Government Operations Committee on Oct. 5th, 2006

[Peggy Nash, NDP, Parkdale—High Park, ON]

But the clarity of that concept outweighs any potential problems. Perhaps if we're aware of it, we can put in checks and balances to monitor that.

You raised also the issue of military assets. Can you describe how you would approach the valuing of those assets? I appreciate some assets are different from other assets, especially as we are now in a situation of war. How do you value the equipment and weapons, etc., that are used in war? Is there a recommendation you would have or a preferred practice in terms of their valuation?

[Ronald Salole]

Once again, for the whole-of-government statements, the Government of Canada has taken some really bold steps and has been able to manage some of this with some difficulty. I tend to have agreed with all of the decisions they made and how they were going to handle military assets. The difficulty, as you quite rightly say, is that a lot of these don't have a very long life, and it's the difficulty of being able to say, “What am I going to do if they have a very short life?” But the way the financial statements have portrayed the assets of the military in the whole-of-government statements has been done very well.

The issue then comes down to how you are going to push that down to the departmental level. I think it was Madam Fraser who made the point that if you don't account for your stock of assets, then out of sight is out of mind. You get good accountability if you force some discipline in saying, “Here are my significant assets”, because they cost an awful lot. On the cash basis you would just completely write it off, and you won't see it in anybody's set of records because it's been paid, whereas if you're doing the accrual basis, you need then to look after it, maintain it. It has some value.

It's sometimes difficult when talking about it not to oversimplify things and come up to a simplistic level, because there are some really big issues in here, some tough issues, and it's tough to be able to generalize. But I think it's been done fairly well in the whole-of-government statements, and I don't see why that can't be done for the departmental ones.

[The Chair, Liberal, Diane Marleau]

Thank you very much.

Mr. Alghabra.

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

Thank you, Madam Chair.

There was a question earlier about the benefits of moving to accrual accounting. One of the things you said is that most of the benefits mean to be intangible and the tangible ones may take a few years to be realized.

Would it be fair to categorize as benefits the enormous costs that we incur on a yearly basis to reconcile the books from cash to accrual at the end of the year?

[Ronald Salole]

The saving on those costs?

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

Yes.

[Ronald Salole]

Well, they would factor in on that side of the equation. I have to confess, I don't know what the cost of that is, but I would absolutely--

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

Yes, regardless of what the cost is.

[Ronald Salole]

Whatever it is, it certainly has to go on that part of the equation. You're absolutely right.

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

One of the obstacles--and again, it was brought up earlier today that a lot of people are facing it in moving to accrual accounting--is the cash management factor of it.

In your opinion, is that an insurmountable objection, or is that a challenge that can be managed by putting in place systems to ensure that we have a good handle on our cashflow?

[Ronald Salole]

Actually, I happen to believe it's an advantage. It really is. It's a good point, because the problem is that people want too much out of a set of financial statements. They want that to do the work of too many things. They want it to be both good for stewardship reporting, accountability, telling the picture, telling the story, and they also want to be able to use it for cashflow management and all those things, and I don't think it's very good at that.

If you were to focus your cash management and say, look, don't confuse that with reporting, but focus on cash management--how you're going to invest your surplus moneys, where you're going to put it, what debts you're going to pay, what liabilities you're going to pay, what assets you're going to liquidate, and so on and so forth--in a specialist, focused way, I think it's much better than trying to say, I'm going to mix it up with accounting and everything else.

So for me it's a plus. In private businesses you have the treasury function that deals with investments and how they invest and what they pay and all those functions, and they're not the same people who prepare financial statements, so I think it's a plus.

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

Attached to that and the treasury function, or related to it, is the voting system in Parliament. Currently we vote on cash acquisition. The argument we received the other day is that if we move to accrual accounting, that will have a significant impact on how we vote in Parliament.

I don't know how familiar you are with our voting system. You're probably more familiar with it than I am. But can you please respond to that?

[Ronald Salole]

I'll try, because I'm not familiar--or as familiar as you, for sure--with it. You actually do it, so you must be comfortable with what you're doing.

The way I would respond is that one of the other things we're doing in the public sector accounting board is looking at how to better handle what we call results management, looking at outcomes. I think the Government of Canada has some really incredible, good stuff in that. We're looking at objectives and at outcomes.

To my way of thinking, if you are able to say, “Look, in order to achieve that outcome, here's the total picture on an accrual basis of what's actually going to be the cost, the deliverables, the outcome,” as opposed to saying, “This is multi-year funding”, or “This is going to be spread over two or three years”, if you get the total picture you might be able to make better decisions. Then you would be able to say, “Here's what it's going to cost me to achieve that outcome; is it worth it?” You might be able to make better choices. But I don't speak from deep knowledge on this, I have to confess.

One of the points I want to make is that there is a big difference between funding and cash management, and accrual accounting and reporting on what actually happened. I can't emphasize more that those two shouldn't be mixed. You'll do both better if you can look at what the objective of each is going to be.

When you're doing your vote and getting the authority, which is very important--that's probably the most important job that parliamentarians have to do, giving the authority--you have to be able to try to make sure that it's value for money.

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

I think it's very obvious from everything you're saying today, but I want to get it on record: you are in favour of moving completely to accrual accounting.

[Ronald Salole]

Yes.

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

Thank you.

[The Chair, Liberal, Diane Marleau]

Thank you.

Mr. Warkentin.

[Chris Warkentin, Conservative, Peace River, AB]

Thank you for coming today. I appreciate it.

With your involvement with the standards department, I'm sure that once the government continues to move in this direction--as many of us around the table hope--you'll probably be busy with a few things in trying to explain to our bureaucracy how to account for a number of things.

I'm going to ask questions specifically with regard to capital assets. Obviously we have our heritage sites. We also have our parks. There are a lot of things that we, as a government, as the Canadian people, have every intention of keeping forever, with no intent to divest at any time. Is it common practice for these to have current market value? If so, obviously there's cost involved in trying to track that from year to year: the current property values, comparisons, and those types of things. How do you account for that? Or maybe different jurisdictions account for that. It's going to become one of the issues we're going to have to deal with.

If we try to maintain a current market value, there's obviously a huge cost involved in that, but if we don't, then we have a liability option for these things, and then, on the books, it looks like a deep hole that we continue to waste our money in.

There's a real balancing act there. I'm just wondering if there's a way, maybe in the standards, to get away from the high cost of having this on the books, but still have it on the books, so that it gives us a clear picture of what the current situation is.

[Ronald Salole]

That's a real beauty, and we haven't been able to crack it.

We don't have the same problem as the European countries. Our heritage assets are very young compared to those in Europe—the Coliseum or whatever the items are—and they haven't cracked it either.

I think it illustrates very well one of the limitations of financial reporting. Financial reporting is good at telling you what happened, when it happened, and what transaction and event occurred. It tells you that story.

I think for things such as collections, museums, heritage assets, one has to almost go outside of the financial statements and say, we don't want to burden the financial statement. This is my own personal view. We haven't cracked it.

People are talking as we speak. I've just received a draft paper from the International Public Sector Accounting Standards Board talking about heritage assets. We're in the middle of trying to decide whether fair market values make an awful lot of sense.

The tendency is not to include them in financial statements for the reasons you've stated. It's costly. You might as well not.

But we can handle it outside of the financial statements. We can look at ways to keep that stock of heritage assets, such as collections in museums, alive and ensure that the maintenance and development of those assets are maintained. I think it's going to be outside.

[Chris Warkentin, Conservative, Peace River, AB]

Right. It becomes complicated, of course, when you have buildings, structures, because obviously these need ongoing maintenance, and they are often being used for practical purposes. The House of Commons precinct is a perfect example.

If we move out of heritage to general but fixed government assets, such as some of the infrastructure the federal government owns, how do you get away from the high cost of valuing that on an annual basis?

We want the information. We want to know what the current liability for that structure is in terms of the infrastructure, but coming from the private sector involved in the construction industry, I know the high cost of doing an ongoing evaluation, doing appraisals on an annual basis. It's astronomical. There's no real value to it per se, except to get the books right.

Is there a mechanism or a standard that can be applied here where we just say, you know, inflation? Or are there general principles that can be applied to get away from the high cost of trying to follow or collect this information, so that we're not burdened with additional, astronomical costs?

[Ronald Salole]

The Public Sector Accounting Board currently has a particular project that's trying to look at infrastructure assets. But primarily it's going to affect local governments more than anything else. It's the roads, the sewers, and the difficulty there is the so-called infrastructure deficit that people have not been able to maintain and develop. How do you account for that? How do you make sure that some of the easy decisions when you're pushed for money are not to continue with a deferred maintenance plan, but make sure that those assets are maintained?

It really goes back to what I was saying right at the very beginning. Financial statements on the accrual basis of accounting are a great way to tell you what transactions and events happened in a particular period. They are limited in being able to then tell you that you haven't spent in maintaining your assets to the degree that you want.

Currently our accrual accounting system is rooted in ensuring that we are going to keep to historical costs, actual transactions, as opposed to looking at fair market values. If there are those values that are going to placed or tend to be placed, primarily by way of note—

[Chris Warkentin, Conservative, Peace River, AB]

I think the difficulty is that sometimes there is evidence or documentation of a liability, as it's commonly known. We've had witnesses before our committee telling us that there is an infrastructure deficit for many of the buildings the federal government owns in the amount of $4 billion. It's not accounted for anywhere. It's just a generally understood idea.

We could put that on the books. But if you don't contrast that with the current market value of those structures, you don't make wise decisions. We need to maintain the current market value estimates on the books somewhere, so that we don't make unwise decisions.

If we did a cost of purchase, all those structures may amount to $2 billion, so we say let's give these buildings away—but I'm just pulling numbers out of the air.

[Ronald Salole]

Don't get me wrong, I don't hold with putting a liability on the books either. Today it might be the infrastructure deficit. Why wouldn't somebody down the road come up and say there's an education deficit, we have a liability, we have to put it up there? Or some other deficit somewhere else. Those things do not, the way we think in standards setting, meet the definition we have for a liability. That has to meet a very strict definition, but it's good information that ought to be held.

[Chris Warkentin, Conservative, Peace River, AB]

I know my time is up, I'm sure, but can I just ask a follow-up question?

[The Chair, Liberal, Diane Marleau]

Yes.