Addressing the Mismatch between Budget Preparation
and Accounting
An opinion piece by Bill Cox, CPA, CA
32 CPABC in Focus • Nov/Dec 2014
One of the most important objectives of local government is to
manage, save for, and replace infrastructure, so expenditure on capital
items will usually be a significant component of expenditures in any
given year. Capital expenditures are not expenses for accounting
purposes—they are, instead, amortized over the life of the underlying
capital asset. In addition, they are often much higher than amortization
expenses due to inflation and the very long lifespan of many infrastructure assets. As a result, it is commonplace for local governments
to have a surplus almost every year, and this surplus can be significant
in size. This can be difficult for local government councillors and
taxpayers to understand. “If we balanced the budget,” they may ask,
“why are we running a huge surplus? Are taxes too high?”
A different type of issue can arise for BC Crown corporations and
agencies. Crown corporations and agencies form part of the Province
of British Columbia reporting entity, and, as such, they also follow
PSAS. The combination of adhering to the Budget Transparency and
Accountability Act (BTAA) and reporting under PSAS creates problems.
An important concept under PSAS is that transfers to or from reserves or accumulated surplus (collectively referred to as “retained
earnings” in the private sector) are not revenues or expenses for accounting purposes. The logic of this concept is obvious, and it’s consistent with other accounting frameworks: If you just move funds
from one pocket to another, you are not creating or using resources.
Section 23.1 of the BTAA requires the use of PSAS (which is a good
Nastco/iStock/Thinkstock
Bill Cox is a partner with BDO
Canada LLP, providing audit
and assurance services to
governments, NPOs, financial
institutions, and private
businesses. He is a member of
the Public Sector Accounting
Board and the AcSB/PSAB Joint
Not-for-Profit Task Force.
A
s vital accountability tools, budgets
play an important role in the public
sector. So it’s no surprise that there
are public sector accounting standards (PSAS)
in this area. Section PS 1201 – “Financial
Statement Presentation” of the PSA Handbook
is the relevant standard; it requires governments to report actual-to-budget comparisons
in their financial statements.
It would be difficult to argue against the
merits of presenting budget information.
After all, one of the objectives of public sector
financial statements is to add accountability
value, and, in almost every respect, budget
information adds value to public sector financial statements. And yet there are a few areas
of tension between budget preparation and
accounting that have the potential to derail
the benefits of reporting budget figures in the
financial statements. Accountants working
in the public sector need to consider and
address this “mismatch.”
We speak of “mismatch” in many areas of
accounting. For example, a financial institution
may have a mismatch between the maturities
of its assets and liabilities. Or a business may
have a mismatch between the life of its plant
and related funding. Even the tried and true
“matching principle” is not quite dead—it
still exists as long as its application does not
create deferrals on the balance sheet that are
inconsistent with the accounting framework’s
definition of assets or liabilities.
In the public sector, “mismatch” results
when the methods and concepts used for
budget preparation differ from those used in
financial reporting. Local governments, for
example, need to balance their budgets, but the
“balancing” is that of cash inflows and outflows, not revenues and expenses. Of course,
inflows and outflows of cash can differ from
those of reported accounting revenues and
expenses, and this disconnect can lead to
puzzling budget results in local government
annual financial statements.