Government Operations Committee on Nov. 7th, 2006

[Chris Warkentin, Conservative, Peace River, AB]

Yes, because at first sight, probably a number of us would go toward the statutory amortization simply because generally things are amortized over a certain length of time, and we don't want governments starting to manipulate the numbers and having the flexibility to massage things. I think that's the concern, that if we don't go to statutory, governments might have the flexibility, but if we do go to statutory, then we might not be able to get a clear picture of the amortization situation.

[Charles-Antoine St-Jean]

I would not be overly concerned with this aspect, for the simple reason that our statements are audited, and we're also moving to departmental financial statements.

One of the key accounting principles is the consistency of the accounting, the depreciation of the amortization, so I would not be overly concerned with that. As the Auditor General said, whatever, model 3 or 4, the depreciation amortization must be minus the economic reality of the usage of the asset. So some assets in certain theatres might be depreciated at 30% as a decline balance. Some others will be depreciating at 100% per year, because of the circumstances.

Whatever method, it will need to be backed up by the economic reality behind the use of the assets.

[Chris Warkentin, Conservative, Peace River, AB]

The question was broached here by somebody else, the question being if there was a way we would be able to move toward a statutory or a multi-year system. Then in certain circumstances, if there was an isolated event such as a war or a situation where a building burned down, the government would have some flexibility to intervene and say that the reality was a little different that year.

Is there any other jurisdiction that uses that type of model?

[Charles-Antoine St-Jean]

Ontario does it that way, the statutory approach. B.C. is a model 3. So I can see both sides of the debate.

[Chris Warkentin, Conservative, Peace River, AB]

Keeping on the theme of standards, we had a witness here by the name of Ronald Salole from the Canadian Institute of Chartered Accountants. I believe I asked him specifically about infrastructure liabilities and environmental liabilities. His concern was that we not bring those liabilities onto the books until we have made a commitment to spend the dollars--and not that we've made the commitment a political decision, but actually assigned a contractor to do the work. It was his belief that within the standards that was accepted generally.

My concern is that many people on this committee want us to be able to see more clearly the reality out there, the liabilities we might have out there. I'm sensing and realizing that we may not be able to do that with accrual accounting.

I see that we're still using environmental liability, so obviously there is some way we can bring that in if the contractor has been signed up to do the work. But what are your thoughts on this?

[Sheila Fraser]

The environmental liabilities are recorded, but only at the time the federal government acknowledges a responsibility and that there will be a cost incurred. For example, in this country there are certain sites that could be provincial or municipal jurisdiction. The federal government would have no responsibility. There would be no liability for that. There can also be a site where the government decides that no remediation will occur, and it will simply cap it or leave it as it is. There would be no real costs incurred going forward to remediate that site, so no liability would be recorded for that and it wouldn't require a contract.

He may have been saying that the government has to recognize that it has a responsibility to do something and there will be a cost incurred.

[Chris Warkentin, Conservative, Peace River, AB]

He was very specific. I got into the whole question then about federally owned buildings. There's a $4 billion liability that's generally accepted throughout the civil service, and I think most parliamentarians have heard that.

His assessment on both the environmental side and the infrastructure side was that we should not document with accrual accounting within generally accepted standards until there has been a contract with somebody to spend the money. That was his testimony.

I'm wondering if you would differ with him on that testimony.

[Charles-Antoine St-Jean]

There might be a misunderstanding there. What's important is that the liability be recognized by the government and that you have sufficient evidence to be able to determine the amount of the liability. So a contract isn't necessarily in place, but at some point you have enough information.... I'm trying to remember what is the certainty or--

[Sheila Fraser]

That might be the case more with infrastructure and buildings. We might look at a building and say that if you want to bring it back to grade A condition it will cost you x dollars. But until the government decides to do that and signs a contract, there is no liability, because it has the choice of simply letting the building deteriorate even further.

In the case of infrastructure, there has to be a contract in place to record a liability generally, whereas environmental is somewhat different. There has to be a recognition of responsibility and, as the Comptroller General said, the ability to estimate how much the costs will be.

[Chris Warkentin, Conservative, Peace River, AB]

Is there some type of assessment required to establish the actual dollar value right now with--

[Sheila Fraser]

On environmental liabilities, the government has done a very good job. On the Treasury Board website there is a listing of all the sites and the estimation of the costs to deal with the environmental liability. That work was carried out three or four years ago and is updated every year. So a significant amount of work has gone into estimating the environmental liability. It is recorded in the financial statements of the government.

[The Chair, Liberal, Diane Marleau]

Mr. Bains.

[Navdeep Bains, Liberal, Mississauga—Brampton South, ON]

I'll pass.

[The Chair, Liberal, Diane Marleau]

Mr. Alghabra.

[Omar Alghabra, Liberal, Mississauga—Erindale, ON]

Thank you, Madam Chair.

On the actual way of voting, I'm not sure why we would be voting $25 million, for example, in the first year if we agreed to adopt accrual accounting and we know that the project costs $100 million. Why wouldn't we vote $100 million in the first year, since that's what the project is going to cost, even though it's only going to cost us $25 million in the first year and $75 million in the second year?

[David Moloney]

I wouldn't want to give explanations for why not, but it is a long-standing approach to parliamentary authority and control of spending that it is voted on year by year. Even though the government's books overall are on accrual now, or even if they were on cash, there's a multi-year reality in a cash world and in an accrual world. We're certainly not saying we wouldn't want to go there. In fact, it is one of the things that departmental managers identify to us often as being a problem for them because of the reality. You can't spend the $25 million only in this example; the $75 million is coming. Why wouldn't you just have the multi-year appropriations and not have to come back? Well, Parliament might want to see it. We would have to present that $75 million for information, then, in a second year, so there'd be a further degree of complication.

I think traditionally, in many governments, both the government and the Parliament might have been concerned about uncertainty in the fiscal situation and the government's wherewithal to actually pre-commit very large amounts of money. So there's a materiality aspect to it. We have very sound finances, happily, now. So perhaps there was a reluctance in the past that was not necessarily appropriate.

This really does go to the heart of parliamentary control and how much freedom Parliament wants to give to departments and ministers to spend.

[Omar Alghabra, Liberal, Mississauga—Erindale, ON]

I understand that, but we are taking it for granted that the actual depreciation, or amortization, or consumption is going to become statutory if we decide to go that way. So it's an automatic approval for Parliament if we go that way, because once the government has committed to purchase that project or that program, the consumption is an automatic thing.

I'm still at a loss. If the government made a commitment for that $100 million, I know the program has to be implemented over a period of two years, but the consumption will be taken over a period of 10 years after that. Why couldn't we just approve the project at that year?

To me it seems if we're going to accrual, the essence of accrual is that we take into account the overall costs of the project the minute we commit to that project. If we claim to take accrual but still vote on a cash basis, we're really still not using the accrual system.

[David Moloney]

I guess the one distinction here would be that the amortization amounts do not kick in until the full cash disbursement takes place. So in this example, if it was just $25 million and then amortization, then we'd vote once, and then.... It's the fact that we won't actually have the series of 10 amounts--10 years of $10 million--without actually having the two votes, the $25 million and then the $75 million.

Whether that's good financial management or good planning of the government's resources overall is a different question. They're logically separable. We're only trying to flag that it's a significant departure. It would improve the ability of departments to have the certainty that they can manage a project well, no question.

[Omar Alghabra, Liberal, Mississauga—Erindale, ON]

I understand the necessity for Parliament to examine the expenditure every year, but Madam Fraser, I'm interested in hearing your thoughts. If Parliament gives approval for this project--and again, let's take the $100 million--why couldn't we ask Parliament to vote for the approval for that project? Calling it multi-year may raise some flags, and that's why maybe labels here are the issue. The issue is whether or not we should vote for this project--do we want this project or not?--and leave the reality of the implementation up to the department.

[Sheila Fraser]

I think, Madam Chair, that the member makes eminent sense, and when I think about it, it would actually improve accountability. If a government of the day has made a commitment to buy a building, shouldn't they be accountable for that before Parliament rather than just for the amount of cash that goes out each year? Especially if we talk about very large purchases, of military equipment or other, which can go out over several years, the decision, really, to carry out those contracts is made in that particular year.

I haven't thought it all through. There may be downsides, but I think the tradition has always been that Parliament has controlled the cash. However, if we do move into a new world of accrual appropriations, I certainly think it's something worth looking at.

[Omar Alghabra, Liberal, Mississauga—Erindale, ON]

Mr. St-Jean.

[Charles-Antoine St-Jean]

I agree. As I said before, multi-year appropriation would be helpful. It's also very important for Parliament and the government to control the cash position. When you do the multi-year appropriation you should also be very clear in which years you expect to see the cash dispersed, because you also have to pace yourself. If you're going to be approving $1 billion over 10 years, there's a difference in cash position if it's going to be over 10 years or one year. You need to have both, but multi-year would be helpful, thank you very much.

[The Chair, Liberal, Diane Marleau]

Thank you.

Mr. Nadeau.

[Richard Nadeau, Bloc, Gatineau, QC]

Thank you, Madam Chair.

Ms. Fraser, gentlemen, in the light of the study we have consulted or the ideas you have put forward, we gather that you are strongly suggesting that we go for accrual accounting.

Correct me if I am mistaken, but we are told that at present, in the government machinery, there are a total of seven different accounting systems and that we have to come up with a single system. Is that the idea?

[Sheila Fraser]

I do not believe that the government has announced that we have to come up with a single system. As I indicated earlier, I would have some reservations concerning the adoption of a single system. Clearly this would be quite a complex system all the same, in view of the size of some departments. Many small agencies would not need a very complicated or very complex system. So we would need at least two.