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.

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