and is calculated as follows ($32,000-2,000 = $30,000) ($30,000/60 mths = $500/mth) (54 mths x $500 = $27,000)

Authority coding rationale: There is no authority impact for the cash received, R300 is used. "D321- Proceeds from disposal of crown assets" is used for the remaining debits and credits ($27,000-$32,000-$3,000) as it reflects the allocation of the proceeds of $8,000 received by the Department.

Object coding rationale: To record the net impact on Cash Accounts, 5299 would be used. As economic objects are recorded on an expenditure basis, one object should be used to record the proceeds from sale. "4843 - Sales of surplus Crown assets to outside parties".

Alternative entries: There is an alternative method to record the sale of an asset that uses two entries with a suspense account in the middle

First entry:

	AMT($)	FRA	AUTH	OBJ
DR Cash in the hands of the dept awaiting deposit to RG	8,000	11125	R300	5299
CR Suspense acct: Proceeds from Asset Sale	8,000	21627	D321	4843

Second entry:

	AMT($)	FRA	AUTH	OBJ
DR Suspense acct: contra proceeds	8,000	21627	F999	7099/3425
DR Accumulated Amortization - informatics hardware	27,000	16222	F999	7099/3425
CR Gain from disposal of equipment	3,000	42411	F999	7099/3425
CR Informatics hardware	32,000	16122	F999	7099/3425

Rationale: The FRAs used are the same with the exception of the addition of a suspense account (FRA 21627). All the authority and object information are in the first entry, while the second entry provides the accrual accounting data, while having a nil impact on the authority and object information. To ensure a nil effect on economic objects, the same code, "7099-Net Increase or Decrease in Other Transactions" or "3425-Reallocation of expenditures/costs within a department" should be used throughout the transaction.

1b) Assuming the circumstance is the same as above except the Department decides to sell the asset for $3,000, on November 1, 2004. Record the disposal of the asset and the related loss.

	AMT($)	FRA	AUTH	OBJ
DRCash in the hands of the Dept awaiting deposit to RG	3,000	11125	R300	5299
DR Accumulated Amortization - informatics hardware	27,000	16222	D321	4843
DR Loss on disposal of physical assets	2,000	51511	D321	4843
CR Informatics hardware	32,000	16122	D321	4843

FRA coding rationale: The Department must record the proceeds received ($3,000) by debiting Cash in the hands of the department awaiting deposit to the RG. The equipment and related accumulated amortization must be written off the books. In this case the net of these three items results in a loss which will be debited to an expense FRA.

Authority coding rationale: There is no authority impact for cash received, but the system requires that a code be used. In this case R300 is used. "D321- Proceeds from disposal of crown assets" is used for the remaining debits and credits ($27,000-$32,000+$2,000) as it reflects the allocation of the proceeds of $3,000 received by the Department.

Object coding rationale: As economic objects are recorded on an expenditure basis, one object is used to record the proceeds from sale "4843-Sales of surplus Crown assets to outside parties". To record the net impact on Cash Accounts, 5299 would be used.

Alternative entries: There is an alternative method to record the sale of an asset which uses two entries with a suspense account in the middle

First entry:

	AMT($)	FRA	AUTH	OBJ
DR Cash in the hands of the dept awaiting deposit to RG	3,000	11125	R300	5299
CR Suspense acct: Proceeds from Asset Sale	3,000	21627	D321	4843

Second entry:

	AMT($)	FRA	AUTH	OBJ
DR Asset Sale - Contra Proceeds awaiting deposit to RG	3,000	21627	F999	7099/3425
DR Accumulated Amortization - informatics hardware	27,000	16222	F999	7099/3425
DR Loss on disposal of physical assets	2,000	51511	F999	7099/3425
CR Informatics hardware	32,000	16122	F999	7099/3425

Rationale: The FRAs used are the same with the exception of the addition of a suspense account (FRA 21627). All the authority and object information are in the first entry, while the second entry provides the accrual accounting data, while having a nil impact on the authority and object information. To ensure a nil effect on economic objects, the same code, "7099 - Net Increase or Decrease in Other Transactions" or "3425 - Reallocation of expenditures/costs within a department" should be used throughout the transaction.

Scenario E - Disposal via Trade-In

It should be noted that there are restrictions on what moveable assets departments can trade-in (e.g. passenger cars, wagons and light commercial trucks) and whether departments can trade these assets for similar or different types of assets (see the Material Management Policy and Motor Vehicle Policy: /pubs_pol/dcgpubs/materielmanage/siglist_eng.asp).

The Department trades in an old piece of research equipment for a new piece of research equipment. The old equipment has an accumulated amortization of $7,000 and an original cost of $8,000. The department receives $600 on the trade in. The new equipment has a value of $10,000.

Journal Entries

1) Record the trade-in

	AMT($)	FRA	AUTH	OBJ
DR Other equipment (new)	10,000	16129	B14A(*)	1219
DR Accumulated Amortization equipment (old)	7,000	16229	D321	4843
DR Loss on disposal of physical assets	400	51511	D321	4843
DR GST refundable advance account	658	13392	G111	8171
CR Other equipment (old)	8,000	16129	D321	4843
CR Accounts Payable	10,058	21111	R300	6299

FRA coding rationale: The equipment (old) and related accumulated amortization must be written off the books. Because the Department received $600 for the trade-in, the loss on the disposal of the trade-in is $400 ($8,000-$7,000-$600). The equipment (new) is recorded at its original purchase price and the amount payable to the vendor is the difference between the purchase price of the equipment (new) and the $600 received for the trade in, plus GST of $658. GST is payable on the net purchase price of the equipment (7% of $9,400).

Authority coding rationale: (*) In this example it is assumed this purchase (equipment (new)) would be charged to the capital vote. However, depending on the department and the asset purchased, the following authority codes could be used: B11A - Program Vote, B12A Operating Vote, or A131 Spending of amounts equivalent to proceeds from disposal of surplus Crown assets. There is no impact on the authority side for the accounts payable, "R300- All other assets and liabilities" would be used. "D321 - Proceeds from disposal of crown assets" is used ($7,000+$400-$8,000) to reflect proceeds of $600 received by the Department for the old equipment. Since GST is not to be charged to a departmental appropriation, it is set up as an advance under a special authority, G111.

Object coding rationale: The economic object is recorded at this point since objects are recorded on an expenditure basis. Economic object 1219 is used to record the purchase of the new equipment - other machinery parts. " 6299 - Net Increase or Decrease to Other Liability Accounts" is used to establish the payable for the amount owing. The GST is reflected by using "8171 - Payment of GST on purchases". "4843 - Sales of surplus Crown assets to outside parties" is used in the remainder of this entry, because it relates to all the proceeds received for the asset being sold.

2) Transfer of funds (optional entry)

	AMT($)	FRA	AUTH	OBJ
DR Other equipment (new)	600	16129	A131	7099
CR Other equipment (new)	600	16129	B14*	7099

FRA coding rationale: The purpose of this entry is purely for authority purposes, there is no effect on FRAs. The same FRA is debited and credited.

Authority coding rationale: The proceeds from the trade-in of $600 are credited to whichever B code the purchase was charged to. In this way, the charge to the appropriation is the net cost of the asset. This entry is optional depending on how departments choose to use the funds related to A131 - Spending of amounts equivalent to proceeds from disposal of surplus crown assets.

Object coding rationale: The purpose of this entry is purely for authority purposes, there is no effect on economic objects. "7099 - Net increase or decrease in other transactions" is used on both sides of the transaction.

Scenario F - Write-off of Tangible Capital Asset

Informatics hardware originally costing $120,000 with a useful life of 5 years has a $60,000 accumulated amortization balance on April 1, 2000. It is amortized at $2,000 per month. In July a fire caused substantial damage to the equipment. The Department decides the equipment has no future benefits and should be written off immediately.

Journal Entries

1) Write-off (bringing the value of the capital asset to zero)

	AMT($)	FRA	AUTH	OBJ
DR Accumulated Amortization - informatics hardware	66,000	16222	F351	7099/3425
DR Loss on disposal of physical assets	54,000	51511	F351	7099/3425
CR Informatics hardware	120,000	16122	F351	7099/3425

FRA coding rationale: The equipment and related accumulated amortization (after adding an additional $6,000 in amortization expense to the accumulated amortization for the informatics hardware in year 2000) must be written off the books. The net result of these items will result in a loss of $54,000. FRA 51511 is used as the department has disposed of the asset. FRA 51733 "Losses on write-offs and write-downs" would be used if the asset continues to be used (see Scenario G).

Authority coding rationale: This is strictly an accrual accounting transaction. There is no impact on the authorities as the appropriation was charged when the asset was purchased. In order to ensure there is a nil effect on authorities, the same authority code is used for all debits and credits. In this case "F351 - Write off of Capital Assets was used."

Object coding rationale: This is strictly an accrual accounting transaction with no impact on the economic objects, as there is no impact on the economy. The economic objects were affected when the asset was purchased. To ensure a nil effect on economic objects, the same code, "7099 - Net Increase or Decrease in Other Transactions" or "3425 - Reallocation of expenditures/costs within a department" should be used throughout the transaction.

Scenario G - Write-down of Tangible Capital Asset

Internally developed software put into operation a year ago has a cost of $400,000 and accumulated amortization of $40,000. The department determines that the software will not provide the full benefits expected (e.g. the software cannot handle the volume of processing required and additional software will have to be purchased to supplement it). The department determines that the cost of the software should be reduced by $100,000 to reflect the decline in the asset's value (this could be the amount of the additional costs required to supplement the software).

Note: other reasons supporting the need for the write-down of an asset can be found in PS 3150.36.

Journal Entries

1) Write-down

	AMT($)	FRA	AUTH	OBJ
DR Losses on write-downs	100,000	51733	F351	7099/3425
CR Accumulated amortization: informatics software	100,000	16223	F351	7099/3425

FRA coding rationale: FRA 51733 "Losses on write-downs" would be used as the asset continues to be used. The credit is to accumulated amortization to reflect the decrease in the net book value of the asset.

Authority coding rationale: This is strictly an accrual accounting transaction. There is no impact on the authorities as the appropriation was charged when the asset was purchased. In order to ensure there is a nil effect on authorities, the same authority code is used for the debit and credit. In this case "F351 - Write off of Capital Assets was used."

Object coding rationale: This is strictly an accrual accounting transaction with no impact on the economic objects, as there is no impact on the economy. The economic objects were affected when the asset was purchased. To ensure a nil effect on economic objects, the same code "7099 - Net Increase or Decrease in Other Transactions" or "3425 - Reallocation of expenditures/costs within a department" should be used throughout the transaction.

Departmental Financial Statement Presentation and Disclosure Requirements

As per TBAS 1.2, for each category of capital asset disclose original cost, additions, disposals, write-downs, accumulated amortization, amortization, and net book value on the Schedule of Capital Assets in the departmental financial statements. Also, for those capital assets where the net book value is already nil, the original historic cost should be disclosed in the notes to the financial statements as an indication of their existence.

3.5.1.1 Capital Leases

A lease is a contractual agreement between a lessor and a lessee that gives the lessee the right to use specific property owned by the lessor for a specific period of time in return for generally periodic cash payments.

If a government department is the lessee, the lease is classified for accounting purposes as either an operating lease or a capital lease. The department would classify a lease as capital if any one of the following conditions are met:

• Is there a transfer of ownership?
• Is there a bargain purchase option?
• Is the lease term greater than or equal to 75% of the asset's economic life?
• Is the present value of payments greater than or equal to 90% of the fair value of the asset?

If a government department is the lessor, then the leases would be classified for accounting purposes as either:

• Operating leases; or
• Direct financing leases or sales-type leases

References

• CICA 3065 (particularly CICA 3065.21-26)

Scenario A - Department enters into Capital Lease agreement as Lessee

Lessor Company and the Department sign a lease agreement that calls for Lessor Company to lease informatics equipment to the Department beginning January 1, 2005. The lease contains the following terms and provisions.

1. The term of the lease is five years, and the lease agreement is non-cancellable, requiring equal payments of $25,981.62 at the beginning of each year (annuity due basis) plus GST.
2. The equipment has a fair value at the inception of the lease of $100,000, an estimated economic life of five years, and no residual value at the end of the 5 years.
3. The Department pays all the executory costs directly except for maintenance costs of $2,000 per year, which are included in the annual payments to the lessor.
4. The lease contains no renewal options and the equipment reverts to Lessor Company at the termination of the lease.
5. The Department amortizes similar equipment it owns on a straight-line basis.
6. Lessor Company set the annual rental to ensure a rate of return on its investments of 10% per year; the Department is aware of this fact. In the event that the Department did not know the lessor's rate of return, the Department would use the CRF lending rate at the time the agreement is signed.

The lease meets the criteria for classification as a capital lease because (1) the lease term of five years, being equal to the equipment's estimated economic life of five years, satisfies the 75% test; or because (2) the present value of the minimum lease payments ($100, 000 as computed below) exceeds 90% of the fair value of the property ($100,000).

Journal Entries

1) To record the capital lease on January 1, 2005.

	AMT($)	FRA	AUTH	OBJ
DR Informatics Equip-Capital Leases (asset)	100,000	16622	R300	7099
CR Informatics Equip-Capital Lease (obligation)	100,000	24222	R300	6299

FRA coding rationale: The asset value and the amount of the obligation are recorded at the beginning of the lease term at the present value of the lease payments, excluding the portion relating to executory costs.

The minimum lease payments are $119,908.10 ($23,981.62 x 5) and the amount capitalized as leased assets is $100,000, the present value of the minimum lease payments is determined as follows:

Capitalized amount	= ($25981.62-$2 000) x present value of an annuity due of $1 for 5 periods at 10%.
	= $23981.62 x 4.16986
	= $100000

The lessor's implicit interest rate of 10% is used instead of the lessee's incremental borrowing rate of 11% because (1) it is lower, and (2) the lessee has knowledge of it.

Authority coding rationale: This is strictly an accrual entry. The appropriations are not affected at this point. The appropriation is charged only when the lease, interest payments and executory payments are made. "R300 - All other assets and liabilities" is used here for both sides of the entry.

Object coding rationale: As economic objects are recorded on an expenditure basis, the economic object is not recorded at this point but when the lease payment is made. "7099-Net increase or decrease in other transactions" is used. "6299-Net Increases or Decreases in Other Liability Accounts" is used to establish the accrual of the amount owing.

2) To record the first lease payment on January 1, 2005.

	AMT($)	FRA	AUTH	OBJ
DR Operating Expenses (executory costs)	2,000.00	51321	(**)	0525
DR Informatics Equip-Capital Lease (obligation)	23,981.62	24222	(**)	1221
DR GST refundable advance	1,818.71	13392	G111	8171
CR Accounts Payable	27,800.33	21111	R300	6299

FRA coding rationale: The first lease payment of $23,981.62 represents a reduction of the principal of the lease obligation. There is no interest paid out at this point. At year-end the expense is accrued, (see journal entry 3) below. The executory costs are coded to operating expenses. The Department must record a payable for the amount owing of $25,981.62 plus GST of $1,818.71.

Authority coding rationale: (**) In this example, it is assumed this lease payment and operating expense would be charged to the capital vote -B14A. However, depending on the departmental appropriations, the following authority codes could be used: B11A - Program Vote, B12A Operating Vote, and A131 Spending of amounts equivalent to proceeds from disposal of surplus Crown assets. As there is no impact on the authorities for accounts payable, the code would be "R300- All other assets and liabilities" since the system requires that a code be used. Since GST is not to be charged to a departmental appropriation, it is set up as an advance under a special authority, G111.

Object coding rationale: At this point expenditures are made for the executory costs and lease costs. Therefore economic objects are affected. In this case, "0525-Rental of computer equipment" is used for the executory costs and "1221-Voice communication equipment" is used for the lease payment. "6299-Net Increase or Decrease to Other Liability Accounts" is used establish an accounts payable. The GST must be reflected by using "8171-Payment of GST on purchases".

Each rental payment of $25,981.62 consists of three elements: (1) a reduction in the principal of the lease obligation; (2) a financing cost (interest expense); and (3) executory costs. The total financing cost or interest expense over the term of the lease is the difference between the present value of the lease payments ($100,000) and the actual cash disbursed, net of executory costs ($119,908.10), or $19,908.10. Note: In the journal entry 2) above no portion of the 23,981.62 relates to interest expense. The interest is accrued at the end of the year, (see journal entry 3) below) and is paid in the beginning of the following year (see 5) below).

Lease Amortization Schedule
(Annuity Due Basis)

Date	Annual Lease Payment	Interest (10%) on Unpaid Obligation	Reduction of Lease Obligation	Balance of Lease Obligation
	(a)	(b)	(c)	(d)
Jan.1/05				$100,000.00
Jan.1/05	$23,981.62	0	$23,981.62	76,018.38
Jan.1/06	23,981.62	$7,601.84	16,379.78	59,638.60
Jan.1/07	23,981.62	5,963.86	18,017.76	41,620.84
Jan.1/08	23,981.62	4,162.08	19,819.54	21,801.30
Jan.1/09	23,981.62	* 2,180.32	21,801.30	0
Total	$119,908.10	$19,908.10	$100,000

1. Lease payment as required by lessor, excluding executory costs.
2. 10% of the preceding balance of (d) except for January 1, 2005; since this is an annuity due, no time has elapsed at the date of the first payment and no interest has accrued.
3. (a) minus (b)
4. Preceding balance minus (c).

3a) To record the interest expense for the period between Jan 01, 2005 and March 31, 2005.

	AMT($)	FRA	AUTH	OBJ
DR Interest Component on capital lease pymt	1,900.46	51713	F129	3469/7099
CR Accrued Interest Payable on Capital Leases	1,900.46	21154	R300	6299

Accrued interest payable on capital leases would be reversed and put into Accounts Payable on January 1, 2006, (see 5) below).

FRA coding rationale: The interest expense over the term of the lease is the difference between the present value of the lease payments and the actual cash disbursed for the lease payment. The interest expense is a function of the outstanding obligation. $7,601.84 = ((100,000-23,981.62) x 10%). It is necessary to set up an accrual for the three months Jan 01, 2005 to March 31, 2005 since the department's fiscal year ends on March 31. This would amount to $1,900.46 ($7,601.84 / 12mths x 3mths) interest owing. The Accrued Interest Payable on Capital Leases would be reversed in the following year. Please note: if material, the interest expense would recorded on a monthly basis.

Authority coding rationale: This is strictly an accrual transaction. The appropriation is not affected at this time. The charge to the appropriation occurs when the interest is actually paid out as part of the periodic lease payment. Therefore, it is necessary to use an F code. For the interest expense portion "F129 - Expenses to be charged later to appropriations/Other amounts to be charged later". Accrued interest payable on capital leases does not affect the appropriations, thus "R300 - Total amounts of all other assets and liabilities" would be used.

Object coding rationale: This is strictly an accrual transaction and there is no effect on economic objects. "3469- Charges to other liability account" or "7099- Net increase of decrease in other transactions" should be used. To establish the payable "6299-Net Increase or Decrease to Other Liability Accounts" should be used.

3b) To record the interest expense for the period between April 01, 2005 and Dec. 31, 2005.

	AMT($)	FRA	AUTH	OBJ
DR Interest Component on capital lease pymt	5,701.38	51713	F129	3469/7099
CR Accrued Interest Payable on Capital leases	5,701.38	21154	R300	6299

Accrued interest payable on capital leases would be reversed and put into Accounts Payable on January 1, 2006, see 5) below.

FRA coding rationale: It is necessary to set up an accrual for nine months April 01, 2005 to December 31, 2005. This would amount to $5,701.38 ($7,601.84 / 12mths x 9mths) interest owing. The accrued interest payable on capital leases would be reversed in the following year. Please note: If material the interest expense would recorded on a monthly basis.

Authority coding rationale: Same as 3a).

Object coding rationale: Same as 3a).

4) To record the amortization expense and accumulated amortization for the month.

	AMT($)	FRA	AUTH	OBJ
DR Amortization Expense - Infor Equip (leased)	1,667	51422	F111	3451
CR Accumulated Amortization - Infor Equip (leased)	1,667	16722	F311	7061/7099

FRA coding rationale: The Department should record amortization expense and accumulated amortization as per the Department's normal amortization policy (e.g. straight-line method). $100,000/5years= $20,000/yr $20,000/12mths=$1,666.67/mth

Authority coding rationale: Since the expenditure for the acquisition was already charged to an appropriation in previous journal entries, the appropriations are not affected. F codes would be used to assist with departmental reconciliations. "F111 - Amortization expenses for capital assets" is used for amortization expense and "F311 - Increases (decreases) to accumulated amortization of capital assets" is used for accumulated amortization.

Object coding rationale: These non-cash items have no effect on economic objects."7061- Accumulated amortization on capital assets" or "7099 - Net increase or decrease in other transactions" is used to capture accumulated amortization. "3451 - Amortization expense for capital assets" is used to capture amortization expense.

5) To record the lease payment and to charge the interest expense to the appropriation on January 1, 2006.

	AMT($)	FRA	AUTH	OBJ
DR Operating Expenses (executory costs)	2,000.00	51321	(**)	0525
DR Accrued Interest Payable on Capital Leases	7,601.84	21154	R300	6299
DR Informatics Equip-Capital Lease (obligation)	16,379.78	24222	(**)	1221
DR GST refundable advance account	1,818.71	13392	G111	8171
CR Accounts Payable	27,800.33	21111	R300	6299

FRA coding rationale: The recording of the lease payment results in a reduction of the lease obligation and the recording of a payable to reflect an amount owing to the lessor. The accrued interest charges are reversed and recorded as an accounts payable to reflect an amount owing the lessor as well. The executory costs are charged to an operating expense.

Authority coding rationale: (**) In this example, it is assumed this lease payment and operating expenses would be charged to the capital vote B14A. However, depending on the departmental appropriations, the following authority codes could be used: B11A - Program Vote, B12A Operating Vote, and A131 Spending of amounts equivalent to proceeds from disposal of surplus Crown assets. As there in no impact on authorities for accounts payable and accrued interest payable on capital leases, R300 would be used, as the system requires that a code be input.

Object coding rationale: "6299-Net Increase or Decrease to Other Liability Accounts" is used to record the net impact on other liabilities. At this point expenditures are incurred for the executory costs and the lease costs, therefore economic objects are affected. In this case "0525-Rental of computer equipment" and "1221-Voice communication equipment" are used.

	AMT($)	FRA	AUTH	OBJ
DR Interest Component on capital lease pymt	7,601.84	51713	(***)	3252
CR Interest Component on capital lease pymt	7,601.84	51713	F159	7099

FRA coding rationale: This transaction does not affect accruals only appropriations. However, the system requires that FRA codes be input. To ensure a nil effect on departmental FRAs, it would be necessary to debit and credit the same FRA code for the same amount.

Authority coding rationale: (***) In this example, it is assumed the lease payment and operating expense would be charged to the capital vote B14A, therefore the interest expense would be charged to the same vote. This is not considered to be a public debt charge. However, depending on the department, the following authority codes could be used: B11A - Program Vote, B12A Operating Vote, and A131 Spending of amounts equivalent to proceeds from disposal of surplus Crown assets. Since this transaction is required to affect an appropriation, only one side of the transaction will get charged. As a result it is necessary to use an F code on the other (credit) side of the transaction. In this case, "F159 - Other expenses not being charged to appropriations at the same time" is used.

Object coding rationale: The economic object "3252- Interest administration or service charges, and other penalty charges" would be used to record the interest expense. The credit entry would be to "7099 - Net Increase or Decrease in Other Transactions".

Scenario B - Department purchases leased equipment at the end of the lease term.

Please note that same terms and conditions apply in this Scenario as in Scenario A except that the Department purchases the leased equipment at the end of the lease term for $5,000. (The estimated useful life has been increased by 2 years)

Journal Entries

Journal entries 1 to 5 - see Scenario A above.

6) To record the purchase of the leased equipment at end of lease term for $5,000.

	AMT($)	FRA	AUTH	OBJ
DR Informatics Equipment	100,000	16122	F351	7099
DR Informatics Equipment	5,000	16122	(****)	1221
DR Accumulated Amortiz - Infor Equip (leased)	100,000	16722	F311	7061/7099
DR GST refundable advance account	350	13392	G111	8171
CR Informatics Equip-Capital Leases (asset)	100,000	16622	F351	7099
CR Accumulated Amortization - Equipment	100,000	16222	F311	7061/7099
CR Accounts Payable	5,350	21111	R300	6299

FRA coding rationale: Since the $5,000 is a component of the total cost of the equipment, it is capitalized. Upon expiration of the lease, the amount capitalized as leased equipment is fully amortized and taken off the books (note: at this point the lease obligation is fully discharged). Since the equipment has already been amortized for 5 years, the accumulated amortization must be recorded on the books. The remaining $5,000 will be amortized over the next two years. GST of $350 (7% on $5,000) is owed on the purchase.

Authority coding rationale: Only $5,000 will get charged to an appropriation since the $100,000 was already charged when the lease payments were made over the last 5 years.

(****) In this example, it is assumed the purchase would be charged to a capital vote- B14A. However, depending on the department, the following authority codes could be used: B11A - Program Vote, B12A Operating Vote, and A131 Spending of amounts equivalent to proceeds from disposal of surplus Crown assets. There is no affect on appropriations throughout the rest of the entry therefore the applicable F codes are used, as well as R300 for the accounts payable set up.

Object coding rationale: There is no affect on expenditures in this transaction except for the additional $5,000 spent on the Informatics equipment. To capture the accumulated amortization on the equipment 7061 or 7099 is used. Economic object 1221 reflects the $5,000 acquisition of the residual Informatics capital asset. "6299-Net Increase or Decrease to Other Liability Accounts" is used to establish the payable. To indicate the nil effect on the remainder of the transaction "7099-Net Increase or Decrease in Other Transactions.

Departmental Financial Statement Presentation and Disclosure Requirements

The gross amount of assets under capital leases and related accumulated amortization should be disclosed. Obligations related to leased assets should be shown separately from other financial obligations. Particulars of obligations related to leased assets, including interest rates and expiry dates, should be shown separately in the notes to the financial statements from other financial obligations. Significant restrictions imposed on the lessee as a result of the lease agreement should be disclosed.

Disclosure should be made of the future minimum lease payments in aggregate and for each of the five succeeding years. A separate deduction should be made from the aggregate figure for amounts included in the minimum lease payments representing executory costs and imputed interest. The resultant net amount would be the balance of the unpaid obligation.

The amount of amortization for leased property should be disclosed separately or as part of amortization and amortization expense for fixed assets. Disclosure should be made of methods and rates of amortization.

Interest expense related to lease obligations should be disclosed separately.

3.5.1.2 Assets Under Construction

Introduction

The cost of a constructed asset would include direct construction or development costs (such as materials and labour), and overhead costs directly attributable to the construction or development activity. PS 3150.12

Capitalization of costs ceases, however, when a tangible capital asset is ready for use. Determining when a tangible capital asset, or a portion thereof, is ready for productive use requires consideration of the circumstances in which it is to be operated. Normally it would be predetermined by reference to factors such as productive capacity, occupancy level, or the passage of time. PS 3150.17

Assets under construction also include those assets that have been acquired but require additional work to get them ready for use. See Scenario A.

Amortization

Assets under construction are not amortized while they are still being constructed. This is because the asset is not being used in program delivery. The amortization process starts when the asset's construction is complete and has begun being used by the department.

1. to which the asset can be used.

References

• PS 3150.12,.17,.36,.45
• TBAS 3.1 Capital Assets
• TBAS 1.2 Departmental and Agency Financial Statements

Scenario A - Department purchases a computer but work is still required to get it ready for use.

Department buys computer hardware for $200,000. The equipment is not functional until it has been installed properly and is ready for use. Until that time the equipment will not be amortized. The following costs are associated with getting the equipment ready for use.

• Freight $500
• Computer consultants to set up the hardware $35,000
• Departmental Staff salaries used to set up hardware $20,000
• Additional circuits required to modify the hardware to adapt to Departmental needs $5,000
• It is assumed that the department has a separate capital vote.

Journal Entries

1) Purchase of the computer hardware

	AMT($)	FRA	AUTH	OBJ
DR Other WIP - Computer Hardware	200,000	16319	B14A(*)	1226
DR GST Refundable Advance Account	14,000	13392	G111	8171
CR Accounts Payable	214,000	21111	R300	6299

FRA Coding Rationale: The asset is over the threshold $10,000 amount and must be capitalized. However, since the asset is not ready for use, the costs must be allocated to a work in progress (WIP) account. This is essential since the asset should not be amortized. At this point the Department is being charged GST on the computer, and must pay it to the vendor. However, as the Department will eventually recover this amount from Canada Customs and Revenue Agency (CCRA) they should record it as an asset in "13392 GST/HST Refundable advance accounts". Since the Department has not paid for the computer equipment, a payable must be recorded for the amount owing.

Note: if the department's system cannot accommodate this entry, the purchase of hardware may first be charged to operating expenses and then transferred to the work in process account. See Section 3.5.1 Capital Assets, Scenario C, journal entries 1 and 2 for an example of this type of entry.

Authority Coding Rationale: (*) In this example it is assumed this purchase would be charged to the capital vote. However, depending on the department's vote structure and the asset purchased, the following authority codes could be used: B11A - Program Vote or B12A Operating Vote. Since GST is not to be charged to a departmental appropriation, it is set up as an advance under a special authority, G111. Since Accounts Payable has no impact on the authority side, "R300 - All Other Assets and Liabilities" is used.

Object Coding Rationale: "1226 - Computer Equipment - Large/medium- mainframe, mini" would be used to reflect the purchase of this equipment. Since there is GST/HST payable, the GST must be reflected by using, "8171-Payment of GST on purchases". "6299-Net Increase or Decrease to Other Liability Accounts" is used to establish the accrual of the amount owing.

2) Departmental salaries are paid and a portion is allocated to the WIP account

	AMT($)	FRA	AUTH	OBJ
DR Salaries and wages Expense	100,000	51311	B11A/B12A	0101
CR Payroll Control Account 100,000	63DDD	0000	0000

FRA Coding Rationale: Salaries and wages for employees in the department are recorded as an operating expense and the amount is paid through the Payroll Control Account. The amount that pertains to the asset in question will get allocated to the Computer equipment WIP account accordingly (see below).

Authority Coding Rationale: Salaries can be charged to of the Department's capital, program or operating appropriation depending on the vote structure of the Department. Payroll Control account has no impact on appropriations and is therefore coded as 0000.

Object Coding Rationale: "0101- Civilian regular time - continuing employment" is used for salaries paid to full-time indeterminate employees. All RG interface Control Accounts are zero filled (0000), with the exception of I/S Control Accounts, at the object level.

	AMT($)	FRA	AUTH	OBJ
DR Other WIP - Computer Hardware	20,000	16319	B14A	3425
CR Salaries and wages Expense	20,000	51311	B11A/B12A	3717

FRA Coding Rationale: $20,000 of salaries and wages that relate directly to the computer hardware will get re-allocated from operating expenses to the computer equipment WIP account.

Authority Coding Rationale: The salaries and wages should be re-allocated from the program or operating vote to the capital vote.

Object Coding Rationale: Since the salaries are being reallocated to a WIP account within the same department "3425 - Reallocation of expenditures/costs within a department" is used for the debit side of the transaction and "3717 - Recoveries of expenditures/costs within a department" is used on the credit side of the transaction. Since both of these items relate to standard object 12 they will be netted against each other, therefore having a nil effect.

3) To record additional expenses related to the computer hardware

	AMT($)	FRA	AUTH	OBJ
DR Other WIP - Computer Hardware (Consulting)	35,000	16319	B14A(*)	0472
DR Other WIP - Computer Hardware (Freight)	500	16319	B14A(*)	0210
DR Other WIP - Computer Hardware (Circuits)	5,000	16319	B14A(*)	1229
DR GST refundable advance	2,485	13392	G111	8171
CR Accounts Payable	42,985	21111	R300	6299

FRA Coding Rationale: Once again the asset is still not ready for use, invoices has been received for consulting fees, additional circuits and freight so these amounts must be capitalized to the computer hardware WIP account. As well, a liability must be set up for the amount owing to the contractor. In this case, "21111 - Accounts Payable" is used.

Note: if the department's system cannot accommodate this entry, these costs may first be charged to operating expenses and then transferred to the work in process account. See Section 3.5.1 Capital Assets, Scenario C, journal entries 1 and 2 for an example of this type of entry.

Authority Coding Rationale: B14A(*) Consulting fees, freight and circuits that pertain to the computer is to be paid out of the Department's capital, program or operating appropriation depending the vote structure of the Department. Since Accounts Payable has no impact on the authority side, "R300 - All Other Assets and Liabilities" is used

Object Coding Rationale: Assuming that the freight charges are billed separately from the computer hardware purchase "0210 - Transportation of things not elsewhere specified" is used. "0472 - Information Technology consultants" is used for the consulting fees incurred by the department."1229 - Computer Equipment parts" is used for the circuits. "6299 - Net Increase or Decrease to Other Liability Accounts" is used to establish the accrual of the amount owing.

4) The computer is ready for use

	AMT($)	FRA	AUTH	OBJ
DR Computer Hardware	260,500	16122	F999	3425
CR Other WIP-Computer Hardware	260,500	16319	F999	3717

FRA Coding Rationale: Since the asset is now ready for use, it also now must start being amortized. This means that the balance in WIP must reallocated to the Computer Hardware (asset) account.

Authority Coding Rationale: This is strictly an accrual transaction, so there is no impact on the authority side. The charge to the appropriation was made in the previous entry. In this case, "F999 - Other F Codes" will be both debited and credited, so there will be no effect on the authorities.

Object Coding Rationale: Since this is a re-allocation from the WIP account to the asset account within the same department, "3425 - Reallocation of expenditures/costs within a department" is used for the debit side of the transaction and "3717 - Recoveries of expenditures/costs within a department" is used on the credit side of the transaction. Since both of these items relate to standard object 12 they will be netted against each other, therefore having a nil effect.

Departmental Financial Statement Presentation and Disclosure Requirements

The department's Statement of Financial Position should disclose the net book value of tangible capital assets not being amortized because they are under construction or development. PS 3150.45.

Introduction

Accounts payable are balances owed to trade creditors, sundry creditors and others for goods, services, loans, transfer payments etc. Payables arise because of the time lag between the requirement to record the obligation and the requirement to satisfy the obligation at a later date.

Particular attention must be paid to transactions occurring near the end of one accounting period and at the beginning of the next to ascertain that the goods received (the inventory) and the liability (accounts payable) for those goods both are recorded in the same period.

Accrued liabilities should be set up for estimated amounts for goods or services received but not recorded at the end of each month, for any material amounts. These should be subsequently reversed when definitive amounts are known, at which time an accounts payable would be set up, or at the beginning of the next month depending on a department's system.

Since Accounts Payable do not affect appropriations, the R300 authority code should always be used.

References

• PS 1500.41, 1500.43, 1800.25
• CICA 3860.43-.95 (for disclosure)

Scenario A

Supplies of $500 are purchased and received.

Journal Entries

1) To record purchase of supplies (assume purchase and receipt of goods at same time)

	AMT($)	FRA	AUTH	OBJ
DR Operating Expenses	500	51321	B11A/B12A	11XX
DR GST/HST Refundable Advance Account	35	13392	G111	8171
CR Accounts Payable	535	21111	R300	6299

FRA coding rationale: Since supplies were purchased and received in the period, operating expenses must be recorded. At this point the Department is being charged GST on the purchase of supplies, and must pay it. However, the Department will eventually recover this amount from Canada Customer and Revenue Agency (CCRA) and should record it as "13392 GST/HST Refundable advance accounts". The cost of the operating expenses plus 7% GST would be accrued as an accounts payable in the period since expenses were incurred but not yet paid.

Authority coding rationale: Since this is a legitimate charge against an operating appropriation, it would be recorded against either B11A or B12A depending on whether the department has a program vote (B11A) or an operating vote (B12A). Since GST is not to be charged to a departmental appropriation, authority G111 is used. Accounts Payable does not affect the appropriations, thus "R300 -Total amounts of all other assets and liabilities" would be used.

Object coding rationale: Depending on the actual supplies purchased, the appropriate economic object in sub-category 11 should be used. "6299-Net Increase or Decrease to Other Liability Accounts" is used to record the establishment an accounts payable. Since there has been an acquisition of goods on which GST/HST is payable, the related GST must be reflected by using, "8171 - Payment of GST on purchases"

2) Department requisitions Receiver General (RG) for payment.

	AMT($)	FRA	AUTH	OBJ
DR Accounts Payable	535	21111	R300	6299
CR Payments in Transit	535	11134	R300	5299

FRA coding rationale: Since the payment is being requisitioned, the payable is reversed and the Payment in Transit account would reflect these payments requisitioned but not yet paid. The control account should not be charged until PWGSC has confirmed that the payment has been made.

Authority coding rationale: Neither of the accounts impacts appropriations so both sides of the entry must therefore be coded to R300-Total amounts of all other assets and liabilities.

Object coding rationale: "6299-Net Increase or Decrease to Other Liability Accounts" are used to indicate a settlement of accounts payable. To record the net impact on Cash Accounts, 5299 would be used.

3) The Receiver General (RG) notifies the department that the payment is made at which time the Department will make the following entry:

	AMT($)	FRA	AUTH	OBJ
DR Payments in Transit	535	11134	R300	5299
CR Cash Payment Control Account	535	61DDD	0000	0000

FRA coding rationale: Once the payment is made, Payments in Transit is reversed and the Cash Payment Control account is credited to reflect that the RG has made the payment. The last three digits of the control account will be the department number.

Authority coding rationale: Neither of these accounts affect appropriations. The authority code is 0000 for the "Cash Payment Control Account" and "R300-All other assets and liabilities" for Payments in Transit.

Object coding rationale: To record the net impact on Cash Accounts, 5299 would be used. All RG interface Control Accounts are zero filled (0000), with the exception of I/S Control Accounts, at the object level.

Departmental Financial Statement Presentation and Disclosure Requirements

Accounts payable are to be classified as a liability in the Statement of Financial Position.

Introduction

Deferred revenues or unearned revenues are monies received in advance from parties external to government for which a government entity will provide specified goods or services in the near future. Deferred revenues related to unspecified goods and services are recorded in specified purpose accounts (see Specified Purpose Accounts section of this manual).

The unearned revenues may arise from the following types of sales of goods and services to outside parties:

• Rights and privileges;
• Lease and Use of Public Property;
• Services of a regulatory nature;
• Services of a non-regulatory nature;
• Sales of goods and information products;
• Other fees and charges; etc.

For government accounting purposes, the revenue recognition principle dictates that revenue is recorded in the period it is realized. When revenues are received prior to being realized, the amount applicable to future periods is deferred to those future periods.

The amount unearned or deferred (received in advance of realisation) is considered a liability because it represents an obligation arising from a past transaction to provide a good or service in the future.

As the goods are provided or the services are rendered the government entity will realize and recognize its revenue in the appropriate accounting period.

The following transactions deal with the " normal day to day situations" with respect to external non-tax revenues. More complex transactions that deal with specified purpose accounts can be found in the section entitled "Specified Purpose Accounts" of the manual.

References

• CICA 1510.05, 1510.07, 3400
• PS 1500.34, 1800.25, 1800.40, 3100.07-.12, 3410.47-.48

Scenario A - Non Respendable Revenue

The Department receives $100 in year 1 for services that will not be performed until year 2.

Journal Entries

1) To record the fee of $100 collected in Year 1.

	AMT($)	FRA	AUTH	OBJ
DR Cash in the hands of the Departments awaiting deposit to the RG	100	11125	R300	5299
CR Deferred revenues	100	21510	D/E(*)	45xx

FRA Rationale: The Department must recognize the monies received in advance from the outside party in the appropriate cash account. Since the fees relate to revenue that will be realized in a subsequent period, the Department must recognize this fee as other deferred revenue (a liability account).

Authority Rationale: There is no impact on the authority side for cash. Therefore R300 would be used. D/E(*) Depending on which type of revenue is considered in the scenario, the Department would choose the appropriate code from the following chart.

	Statutory Non-Tax Revenue	Non Statutory Non-Tax Revenue
Non-Respendable Revenue	D221 to D223	E221 to E223

Object Rationale: To record the net impact on Cash Accounts, 5299 would be used. Economic objects are recorded on a cash receipt basis for deferred revenues. Depending on the type of revenue received, the appropriate economic object within the 45xx category would be used.

2) The Department performs the required service or provides the required goods for the outside party

	AMT($)	FRA	AUTH	OBJ
DR Deferred revenues	100	21510	D/E(*)	4888
CR Non tax revenue	100	4231x	D/E(*)	4888

FRA Rationale: As revenue is earned by performing the required service or providing the good, the appropriate amount is brought into revenue. At this point it is permissible for the Department to recognize revenue. At the same time the equivalent amount will be removed from the liability account for the deferred revenue (21510).

Authority Rationale: This is strictly an accrual transaction. Authorities are not affected here at all. However, the system requires that authority codes be input. In order to achieve a nil effect on departmental authorities one option would be to debit and credit the same authority for the same amount. D/E(*) Depending on which type of revenue is considered in the Scenario , the department would choose the appropriate code from the following chart. Note: if E221 was the applicable code then it would be used on both the credit and debit side of the entry.

	Statutory Non-Tax Revenue	Non Statutory Non-Tax Revenue
Non-Respendable Revenue	D221 to D223	E221 to E223

Another option would be use R300 for Other Deferred revenues and F259 for non- tax revenue. Both the R300 and F259 have no effect on appropriations thereby producing the same results as the above option.

Object Rationale: "4888 - reallocation from non budgetary funds and accounts" must be used here since this is a reallocation of deferred revenue to non-tax revenue. There is no effect on the economic object at this point. The economic object captured the revenue in the previous journal entry.

Scenario B - Respendable Revenue

The Department receives $100 in year 1 for services that will not be performed until year 2.

Journal Entries

1) To record the fee of $100 collected in Year 1 and record revenue credited to the vote (done at the same time).

1a) To record the fee of $100 collected in Year 1

	AMT($)	FRA	AUTH	OBJ
DR Cash in the hands of the Departments awaiting deposit to the RG	100	11125	R300	5299
CR Deferred revenues	100	21510	D/E(*)	45xx

FRA Rationale: The Department must recognize the monies received in advance from the outside party in the appropriate cash account. Since the fees relate to revenue that will be realized in a subsequent period, the Department must recognize this fee as deferred revenue (a liability account).

Authority Rationale: There is no impact on the authority side for cash, therefore R300 would be used. D/E(*) Depending on which type of revenue is considered in the Scenario , the Department would choose the appropriate code from the following chart.

	Statutory Non-Tax Revenue	Non Statutory Non-Tax Revenue
Respendable Revenue	D211 to D213	E211 to E213

Object Rationale: To record the net impact on Cash Accounts, 5299 would be used. Economic objects are recorded on a cash receipt basis for deferred revenues. Depending on the type of revenue received, the appropriate economic object within the 45xx category would be used.

1b) Since the cash is received by the Department, and the Department has the authority to respend it, the revenue is credited to the vote

	AMT($)	FRA	AUTH	OBJ
DR Deferred revenues	100	21510	D218/E218	7099
CR Deferred revenues	100	21510	B13A	7099

FRA rationale: This is strictly an authority transaction. To ensure there is no effect on FRAs, the same FRA is debited and credited for the same amount.

Authority rationale: When a Department has authority to re-spend revenue, it can only be re-spent when the revenue is actually received (i.e. on a cash basis). Only the revenue portion of the transaction is affected. In this case, $100. To reflect this, the cash received is credited to "B13A Revenues credited to the vote". The debit will be to either a D218 (statutory) or E218 (non-statutory) depending on the situation It is important that either D218 and E218 be used in this transaction and that the authority code used to set up the revenue transaction not be used. Otherwise, the revenue charging authority information would be lost.

Object rationale: This is strictly an authority transaction. To ensure there is no effect on objects, the same object is debited and credited for the same amount. "7099- Net Increase or Decrease in Other Transactions" is used here since this will have a nil effect on objects

2) The Department performs the required service or provides the required goods for the outside party

	AMT($)	FRA	AUTH	OBJ
DR Deferred revenues	100	21510	D/E(*)	4888
CR Non tax revenue	100	4231x	D/E(*)	4888

FRA Rationale: As revenue is earned by performing the required service or providing the good, the appropriate amount is brought into revenue. At this point it is permissible for the Department to recognize revenue. At the same time the equivalent amount will be removed from the liability account for the deferred revenue (21510).

Authority Rationale: This is strictly an accrual transaction. Authorities are not affected here at all. However, the system requires that authority codes be input. In order to achieve a nil effect on departmental authorities one option would be to debit and credit the same authority for the same amount. D/E(*) Depending on which type of revenue is considered in the Scenario , the department would choose the appropriate code from the following chart. Note: if D211 was the applicable code then it would be used on both the credit and debit side of the entry.

	Statutory Non-Tax Revenue	Non Statutory Non-Tax Revenue
Respendable Revenue	D211 to D213	E211 to E213

Another option would be use R300 for Other Deferred revenues and F259 for non- tax revenue. Both the R300 and F259 have no effect on appropriations thereby producing the same results as the above option.

Object Rationale: "4888 - reallocation from non budgetary funds and accounts" must be used here since this is a reallocation of deferred revenue to non-tax revenue. There is no effect on the economic object at this point. The economic object has captured the revenue in the previous journal entry.

Scenario C - Refund

The outside party requests a refund prior to the Department performing the required service or providing the required goods.

Journal Entries

1) Same as Scenario A 1)

2) The outside party requests a refund prior to the Department performing the required service or providing the required goods.

	AMT($)	FRA	AUTH	OBJ
DR Deferred revenues	100	21510	D/E(*)	45xx
CR Accounts Payable	100	21111	R300	6299

FRA Rationale: The Department proceeds with the refund of money received in advance from the appropriate cash account. Since the revenue was never realized the Department must reduce the Other Deferred Revenue and set up a payable.

Authority Rationale: The authority code for the deferred revenue would be debited by the equivalent amount since the service or good was not provided. D/E(*) Depending on which type of revenue is considered in the Scenario , the department would choose the appropriate code from the following chart.

	Statutory Non-Tax Revenue	Non Statutory Non-Tax Revenue
Respendable Revenue	D211 to D213	E211 to E213
Non-Respendable Revenue	D221 to D223	E221 to E223

Accounts payables do not affect appropriations, the code R300 would be used.

Object Rationale: The same economic object 45xx would be reversed since the payment was refunded. "6299-Net Increase or Decrease to Other Liability Accounts" is used to establish an accounts payable".

Please note: If the transaction deals with respendable revenue it would necessary to reverse the entry that is described in Scenario B, Journal entry 1b) of this section as well.

Departmental Financial Statement Presentation and Disclosure Requirements

Deferred Revenue should be recorded under the liability section of the Department's Statement of Financial Position.

Introduction

A loan guarantee is a promise to pay all or a part of the principal and/or interest on a debt obligation in the event of default by the borrower.

Contingent Liability

A loan guarantee is a contingent liability of the government. The generally accepted accounting principles for contingent liabilities are, therefore, appropriate for loan guarantees. See the Contingencies Section of the Manual.

To the extent that the future event is likely to occur or fail to occur, and a reasonable estimate of the loss can be made, an estimated liability is accrued and an expense recorded on the government consolidated financial statements and NOT on the departmental financial statements unless so advised by TBS.

Departments will only set up a liability (payable) and a corresponding expense once the criteria of the PAYE policy has been met.

Departments will provide information on loan guarantees to Receiver General in accordance with the Public Accounts Instruction Manual (PAIM).

Provision for Losses

For the time being, TBS will be recording the provision for losses on loan guarantees based on information provided by departments to the Receiver General. Please see FY 2001-02 FIS Transition Period -Transition Protocol and Accounting Requirements document issued on November 15, 2000.

Payment of Loan Guarantees

If the Department has made payments under the terms of a guarantee and has recourse to recover amounts paid from the borrower, such amounts should be accounted for in accordance with LOANS RECEIVABLE Section PS 3050. (PS 3310.21). See Loans Receivable Section of this manual.

References

• PS 3310
• Contingencies Section of the FIS Accounting Manual
• TBAS 1.2 Departmental and Agency Financial Statements
• PS 1500
• Loans Receivable Section of the FIS Accounting Manual

FY 2001-02 FIS Transition Period -Transition Protocol and Accounting Requirements document issued on November 15, 2000

Scenario A - Department provides loan guarantee.

A Department has provided an outside organization for the purpose of development assistance to foreign countries with a loan guarantee in year 1. The outside organization defaults on the loan in year 2. The amount of the loan is $100,000.

Journal Entries

1) Year 1 - Department provides Loan Guarantee

No journal entry is required.

The Department will only disclose by way of a note to the departmental financial statement that they have contingencies in the form of loan guarantees. (See TBAS 3.6 Contingencies)

2a) Year 2 - Borrower defaults and Department pays out loan guarantee to lender

	AMT($)	FRA	AUTH	OBJ
DR Expenses related to loan guarantees	100,000	51727	A/B(*)	2304
CR Accounts Payable	100,000	21111	R300	6299

(See section on Accounts Payable for the entries required for settlement of accounts payable)

FRA Coding Rationale: When the borrower defaults on the loan the department is required to make the payment to the lender and an expense is incurred. The Department must set up a payable for the amount owing. It should be noted, that due to system limitations and requirements to charge an appropriation the debit is made to Expenses related to loan guarantees instead of a receivable. As a result, the Expenses related to loan guarantee is subsequently removed from the books by a credit in journal entry 3) see below.

Authority Coding Rationale: A/B(*) Depending on the Department's vote structure the following the payment can be charged either B11A(*) - Program Vote, B12A - Operating Vote. If a department has a specific statutory budgetary appropriation for this purpose, it may use this appropriation (i.e. Indian and Northern Affairs A852). Since accounts payable has no impact on appropriations, R300 is used.

Object Rationale: "6299- Net Increase or Decrease to Other Liability accounts" should be used to indicate the establishment of the accrued payable. "2304- Other payments for development assistance to foreign countries" would be used in this case.

2b) Year 2 - Set up a receivable to record money owed to the corporation by the borrower

	AMT($)	FRA	AUTH	OBJ
DR Loans/advances on expired loan guarantees	100,000	13371	R300	5010
CR Expenses related to loan guarantees	100,000	51727	F154	2304

FRA Coding Rationale: Since the Department has made payments under the terms of a guarantee and has recourse to recover amounts paid from the borrower, such amounts should be accounted for as a loans receivable. Normally, the credit would be an allowance for doubtful loans. However, since departments do not record an allowance (See Loans Receivable section of manual), the credit will be to expenses related to loan guarantees.

Authority Coding Rationale: There is no impact on appropriations at this stage. R300 is used to reflect the receivable and "F154-Expenses related to loan guarantees" is used for the other side of the transaction.

Object Rationale: "5010 - Acquisition of loans with cash" should be used for establishing the loan receivable. The economic object debited in entry 2a) would be credited in this entry, in this case 2304.

2c) Year 2 - Record an allowance to reflect impairment of the loan (assume 50%)

	AMT($)	FRA	AUTH	OBJ
DR Bad debt expense	50,000	51732	F122/F119	3462
CR Allowance for doubtful loans	50,000	13379	F412/F119	7021

FRA Coding Rationale: The fact that the borrower has already defaulted on the loan once raises questions regarding the ability of the department to collect on the loan. Hence an allowance for doubtful loans is recorded. The department is able to record an allowance as the disbursement, which established the loan receivable, was charged to a budgetary appropriation.

Authority Coding Rationale: There is no impact on appropriations. "F122-Allowances set up for bad debt expenses" and "F412-Changes to allowances for doubtful accounts" are used. Alternatively, "F119-Expenditures previously charged to appropriations - other amounts to be charged to program expenses" could be used on both sides of the entry.

Object Rationale: There is no impact on economic objects. Bad debt expense is a non-cash expense, therefore it falls under standard object 12 and sub-category 34, "3462 -Allowance for bad debts". For a non-cash item related to assets and liabilities, sub category 70 is used, "7021 - Allowance for valuation of financial claims".

3) Year 3 - The department determines that the loan should be written-off

	AMT($)	FRA	AUTH	OBJ
DR Bad debt expense	50,000	51732	F122/F119	3462
DR Allowance for doubtful loans	50,000	13379	F412/F119	7021
CR Loans/advances on expired loan guarantees	100,000	13371	R300	5399

FRA Coding Rationale: The allowance for $50,000 established in entry 2c is reversed and an additional expense of $50,000 is recorded for the remaining balance of the loan.

Authority Coding Rationale: There is no impact on appropriations. "F122-Allowances set up for bad debt expense" and "F412-Changes to allowances for doubtful accounts" would be used. Alternatively, "F119-Expenditures previously charged to appropriations - other amounts to be charged to program expenses" could be for these two lines. R300 is used for the other side of the transaction.

Object Rationale: Since there is a change in receivables "5399-Net change to accounts receivable" would be used. 7021 is used for the allowance for doubtful accounts while 3462 is used for the bad debt expense.

Departmental Financial Statement and Presentation Disclosure Requirements

Because loan guarantees are contingent liabilities, departments will include only high-level note disclosure. See TBAS 3.6 Contingencies.

Introduction

Future site restoration costs encompass costs for dismantling, abandoning and cleaning up a property. These costs may be incurred as a result of a contract or because the government has established a policy to restore a site. When such costs can be reasonably estimated, they should be accrued (net of expected recoveries), as part of the capital asset and amortized over its useful life. The provision for future site restoration costs is to be recorded as a liability until the future site restoration takes place. Where future site restoration costs are expected to be significant but cannot be reasonably estimated, a contingent liability should be reported.

Costs to capitalized exclude costs related to environmental liabilities due to contaminated sites and solid waste landfills. Accounting and disclosure requirements for these costs will be communicated once the Policy on Accounting for Costs and Liabilities Related to Contaminated Sites is finalized.

References

• TBAS 3.1 Capital Assets
• CICA 3060.39

Scenario A

A department constructs an observation tower on leased land, with the condition that it restores the site to its original condition at the end of the lease term. The tower cost $100,000 to construct and it is estimated to cost $10,000 to dismantle and remove the tower at the end of the ten-year term.

1) To record cost of tower and future site restoration costs

	AMT($)	FRA	AUTH	OBJ
DR Works and infrastructure	100,000	16113	B14A(*)	1339
DR Works and infrastructure	10,000	16113	F129	7099
DR GST refundable advance account	7,000	13392	G111	8171
CR Future site restoration costs	10,000	24112	R300	6299
CR Accounts Payable	107,000	21111	R300	6299

FRA Coding Rationale: The $10,000 in future site restoration costs is capitalized as part of the asset balance. The $10,000 credit is to a liability account that will remain until the restoration work is performed in ten years time.

Authority Coding Rationale: (*) In this example it is assumed the cost of the observation tower would be charged to the capital vote. However, depending on the department and the asset involved, the following authority codes could be used: B11A- Program vote, B12A -Operating vote, or A131 Spending of amounts equivalent to proceeds from disposal of surplus Crown assets. As the costs associated with the future site restoration will only be incurred in the future, "F129 -Other amounts to be charged later" is used. Since GST is not to be charged to a departmental appropriation, it is set up as an advance under a special authority, G111. There is no impact on authorities for the accounts payable and future site restoration costs liability hence R300 - All other assets and liabilities" is used.

Object Rationale: "1339- Other engineering works" is used to record the observation tower. The recording of the future site restoration costs would have no impact economic objects as these are recorded on an expenditure basis; "7099- Net increase or decrease in other transactions" is used. Since there is GST/HST payable, the GST is reflected by using "8171 - Payment of GST on purchases". "6299 - Net increase or decrease to other liability accounts" is used for the two liability accounts.

2) Record amortization of the observation tower

	AMT($)	FRA	AUTH	OBJ
DR Amortization expense	11,000	51413	F111	3451
CR Accumulated amortization	11,000	16213	F311	7061/7099

FRA Coding Rationale: Using straight-line amortization of 10 years, the cost of the asset and the future site restoration is allocated over the life of the asset (110,000/10 years).

Authority Coding Rationale: Expenditures for the acquisition were charged to an appropriation in the previous journal entry, therefore the appropriations are not affected in this journal entry. To assist with departmental reconciliation, F codes are used for these non-appropriated amounts. "F111- Expenditures previously charged to appropriations/Amortization expenses for capital assets" is used for amortization expense and "F311-Non-appropriated amounts added to or deducted from asset balances/ Increases (decreases) to accumulated amortization of capital assets" is used for accumulated amortization.

Object Coding Rationale: As these are non-cash (non-expenditure) items, they have no effect on economic objects." 7061-Accumulated amortization on capital assets" is used to capture accumulated amortization. Alternatively, "7099-Net increase or decrease in other transactions" may also be used. "3451-Amortization expense for capital assets" is used to capture amortization expense.

3) Record the actual restoration costs: Ten years have passed, the demolition of the tower and clean-up costs amount to $12,000.

	AMT($)	FRA	AUTH	OBJ
DR Future site restoration costs	10,000	24112	B11A/B12A	0819
DR Other miscellaneous expenses	2,000	51729	B11A/B12A	0819
CR Accounts Payable	12,000	21111	R300	6299

FRA Coding Rationale: The liability of $10,000 that was recorded in entry 1 to record the future site restoration costs is credited. The additional costs of $2,000 would be recorded as an expense of the current year.

Authority Coding Rationale: The restoration costs would be charged to the operating or program vote, as appropriate. Accounts payable has no impact on authorities hence "R300 - All other assets and liabilities" is used

Object Coding Rationale: The economic object used for the restoration costs is "0819 - Non-professional personal service contracts not elsewhere specified". "6299 - Net increase or decrease to other liability accounts" is used for accounts payable.

Departmental Financial Statement and Presentation Disclosure Requirements

Where future site restoration costs are expected to be significant but cannot be reasonably estimated, a contingent liability should be reported. See section 9.4 Contingencies and TBAS 3.6 Contingencies for guidance.

Introduction

This section addresses non-tax revenues only. (Tax revenues are not addressed in this manual, as they only apply to CCRA.). Non-tax revenue transactions can be external or internal to the Government and can be respendable or non-respendable. Departments require specific authority to be able to respend revenues, either through a voted appropriation or in a statutory appropriation, or specific legislation.

Revenue is defined as the inflow of cash, receivables or other consideration arising in the course of the ordinary activities of the government entity, normally from the sale of goods, the rendering of services, and the earning of interest, royalties and dividends. It does not include borrowings, such as debenture proceeds, or transfers from other funds or include repayments of loans, receivables, advances, etc.

Deferred Revenue is defined as the inflow of cash, receivables or other consideration arising in the course of the ordinary activities of the government entity BEFORE the transactions or events occur that give rise to the earning of the revenues. (See section on Deferred Revenues) Only after the government meets the obligation for which it collected those funds can the transactions be recognized as actual revenue.

Revenue Recognition

Revenues should be accounted for in the period in which the transactions or events giving rise to the revenues occurred. For example, user fees are recorded in the period when the goods or services are provided, sales when the sales are made and revenue from cost sharing arrangements when the costs are incurred to earn that revenue. Revenues should be recognized based on the revenue recognition criteria set out in the CICA handbook [Section 3400.6 to 3400.15] and for administrative simplicity, they are normally recorded at the time the invoice is issued. However, care must be exercised when goods or services are provided near the end of a particular accounting period since revenues must be recognized in the period even though an invoice may not have been issued. This can be accomplished through setting up an accrued or accounts receivable. Items not practically measurable until cash is received would be accounted for at that time. (PS 1500.83)

Examples of Non-Tax Revenues include:

• Sales of goods and services to parties outside or within the government
• Gain on sales of assets (both capital and non-capital)
• Interest and penalties earned on tax and non-tax revenue
• Revenue on consolidated and non-consolidated Specified Purpose Accounts
• Revenue from Cost Sharing Arrangements (other)
• Return on Investments
• Consolidated Crown Corporation revenue
• Other non-tax revenue

References

• PSA 1500.83-1500.87, 1800.37-1800.40
• CICA Handbook Sections 1000.37, 3400

Scenario A1 - External Transactions - Non respendable

The department sells information products to an outside party for $500. (Assumption: Sale takes place in Ontario. See section on Sales Tax for rules on sale tax with respect to sales in other provinces.)

Journal Entries

1) Department has delivered information products to an outside party for $500

	AMT($)	FRA	AUTH	OBJ
DR Accounts receivable	575	11221	R300	5399
CR GST payable	35	21134	R300	6299
CR PST payable	40	21151	R300	6299
CR Sales of goods and information products	500	42315	D/E(*)	4546

FRA Coding rationale: At this point the Department should recognize the revenue since the amount is known and the risks and rewards of ownership have been transferred to the buyer and the seller has completed all significant acts. Once the goods have been provided, the revenue should be recorded in the Department's books, as well as the relevant GST and PST that is payable on the revenue. Assuming this transaction takes place in Ontario, the PST payable is calculated as 8% of the sale price and is a payable to the Ontario Government in accordance with the applicable provincial government requirements for reporting and remitting provincial sales taxes. The GST payable is calculated as 7% of the sales price and is payable to Canada Customs and Revenue Agency. A receivable must be set up to record the amount to be received (which includes the GST and PST) by the outside party. Where an invoice has not been issued, an accrued receivable for an estimated amount should be set up using FRA 11223 and ignoring the GST and PST payable. This accrual can be reversed in the next period before the invoice is issued.

Authority code rationale: Since there are no impacts on the authorities for payables and receivables "R300- All other assets and liabilities" is used. D/E(*) With respect to revenue, depending on the nature of the revenue any of the following applicable codes could be used:

	Statutory Non-Tax Revenue	Non Statutory Non-Tax Revenue
Non-Respendable Revenue	D221 to D223	E221 to E223

Please note that these D and E codes capture the relevant revenue charging authority. D is used for those which are statutory whereas E captures those which are non-statutory. These do not affect appropriations, and no further entries for authorities are required when the cash is received from the customer.

Object coding rationale: "To record the GST Payable and PST payable "6299-Net Increase or Decrease to Other Liability Accounts" would be used. "5399 - Net Change to Accounts Receivable" is used to establish an accounts receivable. At this point the revenue is earned, therefore the object is affected. "4546-Sales of information products" would be used in this particular Scenario. However, depending on the nature of the good or service provided, the appropriate non-tax revenue object (45xx or 48xx) would be used.

Scenario A 2 - Internal Transactions - Non-respendable

There is no conceptual difference between transactions with external parties and those with other government departments but there are procedural differences. The major difference is that, for sales of goods and services, the billing department (creditor) does not have to wait for payment by the invoiced department (debtor). Instead, the creditor is deemed to have been paid when a transaction is processed by the Interdepartmental Settlement functionality of the Standard Payment System (SPS/IS). The Receiver General Manual should be consulted for more information on the Interdepartmental Settlement process.

For the purposes of the accounting transactions, there is no requirement for the creditor department (the selling department) to affect accounts receivable with the new FIS Interdepartmental Settlement (IS) process, and to separate the billing process from the settlement process for their revenue transactions. However, for the following reasons it may be advantageous to use the Accounts Receivable functionality of your financial system, especially if there are multiple potential sources of IS initiation, for example, more than one billing or invoicing system:

• Single point for the processing of transactions to and from SPS/IS,
• Centralized record of transactions per customer,
• More accurately reflects cross-year transactions (revenue earned in one fiscal year, IS initiation in the following fiscal year)

May facilitate reconciliation with the IS Control Accounts.

Journal Entries

1) Department has sold goods to another department for $500

	AMT($)	FRA	AUTH	OBJ
DR Other Receivables from OGD	500	11242	R300	5399
CR Sales of goods and information products	500	42315	D/E(*)	4546

	AMT($)	FRA	AUTH	OBJ
DR IS Debit Control Accounts	500	64DDD(**)	0000	9DDD(***)
CR Other Receivables from OGD	500	11242	R300	5399

	AMT($)	FRA	AUTH	OBJ
DR IS in Transit to RG	500	11245	R300	5299
CR Sales of goods and information products	500	42315	D/E(*)	4546

	AMT($)	FRA	AUTH	OBJ
DR IS Debit Control Accounts	500	64DDD(**)	0000	9DDD(***)
CR IS in Transit to RG	500	11245	R300	5299

FRA Coding rationale: At this point the Department should recognize the revenue since the amount is known and the risks and rewards of ownership have transferred to the buyer as well the seller has completed all significant acts. The Department is deemed to have been paid on successful processing of the transaction through SPS/IS; the IS Debit Control Account is used on receipt of the return file from SPS/IS. (Departments are not obliged to use the "In Transit" accounts. The alternative is to affect the Control Account on initiation of the transaction to the Receiver General system and adjusting for any rejected items after receipt of the appropriate return file.)

Authority code rationale: D/E(*) See Scenario A1, Journal Entry 1, Authority Code Rationale. Since there is no impact on authorities with respect to Transit accounts R300 is used, All RG Interface Control Accounts are zero-filled.

Object coding rationale: "5399-Net Change to Accounts Receivable" is used to establish an interdepartmental account receivable. To record the net impact on Cash Accounts, 5299 would be used. "4546-Sales of information products" should be used in this particular Scenario. But depending on the nature of the good or service sold the appropriate non-tax revenue object in sub-categories 45, 46, or 48 would be used. 9DDD is used for interdepartmental settlements.

Scenario B1 - External Transactions - Respendable

The department sells information products to an outside party for $500. (Assumption: Sale takes place in Ontario. See section on Sales Tax for rules on sales tax with respect to sales in other provinces.)

Journal Entries

1) Department has delivered information products to an outside party for $500

	AMT($)	FRA	AUTH	OBJ
DR Accounts receivable	575	11221	R300	5399
PST payable	40	21151	R300	6299
GST payable	35	21134	R300	6299
CR Sales of goods and information products	500	42315	D/E(*)	4546

FRA Coding rationale: At this point the Department should recognize the revenue since the amount is known and the risks and rewards of ownership have transferred to the buyer as well the seller has completed all significant acts. Once the goods have been provided, the revenue should be recorded in the Department's books, as well as the relevant GST and PST that is payable on the revenue. Assuming this transaction takes place in Ontario, the PST payable is calculated as 8% of the sale price and is a payable to the Ontario Government in accordance with the applicable provincial government requirements for reporting and remitting provincial sales taxes. The GST payable is calculated as 7% of the sales price and is payable to Canada Customs and Revenue Agency. A receivable must be set up to record the amount to be received (which includes the GST and PST) by the outside party. Where an invoice has not been issued, an accrued receivable for an estimated amount should be set up using FRA 11223, but ignoring the GST and PST payable.

Authority code rationale: Since there are no impacts on the authorities for payables and receivables "R300- All other assets and liabilities" is used. D/E(*) With respect to revenue, depending on the nature of the revenue any of the following applicable codes could be used:

	Statutory Non-Tax Revenue	Non Statutory Non-Tax Revenue
Respendable Revenue	D211 to D213	E211 to E213

Please note that these D and E codes capture the relevant revenue charging authority. D is used for those which are statutory whereas E captures those which are non-statutory. These do not affect appropriations at this stage, but further entries for authorities are required when the settlement is received from the customer.

Object coding rationale: To establish the PST and GST payable "6299-Net Increase or Decrease to Other Liability Accounts" would be used. "5399 - Net Change to Accounts Receivable" is used to establish an accounts receivable. At this point the revenue is earned, therefore the object is affected. "4546-Sales of information products" would be used in this particular Scenario , as this amount is respendable revenue that is included in standard object 13. However, on the nature of the good or service provided, the appropriate non-tax revenue object in sub-category 35 would be used.

2) Subsequently, the invoice is paid in full and revenue is credited to the vote (Department has authority to respend)

	AMT($)	FRA	AUTH	OBJ
DR Cash in Hands of Depts (awaiting deposit to RG)	575	11125	R300	5299
CR Accounts receivable	575	11221	R300	5399

FRA coding rationale: At this point the outside party has paid the department thereby reversing the accounts receivable and increasing the Department's "Cash in hands of Depts (awaiting deposit to RG)" holdings.

Authority coding rationale: Since there is no effect on appropriations with respect to the settlement of the accounts receivable, R300 is used.

Object coding rationale: To record the net impact on Cash Accounts, 5299 would be used. To indicate the net impact on accounts receivable" 5399-Net Change to Accounts Receivable" is used.

	AMT($)	FRA	AUTH	OBJ
DR Sales of goods and information products	500	42315	D218/E218	7099
CR Sales of goods and information products	500	42315	B13A	7099

FRA rationale: This transaction is strictly recorded for authority purposes only. To ensure there is no effect on FRAs, the same FRA is debited and credited for the same amount.

Authority rationale: When a Department has authority to re-spend revenue, it can only be respent when the revenue is actually received (i.e. on a cash basis). Only the revenue portion of the transaction is affected-in this case, $500. To reflect this, the cash received is credited to "B13A Revenues credited to the vote". The debit will be to either a D218 (statutory) or E218 (non-statutory) depending on where the original sale was recorded. It is important that either D218 and E218 be used in this transaction and that the authority code used to set up the revenue transaction not be used. Otherwise, information on the revenue charging authorities would be lost.

Object rationale: This is strictly an authority transaction. To ensure there is no effect on objects, the same object, "7099- Net Increase or Decrease in Other Transactions", is debited and credited for the same amount so it will have a nil effect on objects.

Scenario B2 - Internal Transactions - Respendable

As with transactions with external parties, the only differences between the entries for respendable revenue and those for non-respendable revenue are the authority code used on the recognition of Revenue and the requirement to affect the authority for Revenue Credited to the Vote.

The authority code rationale in Journal Entry 1 in Scenario B1 applies to the entry to recognize revenue used in the first journal entry of Scenario A2, regardless of whether Accounts Receivable is used or not.

The same transaction as Journal Entry 2b of Scenario B1 must be recorded whenever the Department considers itself to have been "paid".

Scenario C - Recognition of Gains on Sales of Assets

See Tangible Capital Asset Section

Scenario D - Interest Revenue on Overdue Receivables

An outside party is overdue in paying their trade receivables for goods sold to them by the Department. The Department is owed $50 in interest on these overdue accounts receivable.

Journal Entries

1) Record interest on non-tax revenue

	AMT($)	FRA	AUTH	OBJ
DR Accounts receivable non-tax revenue	50	11221	R300	5399
CR Interest on overdue accounts receivable	50	42541	E500	4832

FRA coding rationale: Since the amount of revenue is measurable and ultimate collection is reasonably assured, the department will recognize $50 in interest revenue on overdue accounts receivable. Since the amount is yet to be received from the outside party, an accounts receivable is set up. If the department wants to separate these receivables from the regular receivables, FRA 11223 is available for this purpose.

Authority coding rationale: There is no impact on authorities with respect to receivables, R300 is used. "E500 - All other non-tax revenue" would be used in this Scenario since there is no other specific authority to capture this information. It should be noted that this authority is credited on an accrual basis and not when the cash is received.

Object coding rationale: 5399 is used to establish an accounts receivable. "4832-Interest on overdue accounts receivable" is used to indicate that the revenue has been earned. If the original revenue is respendable, object 3593 should be used instead of 4832.

Departmental Financial Statement Presentation and Disclosure Requirements

Revenues are to be recorded by program and business line on the Department's Statement of Operations. The amounts of individual items that make up the total non-tax revenue of the Department are to be captured in the Schedule of Non-tax Revenues.

Introduction

This section applies to the receipt of physical assets through gifts, bequests and donations. This section also applies to the receipt of financial assets through gifts, bequests and donations that do not have a specified purpose. Gifts, bequests and donations of financial assets that are received for a specified purpose should be accounted for as a specified purpose account (see section 9.3).

Authorities Perspective:

Any amount received as a gift to the Crown without any condition or requirement as to the use of the amount shall be credited to the Debt Servicing Reduction Account.

Accrual Accounting Perspective:

Donations are treated differently depending on whether they are restricted donations or unrestricted donations.

Restricted Contributions:

If the external parties specify how the resources are to be used, those inflows are restricted in nature. For example, a third party could donate a parcel of land, conditional that a building or other structure be built on it. This would constitute an external restriction since the asset is restricted by agreement with the external party. Restricted contributions for the purchase of capital assets that will be amortized should be deferred and recognized as revenue on the same basis as the amortization expense relate to the acquired capital assets (CICA 4410.33).

It should be noted that a contribution restricted for the purchase of a capital asset or a contribution of the capital asset itself is a type of restricted contribution (CICA 4410.02(b(i))).

Unrestricted Contributions:

Unrestricted contributions (i.e. cash) should be recognized as revenue in the current period (CICA 4410.47).

A donated capital asset would be recorded at its fair value at the date of contribution. Fair value may be estimated using market or appraisal values. When an estimate of fair value cannot reasonably be made, the capital asset would be recognized at a nominal value (CICA 4430.09).

References

• Policy on Specified Purpose Accounts - Appendix A Section 4 (available at: /pol/doc-eng.aspx?id=12249
• CICA 4410, 4430
• Debt Service Reduction Act

Scenario A - Donation of money - No specified purpose & no conditions attached

A third party donates $15,000. There are no conditions attached to this gift.

Journal Entries

1) To record the receipt of an unrestricted contribution.

	AMT($)	FRA	AUTH	OBJ
DR Cash in the hand of the Depts awaiting deposit to RG	15,000	11125	R300	5299
CR Gifts to the Crown	15,000	42712	D341	4899

FRA coding rationale: Since this is an unrestricted donation it should be brought into revenue in the current period.

Authority coding rationale: Since the entire amount of revenue is being recognized at this point an authority will be affected. In this case, D341-Gifts to the Crown would be credited. The use of this code would alert PWGSC that the amount must be reported as part of the Debt Service Reduction Account in the Public Account. There is no impact on the authority side for "cash", therefore, "R300-All other assets and liabilities" is used.

Object coding rationale: To record the net impact on Cash Accounts, 5299 would be used. To reflect incoming revenue in the period "4899-Other non-tax revenue" would be used.

Scenario B1 - Contribution is land - without restriction

A third party donates land with a fair market value of $12,000. There is no restriction placed by the donor on the use of the land.

Journal Entries

1) To record the receipt of the donated land.

	AMT($)	FRA	AUTH	OBJ
DR Land	12,000	16111	R300	1301
CR Gifts to the Crown	12,000	42712	E500	4899

FRA coding rationale: Because the contribution of land is without restriction, the fair value of the land should be used. The donation is credited to revenue.

Authority coding rationale: "E500-All other non-tax revenue" is used for the revenue side of the transaction as there is no specific authority associated with donations of assets. "R300 - all other assets and all other liabilities" is used to record the land. Alternatively, "F999 - Non-appropriated amounts" could be used on both sides of the entry as a donated asset has no effect on authorities.

Object coding rationale: 1301 would be used for the land and "4899 - Other miscellaneous non-tax revenue" would be used for the revenue side.

Scenario B2 - Contribution is land - with restriction

A third party donates land with a fair market value of $12,000 provided that it be used to build a monument

Journal Entries

1) To record the receipt of the donated land.

	AMT($)	FRA	AUTH	OBJ
DR Land	12,000	16111	R300	1301
CR Deferred Revenue	12,000	21510	E500	4899

FRA coding rationale: As the donation of land has a restriction which has not yet been fulfilled, the donation cannot yet be recognized as revenue.

Authority coding rationale: "E500-All other non-tax revenue" is used for the deferred revenue side of the transaction as there is no specific authority associated with donations of assets. "R300 - all other assets and all other liabilities" is used to record the land. Alternatively, "F999 - Non-appropriated amounts" could be used on both sides of the entry as a donated asset has no effect on authorities.

Object coding rationale: 1301 would be used for the land and "4899 - Other miscellaneous non-tax revenue" would be used for the revenue side.

2) The monument is now built, thus the restriction is no longer in effect and the donation can now be recognized in revenue.

	AMT($)	FRA	AUTH	OBJ
DR Deferred Revenue	12,000	21510	F450	7099
CR Gifts to the Crown	12,000	42712	F259	7099

FRA coding rationale: Once the land is used for the purpose specified, there is no longer a restriction on the contribution. Therefore, it is necessary to reduce deferred revenue (the liability) and record revenue.

Authority coding rationale:. There is no impact on authorities/appropriations, F codes will be used in order to assist in departmental reconciliations. "F450- Other non-appropriated amounts added to or deducted from liability balances" would be used for the deferred revenue amount. "F259- Other revenue not being credited to appropriations or other authorities at the same time" should be used for the revenue amount.

Object coding rationale: Since the object information was recorded at the time of the donation there is no impact on the objects for this entry. "7099 - Net increase or decrease in other transactions" would be used for both sides of the entry.

Scenario C - Contribution is an asset which is above the departmental capital asset threshold.

A third party donates equipment with a fair market value of $20,000 and it is required that the equipment be used for a specified purpose. The equipment has an expected useful life of two years with no residual value.

Journal Entries

1) To record the receipt of the donated equipment.

	AMT($)	FRA	AUTH	OBJ
DR Machinery and equipment	20,000	16121	R300	1243
CR Deferred Revenue	20,000	21510	E500	4899

FRA coding rationale: Contributions of assets should be recognized as increases in revenue. The fair value of the asset of $20,000 is credited to a revenue account. Since the fair value of the asset donated is above the Department's capital asset threshold, the charge is made to an asset account.

Authority coding rationale: "E500-All other non-tax revenue" is used for the deferred revenue side of the transaction as there is no specific authority associated with donations of assets. "R300 - all other assets and all other liabilities" is used to record the land. Alternatively, "F999 - Non-appropriated amounts" could be used on both sides of the entry as a donated asset has no effect on authorities.

Object coding rationale: Only one side of the transaction will have an impact on the objects. At this point equipment has been donated, therefore 1243 would be used. "4899 - Other miscellaneous non-tax revenue" would be used for the revenue side.

2) To record the amortization expense and the accumulated amortization for one month

	AMT($)	FRA	AUTH	OBJ
DR Amortization Expense	833	51433	F111	3451
CR Accumulated Amortization	833	16233	F311	7061

FRA coding rationale: It is necessary to allocate the cost of the asset as an expense in a rational and systematic manner over those periods expected to benefit from the use of the asset. Using straight-line amortization, the monthly charge to amortization expense and accumulated amortization would be $833 ($20,000/2yrs = $10,000/year; $10,000/12mths = $833/month).

Authority coding rationale: Expenditures for the acquisition were charged to an appropriation in the previous journal entry, therefore the appropriations are not affected in this journal entry. To assist with departmental reconciliations, F codes are used for these non-appropriated amounts. "F111- Expenditures previously charged to appropriations/Amortization expenses for capital assets" is used for amortization expense and "F311-Non-appropriated amounts added to or deducted from asset balances/ Increases (decreases) to accumulated amortization of capital assets" is used for accumulated amortization.

Object coding rationale: As these are non-cash (non-expenditure) items, they have no effect on economic objects." 7061-Accumulated amortization on capital assets" is used to capture accumulated amortization. "3451-Amortization expense for capital assets" is used to capture amortization expense.

3) To recognize revenue earned

	AMT($)	FRA	AUTH	OBJ
DR Deferred revenue	833	21510	F450	7099
CR Gifts to the Crown	833	42712	F259	7099

FRA coding rationale: As the equipment is used for the purpose specified, there is no longer a restriction on the contribution. Therefore, revenue is recognized in the same amounts as the amortization expense. The deferred revenue account (the liability) is reduced as revenue is recorded.

Authority coding rationale:. There is no impact on authorities/appropriations, F codes will be used in order to assist in departmental reconciliations. "F450- Other non-appropriated amounts added to or deducted from liability balances" would be used for the deferred revenue amount. "F259- Other revenue not being credited to appropriations or other authorities at the same time" should be used for the revenue amount.

Object coding rationale: Since the object information was recorded at the time of the donation there is no impact on the objects for this entry. "7099 - Net increase or decrease in other transactions" would be used for both sides of the entry.

Scenario D - Contribution is an asset which is less than the departmental capital asset threshold.

A third party donates equipment with a fair market value of $4,000 and it is required that the equipment be used for a specified purpose.

Journal Entries

1) To record the receipt of the donated equipment.

	AMT($)	FRA	AUTH	OBJ
DR Operating Expense	4,000	16111	R300	1243
CR Gifts to the Crown	4,000	42712	E500	4899

FRA coding rationale: Contributions of assets should be recognized as increases in revenue. The fair value of the asset of $4,000 is credited to a revenue account. Since the fair value of the asset donated is below the Department's capital asset threshold, the charge is made to operating expense.

Authority coding rationale: "E500-All other non-tax revenue" is used for the revenue side of the transaction as there is no specific authority associated with donations of assets. "R300 - all other assets and all other liabilities" is used to record the land. Alternatively, "F999 - Non-appropriated amounts" could be used on both sides of the entry as a donated asset has no effect on authorities.

Object coding rationale: Only one side of the transaction will have an impact on the objects. At this point equipment has been donated, therefore 1243 would be used. "4899 - Other miscellaneous non-tax revenue" would be used for the revenue side.

Departmental Financial Statement Presentation and Disclosure Requirements

Unrestricted gifts, bequests and donations of financial assets are reported on the department's Statement of Operations under the heading Revenues.

Capital assets received as a result of gifts, bequests and donations should be included in the department's disclosure of capital assets. See presentation and disclosure requirements in Section 3.5.1.