J. Prepaid Capital Advances Procedures

J.1 General

Ministries are responsible for implementing and administering their Prepaid Capital Advance (PCA) control practices in compliance with prepaid capital advance accounting and administration policies (CPPM 3.4.3(e)) and procedures. Ministry records must be reconciled to central accounts balances, errors and omissions corrected.

Principles for establishing and recording a PCA:

• the PCA embodies a future benefit that involves a capacity, singly or in combination with other assets to provide services;
  
  
• the entity making the PCA can control access to the benefit such that services will be delivered; and
  
  
• the transaction or event giving rise to an entity's right to, or control of, the benefit has already occurred.
  

A PCA has all of the following criteria.

Criterion 1

Capital assets acquired as a result of the PCA are dedicated to carrying out the Province's ongoing accepted program responsibilities.

Indicators:

• The program falls under the jurisdiction of the Province under the Constitution Act (e.g., health, education and transportation).
  
  
• The Province has not delegated its responsibility for the program funding to another level of government.
  
  
• There is ongoing funding for capital assets used in the program.
  
  
• There is ongoing inclusion of operational funding for the program in the Consolidated Revenue Fund, government agencies or Crown corporations.
  
  
• There is ongoing government involvement in the operating policy of the organization such as influencing a significant portion of the types/amounts of revenues or expenses that may be charged or incurred by the organization.
  

Criterion 2

The tangible capital asset and the related program are for the benefit of the Province's general public.

Indicators:

• The tangible capital asset is acquired by an organization that provides a service to the general public.
  
  
• The recipient organization has agreed to provide this service.
  
  
• The program in which the asset is employed may be geographically based or otherwise restricted in offering, but within these restrictions, available to the general public.
  

Criterion 3

Government has a claim to use the tangible capital assets to deliver the service and fulfil its responsibility.

Indicators:

• The recipient organization has agreed to the Province's claim on the assets.
  
  
• Government accepts responsibility for ensuring proper maintenance of the asset.
  
  
• Residual ownership of the assets reverts back to the Province.
  
  
• Change of use requires prior approval by the Province.
  
  
• Proceeds from disposition of the assets are applied at the discretion of the Province.
  

Criterion 4

Tangible capital assets are not acquired by a government enterprise or by a government business partnership as defined by the Public Sector Accounting Board (PSAB).

Indicators:

• Organizations acquiring the tangible capital assets cannot, in the normal course of operations, maintain their operations and meet their liabilities from revenue received from sources outside the government reporting entity.
  
  
• The organization is not included in the Summary Financial Statements of the Province on a modified equity basis.

J.2 Information Flow and Monitoring

Responsibility of information flow and monitoring are as follows:

Ministries

• co-ordinate capital expenditure requests from organizations under their jurisdiction;
  
  
• ensure that recipient organizations are aware of the terms under which the funds for acquisition of the tangible capital assets have been advanced;
  
  
• advise recipient organizations of the appropriate accounting requirements and ongoing reporting of PCA balances;
  
  
• ensure that the necessary accounting structure is in place to permit appropriate recording and reporting of the PCA amounts;
  
  
• provide a process for recipient organizations to advise the ministry if they are making a significant disposal or write-off of a funded asset to avoid unanticipated year end write downs;
  
  
• in consultation with the Capital Division and FRAS, establish the appropriate amortization rate for the PCA's. The amortization rate must provide for the write off of the PCA over the life of the acquired assets and include land cost amortization as well as allow for normal program losses;
  
  
• review the PCA amortization rate on a regular basis to ensure it is adequate and reasonable. Ensure PCA amortization is recorded in government records on a monthly basis and provide the annual amortization amount to Treasury Board Staff for the Estimates;
  
  
• ensure the amortized PCA total in the books of the Province is not higher than the amortized value of the provincial share of the tangible capital assets held by the funded agencies; and
  
  
• provide year-end confirmation of the PCA balances (i.e., opening balance, current year issues, accumulated amortization and annual amortization expense) in the Corporate Accounting System (CAS) to FRAS.
  

Capital Division

• track amounts paid to organizations to acquire tangible capital assets and categorize according to the agreed classification on an ongoing basis; and
  
  
• ensure relevant ministry is advised, on request, or at least quarterly, of the current status of amounts advanced by classification to organizations under their jurisdiction.
  

Financial Reporting and Advisory Services

• provide an amortization schedule for amounts advanced and then forgiven through the Fiscal Agency Loan (FAL) Program;
  
  
• monitor monthly amortization expense;
  
  
• review ministry's accounting structure to ensure the PCA amounts are appropriately recorded and reported by the ministry; and
  
  
• provide accounting advice on unusual/unique issues that arise with respect to this new accounting policy.
  

Treasury Board Staff

• include current year PCA issues and annual amortization amounts in the Estimates; and
  
  
• monitor monthly capital expenditure and amortization expense.

J.3 Amortization

Classes of assets and the related amortization rates for PCA's are estimated to be:

Note 1:

Amounts advanced through the old fiscal agency loan or guaranteed debt programs will be amortized using an average rate based on the average life of all classes of assets within the major sectors. This would be before April 1, 1998 for the Education sector and before April 1, 1999 for Health and Transportation sectors. This results in the following rates:

School Districts	32 year amortization
Advanced Educational Institutions	22 year amortization
Health sector	24 year amortization
Transportation	Same rate as used for the depreciation of the Crown's asset

Note 2:

Assets acquired with PCA's rather than through the FAL program will be amortized using a rate that provides for normal program losses through disposal, destruction, degradation or other similar loss plus amortization of the assets. Rates are approximations and must be adjusted by the relevant ministry, as appropriate if actual experience would indicate this rate is too high or low. This is to be done in consultation with OCG, TBS and OAG.

Note 3:

Amounts advanced to Transportation Crowns will be amortized at the same rate as is used for the depreciation of the Crown corporation holding the asset. Transportation amortization is based upon a full recovery for asset costs over their useful life.

Amortization will commence in the year following the issue of the funds for health and education organizations. For transportation, the amortization will commence in the year the tangible capital assets start to be amortized by the recipient organization (the asset goes into service). Capitalized financing costs will be considered a part of the cost of acquisition of the asset and will be part of the PCA total advanced.

PCA's are amortized based upon the period established for that class of asset for which the funds were advanced. Where amounts are advanced in bulk and cannot be specifically related to a particular class, then a reasonable allocation will be made. The period established will consider not only the normal life of that class of asset but also the historical and anticipated experience with premature loss due to destruction, sale or other disposal.

Loss or disposal of funded tangible assets that are within the normal program experience should not impact the yearly amortization amount. The amortization rate for PCA's should provide for the following situations:

• loss due to disaster (fire, flood, earthquake, vandals, etc.). The government provides much of the insurance for the organizations receiving prepaid capital advances. Insurance proceeds from Risk Management Branch are expensed by the Consolidated Revenue Fund as paid. Assuming the insurance proceeds are paid through operating expense and used to replace the asset, no change to the PCA amount is required. If the replacement is through a new PCA, then the book value of the repaired building will need new comparison to the PCA total.
  
  
• the amortized costs of major assets that are sold or disposed of do not necessarily need to be removed from the PCA amortization schedule. The write-down should already be provided for in the excess amortization being charged on a yearly basis.
  
  
• the sale proceeds for an asset acquired through a PCA is part of the calculation of the gain or loss on disposal. The amount of write-off would be reduced by the amount obtained from sale of the old asset or insurance proceeds.
  
  
• when the proceeds of disposal are used to off-set amounts to fund a new asset, the total PCA for the new asset should be grossed up to include amounts obtained from the old asset (i.e., the old asset disposal and new asset recording should be shown as separate transactions).
  
  
• when an asset is temporarily taken out of use, or temporarily used to obtain revenue for the original program pending a decision on use or disposal, the PCA will continue to be amortized as before. The related revenue is applied to the same government program; therefore, revenue and expenses are matched and does not constitute a change in use for the PCA.

Land is not normally amortized; therefore, to ensure a valid comparison of the PCA to related assets, the value of the land held by the recipient organization must be reduced by the accumulated amortization on that part of the PCA value.

J.4 Prepaid Capital Advances – Write-downs and Write-offs

A write-down is used to reflect a partial impairment in the value of an asset. For a total loss, please refer to CPPM M.8, Accounting for Losses.

Adjustments to the PCA amount and the related amortization schedule for each sector (e.g., education) other than for new advances should occur:

• only where the provincial portion of the net book value of all the underlying assets for a PCA is less than the amortized PCA; or
  
  
• there has been a significant restructuring of a program resulting in a material disposal of assets.
  

Policy

• When the permanent reduction in the value of an asset can be objectively estimated, the PCA must be written down.
  
  
• The net effect of write-downs of PCA's for the period must be accounted for as expenses in the Statement of Operations.
  
  
• If a write down is necessary, then a review of the amortization rate for assets of the program as a whole must be undertaken and FRAS and TBS advised of the results of the review as quickly as possible.
  
  
• A write-down cannot be reversed.
  
  
• A PCA is never written up except on initial capitalization.

Conditions that may indicate a write-down is necessary include:

• a change in the manner or extent to which the underlying asset is used;
  
  
• removal of the asset from service;
  
  
• physical damage;
  
  
• significant technological developments;
  
  
• a decline in, or cessation of, the need for the service provided by the asset;
  
  
• a decision to halt construction of the asset before it is complete or in useable or saleable condition; or
  
  
• a change in the law or environment affecting the extent to which the asset can be used.

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