PSAB based financial reporting and governance for District School Boards

1. PSAB based financial reporting and governance for District School Boards Information Session for School Board Finance Staff and External Auditors Transfer Payments & Financial Reporting Branch Fall 2008

2. Purpose • The Ministry of Education (EDU) is looking to modernize the accountability framework (i.e. financial reporting model, grants/funding, and governance/budget compliance) for the School Board Sector • EDU is consulting with stakeholders, and is seeking agreement to the financial statement presentation of results. 2007-08 Grants for Student Needs

3. Current Situation • Balanced budget requirements and grant entitlements are primarily cash based • Financial reporting is a combination of cash and accrual based calculations • By 2009-10 PSAB reporting for DSBs must include: • capitalization of tangible capital assets (TCA) on their own entity level financial statements, and • Changes to the presentation of reserves in financial reporting. • Many of the challenges for DSB financial reporting changes are similar to other Government Not For Profit Organizations (GNPO) that are contemplating moving from NPO GAAP to PSAB. 2007-08 Grants for Student Needs

4. Rationale and Goals Rationale & Goals • Aligning the component parts of the financial reporting, entitlement concepts and governance framework to work together and provide meaningful and consistent information to the users of the financial statements. • Improve public confidence through eliminating “two sets of books”. • Develop meaningful Entity Level Financial Statements as these issues have no impact on the Provincial Consolidation 2007-08 Grants for Student Needs

5. Why Now • DSB’s have been on PSAB for financials since 2003 but the Education Act hasn’t been modernized yet. • Accrual accounting will be used in any financial reporting model the sector chooses. • DSB’s have to add the capital assets to their books which adds very material timing differences between cash and accrual • Concept of equity reserves is not aligned with PSAB reporting 2007-08 Grants for Student Needs

6. Implementation Issues • The presentation touches on the following three key impacts: • Treatment of Capital for reporting • Update concepts of “equity reserves" in legal and reporting framework. • Separate concepts of cash requirements from a revenue entitlement. 2007-08 Grants for Student Needs

7. Modernization Goals for Capital • Increase emphasis on DSBs to manage both their operational results, and the capital impact on results • Decisions are balanced between short term objectives and longer term consequences • Focus on managing costs and cash separately • Use PSAB financial statements as a key accountability document for the sector 2007-08 Grants for Student Needs

8. CONCEPT: Treatment of Capital • Capital transactions should only affect budget compliance if: • Capital decision relied on, or resulted in, the need for additional revenue or lower expenses to fund the total cost of the capital project. What does this mean? • Budget compliance should not be effected by: • timing of accounting recognition for capital funds provided or, • planned and approved amortization (i.e. “funded” amortization) • Any capital not directly funded should reflect pressures for single year caused by excess expenses such as the incremental amortization or interest. This would exist in situations such as over benchmark capital construction or over benchmark financing costs. 2007-08 Grants for Student Needs

9. How do we measure capital transactions? • Currently investigating the mechanics of defining an accrual based balanced budget compliance • Preferred method – Use Deferred Capital Contributions • Defer capital revenue and recognize it on the same basis as recognizing amortization expense. Interpretation of standards is not settled with this issue so we are starting with a transitional alternative • Alternative (transitional) – Break up the current Statement of Operations into 2 statements • School Board Operation  Budget Compliance • Capital Operations Statement  Capital Liquidity or other measure • Alternative – Provide capital revenue separate from cash needed for capital plus break up the current Statement of Operations into 2 statements • Revenue entitlement = amortization & interest @ standard • Cash entitlement = principle & interest @ standard • Difference is an inter-company balance with the Province. • Does not fully address internally funded capital. 2007-08 Grants for Student Needs

10. Equity Type Reserves • Reserves are a concept used in predominantly in Not-for-Profit accounting • PSAB statements do not have a financial statement element of equity • Reserves concepts are replaced with accumulated surplus or deficit • Externally restricted reserves will be shown as a liability on the balance sheet • Unrestricted reserves will be replaced with a concept of accumulated surplus • Provincial controls will be redesigned on changes to accumulated surplus • Overall control - allowing a variance of up to 1% on operating allocation to a maximum of available accumulated surplus will draw down accumulated surplus on the financial statements much like how currently boards draw down on a reserve for budget compliance • A DSB with an accumulated deficit or meets other thresholds – needs a deficit management plan 2007-08 Grants for Student Needs

11. Board Defined Reserves • Appropriated vs. un-appropriated accumulated surplus • Leg/reg references need updating as externally restricted reserves are considered liabilities under PSAB • Boards can still appropriate the accumulated surplus for a specific purpose, e.g. Snow removal reserve. These are within discretion of the management or trustees • These can be shown in the notes to the financial statements • Any in-year deficit less that 1% of operating allocation to the maximum of any accumulated surplus will be automatically approved, however it will be at the discretion of the board where it comes out of if accumulated surplus if any has been appropriated for a specific purpose. • Any in-year deficit greater that 1% of operating allocation to the maximum of any accumulated surplus will need ministry approved but it will be at the discretion of the board where it comes out of if accumulated surplus if any has been appropriated for a specific purpose. 2007-08 Grants for Student Needs

12. Funding definitions: Cash vs. Revenue • Current regulatory entitlements calculate a cash payment which the boards record as revenue. • The concept of “Funding” needs separation into funding DSB costs through a “Revenue Entitlement”, and funding the cash requirements with a “Cash entitlement”. • Generally for most operating costs, the revenue entitlement is equal to the cash payment. This is not necessarily the case for capital infrastructure investments or employee future benefits. • With separating cash flow from revenue entitlements the financial impact of any decisions that causes expenses to exceed a revenue entitlement benchmark must be internally managed by the board, as it will be reflected as a deficit used for budget compliance. 2007-08 Grants for Student Needs

13. Funding Cash flow vs. Revenue • The Ministry will need to establish a mechanism to provide cash to DSBs that is different from their revenue entitlement as a result of past or current decisions (e.g. existing debt agreements, new capital investments) • Grant revenue calculation is accomplished using activity based drivers and benchmark rates to establish expense controls for the DSB to manage. • Any difference between the cash funding and the PSAB based revenue entitlement will result in a Due to/Due from the Province. • Mixed purpose grants introduce variability in planning for financial results and when possible will be separated into separate operating and capital components (e.g. School Renewal Grants) 2007-08 Grants for Student Needs

14. Implications of using a Revenue Entitlement • The financial impact of any decisions that causes expenses to exceed a revenue entitlement benchmark in a particular year must be internally managed by the board, as it will be reflected as a deficit used for budget compliance. • The difference between the cash and revenue entitlement will be a Due to/from the province. • This method addresses having the current government recognize the impact of EFB so that payment is only a cash transaction not an appropriation approval in the future. 2007-08 Grants for Student Needs

15. What can I do? • Re-enforce accrual based accounting concepts with your stakeholders • Budget Compliance reports will be on an accrual based calculation and reference PSAB statements when they are fully accrual based. • Look at current operational and capital results to understand if one may be funding pressures in the other. 2007-08 Grants for Student Needs

16. Current Timelines • Discuss changes with central agencies (fiscal management & infrastructure planning) (now) • Changes in legislation to reflect accrual based concepts (Mar) • Changes in regulation to reflect accrual based calculations for revenue and separate cash entitlements. (Mar) • Education on new balanced budget concepts (Jan) • Updates to EFIS forms (ongoing) 2007-08 Grants for Student Needs