Thank you, Madam Chair.
Just to pick up where Jim left off, first of all, I'd like to thank you for the opportunity to meet with the committee and to share our experience with accrual budgeting.
My name is Bruce Bennett, and I am the acting provincial controller in the Treasury Board Office of the Ministry of Finance of Ontario. Our office is the office that puts together the estimates for the government to present to the estimates committee. We are also responsible, on behalf of the legislature, for making sure none of the expenditures is exceeded in the estimates.
So in comparison with Jim's side, we're fairly heavily involved with the government in the accounting policy side of presenting estimates to the legislative committee.
I would like to relate the province's experience in implementing accrual accounting into the budgets and into the estimates of Ontario's ministries--or departments, I think, in the federal terminology.
Going back, in response to some recommendations of the public sector accounting board of the Canadian Institute of Chartered Accountants and the direction of our government of the time, Ontario implemented accrual-based accounting into its summary financial statements in 1993-94 in its public accounts. Ontario's provincial budget was converted to an accrual basis with its 1995-96 fiscal year.
A further major step in accrual accounting was implemented in 2002 and 2003, when Ontario's provincial budget and summary financial statements were prepared for the first time on what's called a full accrual accounting basis; that is, the land, buildings, and transportation infrastructure assets were included in the province's expenses. These were on an amortization basis at that time.
However, although the province's summary-level financial accounts and budgets were prepared on an accrual basis starting in 1993-94, the budgets of Ontario ministries and the estimates presented to the Ontario legislature for approval continued to be prepared on what was referred to as a modified cash or near cash basis until the 2003-04 fiscal year. This was similar I think to the situation at the federal level. During this period of nearly ten years, reports of two independent Ontario review commissions and the Auditor General of Ontario recommended that the province change its accounting and budgeting of ministry financial operations to an accrual basis, consistent with the province's summary level financial statements.
The Ministry of Finance was in favour of this conversion but believed it could best be implemented when the financial systems were in place to accommodate accrual accounting in the ministries. This hurdle was overcome when a new integrated financial information system was implemented on a staged basis across all government ministries over a two-year period starting in 2002.
So in June 2002, legislation was passed in Ontario requiring that the estimates of all ministries be submitted to the legislature for approval on an accrual accounting basis starting with our 2003-04 fiscal year.
Amendments were required to four centrally ministered acts that provide the legal framework for the province's financial practices. The major change was to introduce the concept of expenditure into the Financial Administration Act. This term is defined as making a payment out of the province's Consolidated Revenue Fund or incurring a non-cash expense by Ontario. It's a fairly simple definition.
The changes now require that each ministry include in its estimates all cash and non-cash expenditures it intends to incur during each fiscal year. In addition, the changes now allow for the actual payment of appropriated expenses incurred during a fiscal year to be issued from the Consolidated Revenue Fund any time in the future. In other words, once it has been approved in estimates by the legislature, even though it's not paid out in the year, it can be legally paid out in a following year as long as it has been accrued and approved by the legislature.
A regulation under the Financial Administration Act--and I'll apologize at this stage because I'm going to get into a little detail to give you a sense of the complexity of getting into accrual in Ontario, what it means--prescribes six classes of non-cash expenses.
Three of these classes are considered statutory appropriations, and as a result, ministries do not need to vote appropriations to incur them. Similar to interest in Ontario, which is statutory, these do not have to be voted.
They are amortization of a capital asset, an unusual loss of a capital asset, and bad debt expense on loans and receivables.
Any provincial cash expenditure for these assets has previously been approved by the legislature as a voted appropriation. However, the subsequent non-cash expenses that are incurred due to amortization or loss in value of the assets are considered to be non-discretionary. In other words, there's little or no choice the legislative committee would have.
For these instances, the legislative authority is required to buy or construct a capital asset on the understanding that it will be depreciated or amortized over its useful life. An example of an unusual loss would be a building burning down. Though the legislative assembly doesn't require to approve and vote the burning down of the building, loss in value would be required to approve the expenditures on rebuilding that building, because that would be a cash expenditure.
Given the size of our loans and receivables portfolio, we know a certain percentage of these will be non-collectable. Under accrual accounting standards, a provision for bad debts must be determined each year to estimate the loss in value of these assets. The determination of this bad debt provision is usually based upon actual collections experience, and there is little discretion on the part of the legislature in that area.
So all these classes of non-cash expenditures are not voted upon by the legislature. However, it is important to say that the estimates of these statutory appropriations must be reported in the estimates of the department when they are presented in the estimates to the legislature.
There are three other classes of non-cash expenses that are identified as discretionary. Therefore, to incur these expenses, legislative approval is required on a voted basis. These include certain non-cash accruals, such as imputed interest on loans made below market interest rates; loss on the sale or exchange of a capital asset below its net book value; and the consumption of a prepaid expense in a subsequent fiscal year.
The first two, I believe, are fairly self-explanatory; however, the latter one may be a more difficult concept.
The latter occurs particularly in some conditional transfer payment programs where periodic payments are made to organizations on an estimated cashflow basis and subsequent accounting indicates that an overpayment has been made.
These overpayments, which are cash expenditures, are classified as prepaid expenses when they're voted on and incurred in a year. However, in most cases these overpayments are used to cover subsequent years' expenses. In other words, in the subsequent year, the amount of cash that's actually paid out is less because they use the overpayment from the previous year to cover off the responsibility on that program. This non-cash element of expense in the subsequent year is what we're referring to as requiring approval by the legislative authority.
An additional change was made to permit Treasury Board orders transferring funds between voted appropriations to be made after year-end up to the date the books of the province are closed, which occurs shortly before the financial statements are tabled in a legislature.
This change does not alter the overall level of the spending authority provided by the legislature, but it does allow for year-end adjustments to be accounted for during the closing and auditing of the public accounts.
If year-end expense adjustments result in expenses being incurred in a fiscal year, over and above the level of appropriations approved by the legislature, specific legislative approval is sought for these amounts.
In addition, there was a one-time special requirement put in place for the year of implementation of accrual accounting. As part of the conversion of the estimates to accrual, it was necessary to obtain a one-time-only approval to pay the outstanding liabilities, as at March 31, 2003, that were recorded in the province's audited financial statements. This was required since the authority to pay these liabilities was not included in the previous modified cash appropriations or in the new accrual appropriations of the subsequent year.
The Financial Administration Act was amended to specifically provide approval for the eventual payment. These items were composed of routine accounts payable, retirement liabilities, and various other liabilities of the government.
In order to accommodate the accrual basis of accounting, the content and form of the province's estimates had to be changed to add two new categories—operating assets and capital assets—to the existing categories of operating expense and capital expense. Operating asset appropriations were created to record a ministry program's deposits and prepaid expenses, advances or recoverable amounts, loans, and investments.
In order to illustrate the operating asset estimate presentation, I have included an example of Ontario's Ministry of Health and Long-Term Care estimates, and I will go through those briefly in a minute. In addition, an example of the Ministry of Transportation estimates is provided to illustrate the capital asset category.
It should be noted that, as Jim mentioned, Ontario currently only capitalizes its transportation infrastructure, buildings, and land in its summary financial statements, accounting for approximately 90% of the province's tangible capital assets. The province is planning to capitalize the remaining classes of its assets starting in 2008-09.
In summary, Ontario implemented accrual accounting in a manner that assured the legislature that it received all the information on incurred operating and capital expenses that it had previously received, and it added the additional non-cash expense information. Expenditures on operating and capital assets that were previously included in operating and capital expenditures are now being specifically identified. The change in estimates presentation provides, in our view, a greater transparency for approval of appropriations by the legislature.
In conclusion, what does this really mean? The province has found that moving to accrual accounting in its estimates has resulted in a number of benefits. A better measurement of program expenditure is the most fundamental one, and there is an improved basis for year-over-year comparisons of program expenditures. In other words, the timing of when actual cash payments went out is not as relevant as when the actual expense was incurred or consumed.
It provides a more comprehensive base for legislative and management control of the provincial expenditures. As Jim mentioned, it really eliminates the confusion from maintaining a different basis of accounting for estimates than was used for the province's summary financial statements and budget.
I'd like to turn just briefly to the examples, because I think examples are easier to follow than a lot of what I just said in terms of describing the estimates that are before you. The first one I have—and hopefully it's the first one you have—is the Ministry of Transportation of Ontario estimates for one of their votes. As you can see in the layout, it provides a year-over-year comparison of the estimates that are proposed, compared to the actual that had been incurred in the prior year.
It has four basic categories. One is “Operating Expense”. As you can see, the operating expense shows the voted item and it shows “Bad Debt Expense”, which is statutory, which is what the “S” stands for.
The $1,000 is really just a holder in this particular account, in that they haven't estimated any bad debt expense but have included an item there just to reflect the fact that at the end of the year there could be an actual occurrence of a bad debt expense that would be reported next year to the legislative assembly.
The next area down is “Operating Assets”. As you can see, once again in the case of Transportation, they just have a holder in that case and really don't have any operating assets.
The area where they do get into some major expenditures requiring approval is in the area of the capital expense side. As you can see, “Capital Expense” is made up of two categories. One category is referred to as “Engineering and Construction”. These are capital-related expenses for planning highways in Ontario, for studies, and for things of this nature that aren't related to the construction of specific projects. They do not meet the PSAB requirement for capitalization, but they are related to our capital program and they continue to be presented as a capital expense.
The next category of item that you'll see below is “Capital Assets”. The capital assets are the major assets of the province. They increase during the year, so this is in addition to our capital assets that are being capitalized during the year.
The next sheets just provide a little more detail showing basically the detail of expenditures by salaries and benefits in each of those categories. If you can see it, we actually show the flow through of the capital expenditures through the year, and then their movement to the capital asset category. You can spend a little time going through it there. We try to be transparent and show the flow of how the expenditures move through the accounts and are reflected in capital assets.
I'll move to the one for the Ministry of Health. Again, it provides an example really to show a little more of the operating assets. In the case of the Ministry of Health and its vote, you can see that they do have a significant amount in the “Operating Assets” line. Because of the nature of their programs and pre-advancing money at the end of the year, some of it isn't expensed, but because it's cash going out of the CRF, it still has to be approved by the legislature. This shows the amount that was pre-flowed, if you want, to various organizations in that year. That's the primary element of operating assets.
It goes through and shows our operating expenses for the year, and again in this instance, it does not have any capital assets.
In the case of Ontario at the moment, because we don't have a smaller classification of assets in place, the major ministries that are impacted by the capital estimates are our Ministry of Transportation and our Ministry of Northern Development and Mines, which have predominantly the capital assets. It is not of a major impact on the other ministries.
Before I close off, I would just make a comment on the question of the impact upon the decision-making of the ministries that Jim discussed. In the operating accounts area, the difference between modified cash and accrual has a fairly marginal impact probably on the operating decisions of ministries, because the fundamental decision-making going forward on programs is very closely measured. The area where it has a greater impact is certainly in the capital decision-making and the signals it gives to ministries.
Certainly we have seen definite behavioural changes since we brought in full accrual accounting in 2002-03. In the longer term, they should be looking at the least-cost alternative for taxpayers, but where their budget constraint on the old cash basis prohibited it, there was a disincentive for them to make the best economic decision in the interest of the taxpayers.
So I think when we moved to full accrual accounting, it was very clear that with the option of looking at the best economic decisions and tracking in the accounts, there was far greater consistency. So definitely, we've seen behavioural changes that are to the positive by bringing in accrual accounting, particularly on the capital side.
With respect to the long-term accruals, which are primarily to do with pensions and that area, they're done primarily at a central agency level in the government, and the issues that drive those decisions are primarily negotiations with our various unions. I think they were fairly well analyzed in the past, and I don't think it made major changes in those sorts of decisions.
With regard to the decisions in the ministries on capital and our plans to move ahead in 2008-09, it's interesting. They're already coming forward in their planning, looking at how, rather than leasing computers, it may be more effective to buy, and it may be a lower-cost option for them. We're already seeing, in advance even, behaviour changes coming, and some of the ministries are pressing us to bring it in early, because they can see it's to the advantage of those ministries. So I think it can have a positive impact on the decision-making of the ministries.