A Guide to Preparing Treasury Board Submissions

Appendix C: Accrual Accounting Information

In 2002–03, the government implemented full accrual accounting for the preparation of the Finance Minister's budget and the summary financial statements of the Government of Canada included in the Public Accounts of Canada. However, the Main Estimates, or the appropriations, continue to be based on a "near‑cash" accrual basis of accounting.

Accrual accounting recognizes transactions when the underlying economic event occurs, that is, it recognizes revenue when earned rather than when cash is received, and expenses when incurred rather than when paid.

There are several categories of transactions where there are differences between the classification of elements in the transaction and the timing of charges against the appropriation and recognition of expenses for the purposes of determining the annual surplus or deficit. There are different treatments for revenues, certain liabilities, inventory, and the acquisition of tangible capital assets. A brief discussion of some of the differences is found in Annex 6 of the 2003 Budget Plan.

Accrual accounting provides a more comprehensive picture of the government's financial situation and a more accurate reflection of the financial impacts of economic events and government decisions during the year. The Secretariat is encouraging federal organizations to increase the use of accrual information in decision making since it gives a better presentation of the cost of resources used in a period and thus a better means of relating costs of programs to performance achieved.

To foster the use of accrual information in decision making, the Secretariat requires the inclusion of accrual information in submissions where capital spending is proposed and (a) the resources are incremental (i.e. not presently included in the federal organization's reference levels) and (b) the cash and accrual profiles are materially different.

The "Cost and source of funds" section of submissions related to acquisitions of capital assets or material amounts of inventory should include accrual financial information in addition to the cash profile. For other types of transactions where there are material differences between cash flows and expense recognition (e.g. contaminated sites remediation), the Secretariat may contact the federal organization to obtain accrual information.

For government accounting purposes, capital assets generally include any asset:

acquired, constructed, or developed at a cost exceeding $10,000;
to be used on a continuous basis to achieve government objectives for more than one fiscal year;
not intended for resale in the ordinary course of operations; and
the beneficial ownership and control of which rest with the government.

Capital assets also include betterments. Betterments are expenditures relating to alteration or modernization of an asset that appreciably prolongs the item's period of usefulness or improves its functionality.

For appropriations, the full purchase price or development cost of a capital asset is charged to an appropriation in the year of expenditure. Under full accrual, the costs of developing or acquiring the capital asset are allocated to the periods over which the asset will be used by the federal organization, through amortization.^[1]

Basic steps for calculating annual accrual expense

(1) Cost

Determine the sum of all costs required to make a capital asset operational.
- In the case of acquisition, this can include the purchase price, transportation costs, legal fees, installation costs, etc.
- In the case of developed or constructed assets, this includes direct material and labour costs, as well as overhead costs directly attributable to the construction or development activity.
There are specific rules to follow for the valuation of assets acquired under leases. A lease is either an operating or capital lease. There are numeric thresholds to apply to distinguish between the two. Where a lease is proposed, the submission should note whether the lease is operating or capital, but separate accrual information would only be needed where there is a material difference between the cash flows associated with the lease payments and the accrual expenses of interest and amortization of a capital lease.
The useful life should reflect the accounting policies established by the federal organization.

(2) Amortization period

Determine the useful life of the asset.
- Useful life is the estimate of either the period over which a tangible capital asset is expected to be used or the number of production or similar units that can be obtained from the tangible capital asset. The estimate of useful life should take into account such factors as expected future usage, effects of technological obsolescence, expected wear and tear from use or the passage of time, the maintenance program, studies of similar items retired, and the condition of existing comparable items.
- Since the estimate of the life of an asset is extended into the future, it becomes increasingly difficult to identify a reasonable basis for estimating the useful life. As a result, the maximum amortization period of tangible capital assets other than land is restricted to 40 years except where the federal organization can demonstrate clearly that a longer useful life is expected. Some complex network assets such as water or sewer systems likely have useful lives in excess of 40 years. Indicating a longer useful life for such assets may thus be justified.
- The useful life for the asset(s) covered by the submission should be consistent with the accounting policies of the federal organization. Submission preparers should discuss the useful life of the asset(s) with the group responsible for accounting policies or external financial reporting.
Land has an infinite useful life and is not amortized.

(3) Amortization expense

Amortization is the allocation of the cost of the asset over its useful life.

The federal government generally uses straight‑line amortization, where the cost of the asset is divided evenly by the number of years of useful life to determine the annual amortization expense.
Where a government organization expects the residual value of a tangible capital asset (the value to be realized when the asset is disposed of at the end of its useful life) to be significant, that value is deducted from the historic cost of the asset in the calculation of amortization.
This amount plus operating costs for the year will be the annual accrual expense.
This amount will be recorded in each year of the asset's useful life, starting when the asset is put into use. Since amortization is recorded monthly, annual amortization may be reduced in the first and last years of the asset's useful life.

For more information regarding capital assets, useful life, and amortization standards, please consult Treasury Board Accounting Standards 3.1 and 3.1.1, section 3.5 of the FIS Accounting Manual, and information on how accrual affects liabilities and revenues in Annex 6 of the 2003 Budget Plan.