The Auditor General has qualified his audit report on the government's
1996/97 financial statements. Two of the qualifications relate to the accounting
and reporting treatment of capital assets of the Consolidated Revenue Fund
(CRF), and loans to finance capital assets of other entities. This topic
box addresses these issues. The third qualification relates to the appropriate
reporting entity. This issue has been referred to the Public Accounts Committee
of the Legislature for comment and advice.
A. Capital Assets of the Consolidated Revenue Fund
The Auditor General has recommended that the provincial government capitalize
all of its capital assets. Capitalization of assets and the expensing of
the costs of those assets over their estimated useful life, as opposed
to expensing the costs in the year of acquisition, provides a more accurate
reflection of the annual cost of programs and is consistent with private
sector accounting.
In the 1996/97 budget, the government announced it would capitalize
land, buildings and other fixed assets held by all Crown entities, other
than highway infrastructure expenditures of the BC Transportation Financing
Authority. In the 1997/98 budget, the government announced the extension
of this policy to certain capital assets held by the CRF. The asset classes
to be capitalized were vehicles, buildings and computer systems.
In the 1996/97 Summary Statement Public Accounts, the Auditor General
qualified his opinion, noting that the government was capitalizing land
held by most Crown entities but was not capitalizing land acquired by the
CRF, and that the accounting policy with respect to land was therefore
being applied in an inconsistent manner.
The 1998/99 Estimates reflect the extension of the capitalization
accounting policy to parkland and ferries and landings. With this change,
and the application of capitalization to a wider range of assets, it is
expected that this qualification will be removed from the financial statements.
These extensions of the capitalization policy decrease the deficit by $2
million in the 1997/98 budget forecast amount, and by $2 million in the
1998/99 budget estimate amount.
The adoption of the policy to capitalize assets has no impact on the
government's total taxpayer-supported debt.
B. Loans to Finance Capital Assets of Other Entities
The government has, for more than 20 years, accounted for loans to school
districts and post-secondary institutions for the acquisition of capital
assets by those public bodies, as assets of the Province. These loans have
been made from borrowed funds using certain Crown agencies as financing
intermediaries.
Grants have been provided to school districts and post-secondary institutions,
as annual budgetary expenditures in the Estimates, (i) to pay the annual
interest costs on the debt incurred to make the loans, and (ii) to make
annual sinking fund instalments to the Crown agencies, which over time,
together with the earnings of those invested funds, are sufficient to retire
the debt associated with each loan. The term of the debt was generally
20 years. In this way, the capital costs of schools and post-secondary
institutions were effectively amortized over the term of the related debt
and thus charged to taxpayers over several years, rather than having the
costs written off and charged to the taxpayer in the year the assets were
acquired.
In 1995, the Canadian Institute of Chartered Accountants issued a policy
statement that loans made by governments, the repayment of which is provided
through future appropriations by that government, should not be reported
as assets.
The government has maintained its long-standing position that although
these loans are repaid through future appropriations, these loans should
be accounted for as public assets since the loans represent the underlying
value of the schools and post-secondary institutions that are used to deliver
essential public programs. Therefore, it is equitable and appropriate to
expense the cost of those assets over several years, rather than to have
all of the costs charged to budgetary expenditures in the year the asset
is acquired.
The Auditor General qualified his opinion on both the CRF and Summary
Financial Statements in 1995/96 and 1996/97 in respect of the loans to
school districts and post-secondary institutions, and in respect of similar
loans, also repayable through future appropriations, made to regional hospital
districts and for capital financing to BC Transit.
Commencing with the 1998/99 fiscal year, the government is winding up
the two financing agencies used to provide capital financing loans to the
school districts and post-secondary institutions.
These entities, the British Columbia School Districts and the British
Columbia Educational Institutions Capital Financing Authorities, which
were created in 1963 and 1976 respectively, also hold the related sinking
funds used to retire the debt. The amount of the outstanding loans and
offsetting debt (net of sinking funds) at March 31, 1998 is estimated at
$4.3 billion. This debt will now be included as part of direct debt of
the CRF. The existing outstanding loans to school districts and post-secondary
institutions will be cancelled.
The amount of those loans and new capital funding provided to school
districts and post-secondary institutions will now be treated, for financial
statement reporting purposes, as prepaid capital advances (assets of the
CRF) and amortized over the useful life of the underlying assets. The amortization
period will, on average, approximate 30 years. Borrowing for schools and
post-secondary capital projects will now be raised directly through the
CRF and included in the annual Supply Act.
The impact of this initiative on the 1998/99 Estimates is to
reduce budgetary expenditures by an estimated $30 million in the Ministry
of Advanced Education, Training and Technology and to increase budgetary
expenditures by an estimated $5 million in the Ministry of Education. The
impact on 1998/99 financing (non-budgetary) transactions is to increase
Supply Act requirements by $423 million and to decrease capital
requirements previously borrowed through statutory borrowing provisions
under the financing authorities legislation by an equal amount. There is,
therefore, no impact on the government's total taxpayer-supported debt.
The Auditor General has indicated he is in support of the winding up
of the two financing authorities, the replacement of the loans with prepaid
capital advances as assets of the CRF, and the amortization period for
those advances, as a means of addressing the qualification for the loans.
The government anticipates extending this treatment to the remaining
loans repayable through future appropriations to regional hospital districts
and BC Transit. This will necessitate the winding up of the British Columbia
Regional Hospital Districts Financing Authority. When these steps have
been completed, it is expected the qualification in respect of these loans
will be removed from the financial statements.
