BRITISH COLUMBIA. The Best Place on Earth. December 7,

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1 BRITISH COLUMBIA The Best Place on Earth December 7, Tim Beauchamp, Director Director, Public Sector Accounting 277 Wellington Street West Toronto, ON M5V 3H2 Dear Mr. Beauchamp: RE: Statement of Principles -Indicators of Government Financial Condition, Invitation to Comment Thank you for the opportunity to comment on this Statement of Principles. British Columbia currently reports all of the relevant indicators suggested in the Statement of Principles, and has reported a fully developed financial statement discussion and analysis for several years. A great deal of practice guidance is already available from other bodies with a broader focus on performance reporting and each jurisdiction will need to determine which indicators best meet their stakeholders' needs at any given time. Stakeholder groups will determine the suite of financial indicators that best serve their needs, and judge how successful governments are in presenting the information they need. We do not support the inclusion of Statements of Recommended Practice in the CICA Public Sector Accounting Handbook. PSAB should focus on principle-based accounting guidance rather than prescribing best practices in performance reporting. Even though Statements of Recommended Practice are not GAAP, our experience demonstrates that their inclusion in the handbook will open the door to adverse comment and recommendation from auditors. If PSAB feels compelled to add to the debate in this area, their comments should be presented as a separate research study. In particular, we disagree with several specific points in the Statement of Principles: We do not support the inclusion of planning targets, and variance reporting relating to financial indicators in the Public Accounts. This type of reporting is highly susceptible to error and misinterpretation..../2 Ministry of Finance Office of the Comptroller General Mailing Address: PO Box 9413 Stn Prov Gov1 Victoria BC V8W 9V1 Location Address: 2nd Floor 617 Government Street Victoria BC

2 We also disagree with presenting an assessment of whether financial conditions are improving or deteriorating in the Public Accounts. This is a subjectivejudgement that is best left to stakeholders to detennine using the comprehensive infonnation already provided to them.. We do not believe that indicators can be directly comparable between governments in Canada. Jurisdictions manage the entities that make up their reporting entities in different ways and select accounting policies and practices that best support the reporting needs of their environments. The inclusion of this Statement of Recommended Practice in the public sector handbook will create a false sense of comparability between the presentation of results in different jurisdictions. British Columbia promotes principle-based accounting guidance and believes standards should not be prescriptive. Paragraph 39 of the Statement of Principles suggests that PSAB could prohibit the use of specific indicators, a suggestion which is hard to reconcile with the objective of principle-based accounting. Guiding principles for the qualitative characteristics of financial reporting already exist in the handbook and those principles are sufficient to support the objectives of fair perfonnance reporting in the Financial Statement Discussion and Analysis. Our comments in relation to specific questions are attached. If you have any questions concerning this submission please contact me at (250) or by e- mail: Chervl.WenezenkiYolland@gov.bc.ca. or Carl Fischer, Executive Director, Financial Reporting and Advisory Services Branch, at (250) or by Carl.Fischer@gov.bc.ca. Sincerely, Encl. pc: Carl Fischer, Executive Director Financial Reporting and Advisory Services Office of the Comptroller General Coos Trumpy, Deputy Minister Ministry of Finance.../3

3 - 3 - Responses to ITC Ouestions 1. Are there more, or different, indicators that could be included in the SORP? In particular, for governments with net financial assets, what indicators would you recommend to describe their financial condition using the elements in this SOP? fudicators should not be prescribed. Different users will have different needs that will change over time as the economy changes. British Columbia has made a wide variety of indicators publicly available to meet stakeholder needs, for example: Expense to GDP Taxpayer supported debt to GDP Taxpayer supported debt charges to revenue Percentage change in revenue. Change in GDP Change in unemployment rate. Total revenue and revenue by source to GDP. Per capita information for revenues, expenses, debt, and net liabilities Total expense and expense by function to GDP. Change in net liabilities to change in GDP. Own source revenue to GDP. Self-supported debt to GDP 2. What other risks, if any, would be measured and reported to support a discussion about vulnerability? Each jurisdiction should identify the risks that are relevant, and determine how best to disclose those risks through the planning and reporting stage. 3. Do you agree with the definition of government financial condition? (Principle 3) This is one definition of government financial condition because it includes both service commitments and financial commitments. However, stakeholder groups will have a different definition depending on the situation and their specific interests. 4. Do you agree that government financial condition can be described using the elements of sustain ability, flexibility and vulnerability? Are there other elements? (Principle 4) These elements can broadly describe government financial condition but there may be other elements that are important to specific stakeholder interests or circumstances in the jurisdiction. 5. Do you agree that the indicators included in this Statement of Principles (principles 7-9) appropriately describe the element of financial condition with which they are associated? The indicators describe the elements of financial condition..../4

4 Are the indicators included in this SOP sufficientto support a whole-of-government discussionabout: (a) sustainability; (Principle 7) (b) flexibility; (Principle 8) and (c) vulnerability? (principle 9) It is not possible to prescribe indicators that will meet all requirements in all circumstances. In a principle-based system, with reference to paragraph 39 in the SOP, it would be adequate to state the principles that guide the reporting (in this case paragraphs 4 and 34) without attempting to provide "core" indicators. 7. Do you agree that economy-wide information could be included in a government's public report? (principle 6, paragraph 32) There is some economic information that can add context and understandability to financial reports (i.e., economic growth, GDP, labour market statistics, and per capita information). Governments should present the economic information they feel best promotes the understandability of the financial statements in response to the needs of stakeholders in their jurisdiction. 8. Do you agree that reporting on financial condition would include at least five years worth of historical trend data? (Principle 10) Historical trend information is useful to stakeholders and where appropriate, long term information can be included to inform their understanding. We do not support a universal prescribed term for the inclusion of trend information. Only comparable information should be included and governments should determine the length of trend that is relevant to a particular measure, and how it can best be presented (for example, in table form or graphically). 9. Do you agree that a government's planning documents would include planned results for financial condition indicators? (Principle 11) We disagree with the inclusion of planning, targets, and variance reporting relating to subjective financial indicators in the Public Accounts. Targets are subjective and may falsely lead stakeholders with differing interests. 10. Do you agree that reporting on financial condition would include an assessment of whether financial condition has improved or deteriorated? (Principle 12) We do not believe the inclusion of a self assessment is beneficial or appropriate. This is a subjectivejudgement that is best left to stakeholders to determine using the full range of information available to them.../5 - --

5 Do you agree that it is important to present comparative information about financial condition from other jurisdictions? If not, why not? If so, are the factors described in paragraph 72 appropriate for identifying comparators? (Principle 13) Most jurisdictions are not directly comparable with respect to accounting policy and which organizations are included in the reporting entity. Therefore, direct comparisons would be misleading. Other sources, such as Statistics Canada and credit rating agencies, already provide high level indicators based on their own methods of adjusting information for comparability. 12. Do you agree that when a government chooses to report indicators of financial condition, it would acknowledge its responsibility for preparing and reporting the indicators, key assumptions made and methodologies applied? (principle 14) Governments should acknowledge responsibility for all information included in financial statements and supplemental information. ---