Merci. Thank you, Madam Chair, for inviting me back today.
As Mr. St-Jean has just noted in his remarks, I will be addressing the issue of accrual-based budgeting and accrual-based appropriations. In particular, I wish to elaborate on information provided to the committee by officials of the Office of the Comptroller General in recent appearances, including to provide some international perspective on this important issue.
As members of the committee may know, in the 1996 budget there was an announcement that the government at that time had intended to “move to full accrual accounting for budgeting and accounting purposes”. At that time, accrual accounting for the public sector was a relatively new concept, not only in Canada but in fact worldwide. Given the magnitude and implications of the change involved in implementing accrual accounting across the entire government system, the decision was taken to focus initially on implementing accrual accounting for reporting purposes.
As part of the financial information strategy project, which was completed in April of 2001, accrual accounting was implemented, albeit a year later than originally planned, and it was implemented at that time for the summary financial statements of the government in the 2002-03 public accounts. Importantly, the 2003 budget was also prepared on the basis of accrual accounting, as indeed have the subsequent 2004, 2005, and 2006 budgets.
As part of implementing accrual accounting for reporting and for the budget, cabinets and the central budget agencies have since that time been managing overall decision-making on expenditures using accrual accounting information. The fiscal framework in particular, which is the multi-year framework of financial resources used for implementing and operating government programs, and the funding of those programs, was changed at the time of the 2003 budget to an accrual basis. So in fact the Government of Canada has for some years operated on an accrual budgeting basis for the purpose of all policy initiatives, and in fact all decisions that require cabinet-level approval.
Since 1996, a few other countries besides Canada have implemented accrual approaches for reporting purposes; however, very few have implemented accrual accounting for budgeting or appropriations. Those that have are—from what they tell us—not typically satisfied with the change. In particular, Australia, New Zealand, and the U.K. have adopted forms of accrual budgeting in appropriations. The Netherlands and France each started such projects and cut them short on the basis of their concerns about complexity and cost. The United States federal government looked at the issue and decided not to proceed.
In fact, while there does now seem to be general acceptance among major governments around the world of the advantages of accrual accounting for reporting purposes, there is no international consensus when it comes to how to use accrual accounting for budgeting, control, or appropriation purposes. Canada is thus not alone in taking what I would characterize as a prudent approach to these very important issues.
Last summer, Mr. St-Jean and I engaged a consulting firm to study the issue in detail and to provide us with information needed to determine whether, and if so, how, the use of accrual accounting should be increased in budgeting and appropriations. We received the report this spring, and it concludes that while there are possible advantages to increasing the use of accrual accounting in the budget and expenditure appropriations cycle, such a change will require significant investments in training, in financial systems, as well as the development of new processes for budgeting, both at department and government-wide levels. The questions of whether and how to increase the use of accrual requires careful consideration, and in any case, according to the study, and based on our own work, it will take a number of years.
There are several specific issues that I would like to draw to the committee's attention. A key one, and this certainly draws on the experience of other countries, is the clarity of information that would be provided to parliamentarians. As a government, and we believe as parliamentarians, we must continue to track, control, and report on cash. Accrual accounting can provide excellent estimates of the costs of individual programs; however, cash is a critical element of the government's overall fiscal situation.
We believe Parliament needs to know if cash requirements associated with investment transactions, capital asset purchases, for example, are pushing the government into a cash-borrowing situation. In our view, parliamentarians must be able to manage both cash and accrual information. Other countries have found this complex and are re-examining their approaches to be able to better serve parliaments.
Management control, as well as Parliament control, is another issue. For example, would Parliament, under an accruals appropriation system, exercise control over acquisitions of capital assets if it is not voting on the cash cost of that asset, as is currently the case? Alternatively, if such control would be through voting on the amortization of an asset for its useful life, that raises the issue, as is the case in New Zealand, of requiring multi-year appropriations covering the life of the asset. This would be unprecedented in Canadian practice. It would also raise the important matter of determining what it would mean, what would be parliamentary practice were Parliament to choose not to approve a specific amortization vote. These issues will clearly require close consultation with you, with parliamentarians.
Control over the fiscal framework is a further issue. Under accrual accounting and reporting, the purchase of a capital asset encumbers the fiscal framework in terms of the amortization charge for the entire life of the asset. We need to be able to reflect on the government's overall financial control in fiscal planning, not just reflect but manage those encumbrances to the fiscal framework. Currently, we are able to do that because cabinet decisions taken on an accruals basis are sufficiently large that we can track them in the fiscal framework, and so can the Department of Finance. When one looks at the numbers of capital asset acquisitions across all departments, this becomes a much larger, more complicated exercise.
Finally, we would note that unlike for reporting, there are no generally accepted principles for appropriations around the world. In conjunction with the Department of Finance and the Privy Council Office, our next step is to take the information contained in the report, since we are talking about budgeting here, and develop a model of both budgets and appropriations and estimates documents, along with integrated departmental and government-wide budgeting systems and processes. This would introduce accrual concepts where appropriate and allow for proper management and control, as well as parliamentary oversight of both cash and accrual-based information.
The draft model that comes from these internal consultations will have to be approved by the President of the Treasury Board as well as Treasury Board and cabinet, notably the Minister of Finance and the Prime Minister, given the fiscal framework implications. We will also, as I mentioned earlier, need to consult parliamentarians. Any changes would need to be approved by Parliament, since we would be changing the form and nature of the estimates documents.
The consultant's study indicates to us that given the possible system process and legal changes required and the degree of readiness in departments and agencies, it would likely take some three to five years to fully implement from the time the project is confirmed, depending on the approach taken, with a cost to the government ranging from the tens of millions of dollars to something in the range of $200 million as a top estimate of the cost. This is clearly a major change that needs to be managed and developed appropriately to ensure maximum benefits for minimum cost.
Thank you.