Provincial Comptroller’s Office September 2012

GOVERNMENT TRANSFERS APPLICATION GUIDANCE

PSAB SECTION 3410

Table of Contents RECOGNITION CRITERIA ................................................................................................................................ 1

Transferring Government Recognition ..................................................................................................... 2 Authorization ........................................................................................................................................ 2

Budgetary Authority .......................................................................................................................... 3 Demonstrably Committed ................................................................................................................ 4

Eligibility Criteria ................................................................................................................................... 5 Transferring Government | Recipient Government Symmetry ................................................................ 6 Recipient Government Recognition .......................................................................................................... 6

Authorization and Eligibility Criteria ..................................................................................................... 7 Stipulations ........................................................................................................................................... 7 Liability Assessment .............................................................................................................................. 8

Determining Whether Transfers Received are Liabilities ................................................................. 9 Subsequent Transfers ..................................................................................................................... 10 Unspent Funds ................................................................................................................................ 10

TRANSFER TYPES ......................................................................................................................................... 11 IMPACT OF OTHER ACCOUNTING GUIDANCE ............................................................................................ 11

Liability for a transferring government ................................................................................................... 11 Contractual obligations ........................................................................................................................... 12

PRACTICAL APPLICATION OF PS 3410 GOVERNMENT TRANSFERS ............................................................. 12 Reviewing Transfer Documentation ....................................................................................................... 12 Transferring Government ....................................................................................................................... 14

Assessing when an expense is recognized .......................................................................................... 14 Authorization ...................................................................................................................................... 14

Demonstrable commitment ............................................................................................................ 15 Eligibility Criteria ................................................................................................................................. 15

Recipient Government ............................................................................................................................ 15 Assessing when revenue is recognized ............................................................................................... 15 Authorization ...................................................................................................................................... 16 Eligibility Criteria ................................................................................................................................. 16 Stipulations ......................................................................................................................................... 16 Determining whether a liability exists ................................................................................................ 17

Do the stipulations create a liability for the recipient government? ............................................. 17 Assessment forms ................................................................................................................................... 18

Transferring government assessment ................................................................................................ 19 Recipient government assessment ..................................................................................................... 21

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In PS 3410 Government Transfers, the Public Sector Accounting Board (PSAB) provides recommendations to governments and other public sector entities on accounting for government transfers. The application guidance presented here provides assistance in applying the PSAB recommendations and should be used in concert with the PSAB handbook. PSAB defines government transfers as: Reference PSAB Section

PS 3410.04 Transfers of monetary assets or tangible capital assets from a government to an individual, an organization or another government for which the government making the transfer does not: • receive any goods or services directly in return, as would occur in a purchase/ sale

or other exchange transaction; • expect to be repaid in the future, as would be expected in a loan; or, • expect a direct financial return, as would be expected in an investment.

Government transfers are the most significant expense of the General Revenue Fund and, given their non-exchange nature, determining when it is appropriate to record a transfer expense or transfer revenue can be complex. Legislation provides the government with the ability to make a transfer (i.e., its legal authority), and any regulations, signed agreements or other official documents that are entered into under that legislation are critical to determining the timing of expense. Since there is no exchange of goods or services to identify when an amount is due (i.e., when the transferor owes economic resources to a recipient) an assessment of the legislation, legal documents and any relevant supporting papers is required in order to determine the appropriate timing for recording a transfer. This guidance first addresses expense recognition for transferring governments and follows with revenue recognition for recipient governments. Specific wording from PS 3410, including the glossary and appendices is set out in shaded tables (as above). More specific guidance on how to apply the recommendations to a specific government transfer, including questions to consider is included subsequent to the general guidance. RECOGNITION CRITERIA PSAB provides guidance to transferring governments for recording transfer expense and to recipient governments for recording transfer revenue. The recognition criteria differ for transferring and recipient governments.

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Transferring Government Recognition PSAB sets out two criteria that need to be met for a transferring government to record a transfer expense, the transferring government needs to have authorized the transfer and the recipient needs to be eligible for the transfer. PS 3410.12 A government transfer should be recognized by a transferring government as an

expense in the period the transfer is authorized and all eligibility criteria have been met by the recipient.

Authorization Authorization (set out in PS 3410.28) requires two actions by the transferring government; first, the enabling authority must be in place by the financial statement date (that is, the statute or regulation that establishes the transfer is in force) and second, the transferring government must exercise the authority provided it by that enabling authority. PS 3410.28 (a)

(i) the enabling authority to provide a transfer is in place, which is conveyed through approved legislation, regulations or by-laws of the transferring government, and

(ii) an exercise of authority under that approved legislation, regulations or by-laws has occurred. In essence, a decision has been made by the transferring government under the approved legislation, regulations or by-laws that clearly demonstrates that it has lost its discretion to avoid proceeding with the transfer.

The enabling authority for a transfer provides the government with the legislative authority to make a transfer to an individual or an organization; this type of authority often allows and sometimes requires the government to make a transfer by including phrases like, “the Minister may provide a grant” or “the Minister shall provide a grant.” Some transfer programs are authorized in legislation specific to that transfer (e.g., Active Families Benefit Act), while other transfers are authorized under The Executive Government Administration Act (EGAA), which (for transfers greater than $50,000) requires approval of the Lieutenant Governor in Council through Regulations or Order in Council. Any authorization under the EGAA also requires that the government (usually the minister is specified) be provided authority in another piece of legislation to undertake the activity. The EGAA and this other authorizing legislation work in conjunction to provide the government the authority to make a transfer. Often, the legal authority only enables the government to provide the grant, and at some point in the future, a decision is made and an action is taken that means the government has given up its discretion to make the transfer. This decision and subsequent action is the exercise of authority – that is, the second level of authorization. Exercising its authority leaves a government with little or no discretion to avoid making the transfer. Some transfer agreements may have a number of approval points at different stages of the process; an assessment is required to determine at which of these points the government no longer has discretion.

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An Order in Council (OC) is often part of the process for providing a transfer. The OC might form part of the legal authority, or in some cases could be part of the actions taken by the government to exercise its authority. It is important to look at the OC and other approvals in the context of the whole transfer process to determine when the government has lost its discretion. In many cases, the signature of an individual with the delegated authority to provide that approval will be evidence that the government has exercised its authority. For example, the signature on a transfer approval form of the Deputy Minister or a Program Manager who has the delegated signing authority would be evidence of the exercise of authority. In some cases, the signing of a contract or agreement will be the final authorization required, because recipients are then qualified to receive the transfer (or will be qualified when they meet any eligibility criteria embodied in the agreement). The government loses its discretion whether to provide the transfer when the agreement is signed. Direction from Cabinet or Treasury Board would not indicate loss of discretion. Until an agreement is signed or the delegated authority has provided approval, the government still retains discretion over the transfer. In many cases the government will communicate its intention to provide a transfer. Communications in the form of a public news release or political announcement would not provide evidence that a government has lost its discretion. However, other more direct forms of communication (e.g., letter to the recipient) may need to be considered to determine whether the government retains discretion over the transfer. Determining the point at which government has little or no discretion is not based upon political pressures or moral expectations. While it may be true that a government cannot avoid making certain transfers without serious political repercussions (e.g., in grants for health or education), transfers are accounted for based on the content and structure of the specific arrangement and the transfers guidance. The public or political importance of a transfer does not impact the timing of expense recognition. Budgetary Authority PSAB clarifies that authority to pay (or budgetary authority) may be part of the authorization process. However, a government can still lose its discretion even though it does not have the authority to pay. An assessment is required to determine whether budgetary authority impacts timing of expense recognition. PS 3410.28 In some cases, the authority to pay may be part of the authorization process for the

purposes of this Section and its absence at the financial statement date may indicate that the exercise of authority required by (a) or (b) is not complete. In such cases, the government may retain its discretion to avoid proceeding with a transfer until the authority to pay is in place.

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The term of some transfer agreements extend beyond one fiscal year (multi-year agreements). Budgetary authority may play a significant role in the authorization process in these types of agreements. Agreements may be written such that the Legislative Assembly’s approval of a future year’s budget comprises a part of the authorization process (e.g., where the agreement is no longer binding unless the Legislative Assembly approves the appropriation). The approval by the Legislature of future Appropriation Acts might, in such circumstances, act as the point where the government loses its discretion to avoid making the transfer in that future fiscal year. However, wording in other agreements may indicate that payments will be made “subject to appropriation.” This type of standard clause would not, even in multi-year agreements, provide sufficient evidence that budgetary authority is part of the authorization process. From an accounting perspective, expenses may need to be recorded even though there is no appropriation available. It is important to remember that, “budgetary authority” is not the same thing as “budget room” meaning that, if discretion is lost, an expense must be recorded even when there is no budget available. Demonstrably Committed In rare cases, a government could, through its own actions become “demonstrably committed” to providing authorization. This type of authorization is only valid when the governing legislation (or enabling authority) is not in force, and only applies to a transferring government – it does not impact revenue recognition by a recipient. A government would be demonstrably committed if there was a significant amount of evidence to show that the government has lost its discretion to avoid providing the transfer. PSAB has also specified that for a government to apply this type of authorization, the enabling authority (legislation or regulations) must be in place before the financial statements are completed. PS 3410.28 (b)

(i) actions and communications of the transferring government by the financial statement date clearly demonstrate that it has lost its discretion to avoid proceeding with a transfer and thus the government is demonstrably committed to approving the enabling legislation, regulations or by-laws for the transfer and proceeding with the transfer; and,

(ii) final approval in the stub period of the enabling legislation, regulations or by-laws confirms that the transferring government was demonstrably committed to approving and proceeding with the transfer at the financial statement date.

If it is determined that there is enough evidence to conclude the transferring government has lost its discretion and is demonstrably committed to providing authorization, the authorization criteria has been met for the transferring government at the financial statement date. For transfers without eligibility criteria, an expense would be accrued in the financial statements; where there are eligibility criteria, the expense would be recorded when those criteria are met by the recipient.

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PSAB points to guidance provided in the PS 3200 Liabilities for constructive or equitable obligations to determine whether a government is demonstrably committed to providing a transfer. The paragraphs identified (PS 3200.07 through PS 3200.17) provide detailed guidance on loss of discretion. Eligibility Criteria A recipient’s eligibility is the second of the two recognition criteria for determining timing of expense recognition. Recipients may be required to have certain characteristics or perform certain actions to qualify for a transfer. The transferring government has an expense when it approves the transfer and the recipient meets the eligibility criteria. Most transfer programs include conditions or terms that must be met by the recipient. PSAB classifies all transfer terms that must be met by the recipient as either eligibility criteria or stipulations. PS 3410.08 Eligibility criteria describe who a recipient must be or what it must do in order to be

able to get a government transfer. Stipulations describe how a recipient must use transferred resources or the actions it must perform in order to keep the transfer.

PSAB is clear that the “crucial characteristic that distinguishes” eligibility criteria from stipulations is the timing that the condition is met by the recipient. A recipient must meet eligibility criteria before it qualifies for the transfer. Eligibility criteria are defined in the glossary: Glossary Eligibility criteria are terms imposed by a transferring government that specify who

qualifies to receive a transfer and/or the actions necessary to qualify for a transfer. The nature and substance of the eligibility criteria is such that they must be met before a transfer is provided. They are pre-conditions that must be satisfied in advance in order for a recipient to qualify for a transfer.

PSAB makes it clear that a transferring government would never record a prepaid transfer (PS 3410.13); if the cash is paid (or the transfer is otherwise provided) before the recipient meets eligibility criteria, an expense is always recorded. PSAB explains that when a government provides a transfer before the recipient becomes eligible, that government has made a decision to change the terms of the transfer. In this situation, the unmet eligibility criteria become stipulations of the transfer. Stipulations are discussed in detail under the Recipient Government Recognition section in this document.

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Eligibility criteria set out how a recipient qualifies for a transfer. Eligibility can include characteristics or actions performed. For instance, legislation may set out what characteristics the recipient should have (e.g., must be a municipality or must have suffered flood damage); in other cases, the legislation or agreement may require the recipient to do something to qualify (e.g., the municipality may be required to build a road or the property owner with flood damage may have to make an application by a specified date). Agreements will often contain a schedule of transfer payments. When the transfer has been authorized and the recipient has met eligibility criteria the full amount of the transfer must be recorded as an expense. Delayed cash flow does not delay recognition of the expense. Transferring Government | Recipient Government Symmetry PSAB is clear that symmetrical accounting by the transferor and recipient of a government transfer is not required. That is, when both the transferring government and the recipient government apply PS 3410 to the same transfer, the transferring government may have an expense before the recipient government is required to recognize the transfer in its financial statements. The timing of transfer recognition by one party does not impact the timing of recognition for the other party. Recipient Government Recognition The recognition criteria for recipient governments are similar to those for transferring governments, but for one exception. Recipient governments record revenue when a transfer is authorized by the transferring government and eligibility criteria are met by the recipient, unless the transfer gives rise to an obligation that meets the definition of a liability. The default for recipient governments is immediate recognition of revenue. PSAB splits the revenue recognition criteria for recipient government transfers into three types: Transfers without conditions to be met by the recipient are recognized as revenue when authorized; the recipient government immediately recognizes revenue. PS 3410.16 A transfer without eligibility criteria or stipulations should be recognized as revenue

by a recipient government when the transfer is authorized. Transfers with eligibility criteria but no other terms to be met by the recipient are recognized as revenue when authorized and eligibility criteria are met; in this case as well, the recipient government immediately recognizes revenue, because eligibility criteria are items that must be met before the transfer is provided. PS 3410.17 A transfer with eligibility criteria but without stipulations should be recognized as

revenue by a recipient government when the transfer is authorized and all eligibility criteria have been met.

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Transfers that include stipulations – that is, terms or conditions to be met by the recipient that don’t meet the definition of eligibility criteria – are recognized as revenue when authorized and eligibility criteria are met unless the transfer stipulations establish a liability. In this case, the default for the recipient government is immediate recognition of revenue. If a liability has been created, revenue is recognized as the stipulations are met by the recipient government. PS 3410.19 A transfer with or without eligibility criteria but with stipulations should be

recognized by a recipient government as revenue in the period the transfer is authorized and all eligibility criteria have been met, except when and to the extent that the transfer gives rise to an obligation that meets the definition of a liability for the recipient government in accordance with LIABILITIES, Section PS 3200.

Authorization and Eligibility Criteria Authorization and eligibility criteria have the same meanings for recipient government recognition as for transferring government recognition described earlier. However, authorization for recipient governments does not include the concept of being demonstrably committed to providing authorization. This means that if a transferring government has relied on demonstrable commitment to authorization to fulfill the authorization component in recording a transfer expense, the recipient government would not record the transfer until the subsequent period. Stipulations Stipulations are transfer terms that must be performed to keep a transfer; stipulations differ from recognition criteria, which are met in order to get a transfer. Eligibility criteria matter for the recording of transfers (both expense and revenue), whereas stipulations impact revenue recognition only – and only in rare circumstances. The key to determining whether a transfer term is an eligibility criterion or a stipulation is the timing of when the condition is met; if a condition does not need to be met until after the recipient qualifies for the transfer, that condition is a stipulation. PS 3410.08 …the crucial characteristic that distinguishes the substance of these two types of

transfer terms [eligibility criterion or stipulation] is when they are required to be or are met by a recipient. If a term is required to be and is met before the transfer is provided, it is an eligibility criterion for the purposes of this Section. If a transfer term is met after the transfer is provided, it is a stipulation for the purposes of this Section.

Stipulations might set out the purpose for which transferred resources must be used, for example: to acquire or develop a tangible capital asset; to carry out a specific activity, like provide childcare services; or, to achieve a specific goal, like hiring a specified number of new employees.

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Or, stipulations might specify when resources must be used, for example: in a specific fiscal year (i.e., a particular period of use); or, through a specified number of fiscal years (i.e., a particular pattern of use). As noted in the Transferring Government Recognition section of this document, eligibility criteria become stipulations if the transferring government decides to make the transfer (i.e., pay the cash) before those eligibility criteria are met. Even though the transfer was provided, the terms must still be met, and are assessed as stipulations. It would be rare that the existence of transfer stipulations would indicate that a liability is created and deferral of revenue by the recipient government can occur. The stipulations must be assessed in conjunction with the recipient government’s actions and communications to determine whether an obligation that meets the definition of a liability has been created. Liability Assessment About Liabilities PSAB provides guidance on liabilities in PS 3200. A liability has three essential characteristics: - A government has little or no discretion to avoid the obligation; - There is expected to be a future sacrifice of economic benefits; and, - The transactions or events obligating the government have already occurred. PS 3200.05 Liabilities are present obligations of a government to others arising from past

transactions or events, the settlement of which is expected to result in the future sacrifice of economic benefits. Liabilities have three essential characteristics: a) they embody a duty or responsibility to others, leaving a government little or no

discretion to avoid settlement of the obligation; b) the duty or responsibility to others entails settlement by future transfer or use of

assets, provision of goods or services, or other form of economic settlement at a specified or determinable date, on occurrence of a specified event, or on demand; and,

c) the transactions or events obligating the government have already occurred. PS 3200.07-.08 describe what it means for a government (in this case the recipient of a transfer) to have lost its discretion. Discretion is said to be the ability to make individual choices, judgments or decisions and that if discretion is lost, a government has no realistic alternative but to settle the obligation. The obligation does not depend on future actions of the government or other transactions or events. The government has given up its freedom to make further choices, judgments and decisions related to the obligation. PSAB requires that the future sacrifice of economic benefits be to a third party (PS 3200.19) and the timing of that sacrifice must be specified (PS 3200.21); for example, the payment has to be made on a certain date or when a particular event occurs.

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The past transaction or event that obligates a government distinguishes a liability from a future obligation (PS 3200.22). For most transactions the event is easy to determine; it is usually the point of exchange. For transfers received, any obligating event will derive from the stipulations in the transfer agreement or a combination of the stipulations and any actions and communications of the recipient that are consistent with the substance and intent of those stipulations. PS 3410.21 There may be circumstances when the stipulations of a transfer alone are too broad

to create an obligation that meets the definition of a liability as set out in paragraph PS 3410.20(a). In such cases, a recipient government would review its own actions and communications by the financial statement date to evaluate whether they are consistent with the substance and intent of the transfer stipulations, and determine whether the nature and extent of those actions and communications together with the transfer stipulations create an obligation that meets the definition of a liability…

Determining Whether Transfers Received are Liabilities For a recipient government to have lost its discretion when it receives a transfer, the stipulations would be strong enough and specific enough to limit the recipient’s ability to make individual choices, judgments or decisions related to the use of the funds. Funding provided for general purposes (e.g., “employee recruitment” or “medical equipment” or “operating”) would not meet the liability requirement. Although PSAB specifies that stipulations may indicate that a liability exists, it would be difficult for any stipulations to establish a liability without action on the part of the recipient. Actions by a recipient are likely needed to satisfy two of the characteristics of a liability: • an expectation that economic benefits will be sacrificed, the process of fulfilling the

stipulations would need to be far enough along to ensure that the recipient has an obligation to a third party; and,

• the past transaction or event requirement must be related to the future use of the transferred resources1; that is, having entered into the agreement cannot be enough to meet this characteristic.

Stipulations are expected to be unlikely to indicate that the definition of a liability has been met. To have a liability when a transfer is received, the stipulations in the transfer agreement and the actions undertaken by the recipient government will have established a situation where a past transaction or event has made it so that the government has no discretion but to make a payment or provide a service to a third party.

1 PSAB makes it clear that where future use of the funding is to provide a subsequent transfer, the past transaction or event that establishes a liability is the authorization and meeting of eligibility criteria for that subsequent transfer. This shows that the assessment of whether a liability exists can’t rely on the recipient having agreed to accept the transfer; some other action must have been taken.

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The transfer stipulations need to be strong enough or specific enough to bind the recipient government, such that the liability definition is met. There are limited circumstances where this might occur. It is likely that the only situations where stipulations and recipient government actions could create a liability would be in cost-sharing agreements where the cash is provided prior to the recipient incurring eligible costs. For example, under a cost-sharing arrangement for a capital construction project, the transfer is paid in full before construction is underway; that is, the recipient has not yet incurred a corresponding amount of eligible expenditures (PSAB calls this a financing arrangement in PS 3410.B15 – .B17). It might be appropriate to record a liability for the amount of the excess when: • strong enough stipulations in the transfer agreement constrain the recipient government’s

decisions regarding construction and design; and, • the recipient government has an existing construction contract with a third party to incur

the expenditures. Subsequent Transfers PSAB sets out specific guidance for recording a liability when the transfer will be used to provide a subsequent transfer (e.g., federal government → provincial government → municipality). In these cases, stipulations must be strong enough on their own to record a liability. Specifically, PSAB requires that when the actions and communications of the recipient are being considered in determining whether a liability exists, the past transaction or event that gives rise to a liability is authorization and the meeting of eligibility criteria for the subsequent transfer. This requires that the subsequent transfer be expensed; the corresponding transfer received would be recognized as revenue. Unspent Funds Agreements may specify that the recipient is required to refund unspent transfers to the transferring government. This refund is a separate event from the initial receipt of the government transfer. Terms such as this usually indicate a time period in which the transfer is to be used or indicate a specific event before which the transfer is to be used; if there are remaining unused amounts at the end of the specified period, those amounts are to be returned to the transferring government. Determining whether a liability should be recorded in these cases cannot be made until the specified time period has passed and there is an ability to assess whether the funds have been used. Until that time has passed, the recipient likely has no liability related to the refund.

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TRANSFER TYPES PSAB identifies two specific types of transfers and provides additional guidance in Appendix B on how to apply the standard to entitlements and shared cost agreements. Entitlements are transfers for which both the recipient and the amount of the transfer is established in legislation or regulations (PS 3410.B1). For entitlements, no exercise of authority is required on an ongoing basis; the legislation provides for both stages of the authorization process. As an example, Saskatchewan social assistance is an entitlement. An individual that meets the low-income requirements set out in the regulations is entitled to receive the monthly amount set out in the regulations. Shared cost agreements are between two parties that jointly share the financial responsibility for specific types of costs related to a project (PS 3410.B9). PSAB identifies that there are two types of shared cost agreements, reimbursements of eligible costs incurred and financing arrangements. Both types of shared cost agreements have built-in eligibility criteria; that is, recipients must incur eligible costs to qualify for the transfer. However, in financing arrangements, payment is usually made ahead of the recipient incurring eligible costs. When that is the case, the transferring government has decided to treat eligible costs as stipulations in the agreement. This means that no prepaid asset is recorded; if the government transfer is paid, an expense is recognized. IMPACT OF OTHER ACCOUNTING GUIDANCE Liability for a transferring government A transferring government has a liability when authorization is provided and eligibility criteria are met by the recipient (i.e., when it recognizes an expense). PS 3410.10 specifies that the past transaction establishing a liability for transfers is the authorization of the transfer and the meeting of eligibility criteria. PS 3200 introduces the concept of constructive or equitable obligations. These obligations become liabilities when it can be determined that the government has lost its discretion to avoid the obligation even though there may be no legally enforceable requirement for the government to settle. However, constructive or equitable obligations are not liabilities unless the other two characteristics of a liability are also met; that is, the government expects to give up economic benefits and the transaction or event that obligates the government has already happened. For government transfers, the obligating transaction or event is authorization of the transfer and the meeting of eligibility criteria by the recipient. Constructive obligations are not applicable to expense recognition for government transfers.

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Contractual obligations PS 3390.03 Contractual obligations are obligations of a government to others that will become

liabilities in the future when the terms of those contracts or agreements are met. PS 3390.04 Contractual obligations are distinct from liabilities as there has been no past

transaction or event obligating the government to a future sacrifice of economic benefits at the financial statement date. Until a transaction or event occurs under a contract, a government does not have a liability. Disclosure of information about contractual obligations relates to the unperformed portion of those contracts.

Transfers that are made through an agreement or contract establish a contractual obligation when the transfer is fully authorized (i.e., signing the contract is the exercise of authority by the transferring government), but the meeting of eligibility criteria has yet to take place. In this case, no expense and liability are recorded, because the recipient has yet to meet eligibility criteria. However, the government is contractually obligated to provide the transfer. As well, for multi-year transfers where the legislative authority is in place and an agreement has been entered into, but full authorization has yet to be granted (e.g., a future Appropriation Act will provide full authorization), the transferring government has lost some of its discretion. The government will have a liability as soon as full authorization is granted (e.g., the Appropriation Act is passed). The government is contractually obligated to provide the transfer. Under both scenarios, the agreements satisfy the contractual obligation definition and disclosure of the remaining years’ funding set out in the agreements is required. For all other signed transfer agreements, it is likely that the liability and expense will already have been recorded because full authorization is granted by the agreement. PRACTICAL APPLICATION OF PS 3410 GOVERNMENT TRANSFERS Reviewing Transfer Documentation Legislation, regulations, agreements and other documentation form the legal structure of a transfer and provide the tools in assessing timing of expense and revenue recognition. It is critical to thoroughly review all available documentation related to the transfer, however the following summaries may provide some assistance in making an assessment.

Transfer legislation/regulations may indicate the type of transfer and, consequently, impact the transfer accounting:

Definitions/“Interpretation” section - May define the recipients and in that definition, may establish eligibility criteria; that is,

what a recipient has to be or has to do to get the transfer.

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Authority to provide a transfer There will be a section in the legislation/regulations that allows or requires the minister to provide the transfer. How that authority is worded will indicate different accounting treatments: - “the minister may…” this type of legal authority allows the government to make a

transfer; further authorization will be necessary for the government to have lost its discretion; and,

- “the minister shall…” this type of legal authority requires the government to make a transfer; in these cases the government’s discretion has been limited; it is possible that additional authorization may be required, for example, when the amount of the transfer is decided; however, when the amount of the transfer is also specified in legislation/regulations the transfer is an entitlement.

Transfer details

Legislation/regulations that govern a specific transfer program will set out terms under which the transfer is being provided. These terms may specify eligibility criteria (terms which must be met before a recipient qualifies for the transfer). These will impact the accounting by both transferring government and recipient government. All other terms that a recipient must meet are stipulations, which may only impact the accounting treatment of the recipient.

Transfer agreements are commonly used for specifying details of transfer programs. These agreements are often structured in a similar manner.

- Definition of terms provides specific meaning to words and phrases used in the agreement.

Similar to legislation, eligibility criteria may be identified here.

- Obligations of each party are set out o transferring government’s obligations usually identify the authorization process and

whether any further approvals are required – these will impact timing of expense and revenue recognition.

o recipient government’s obligations identify what the recipient must do; these obligations are eligibility criteria or stipulations, depending on when the action or obligation must be met; eligibility criteria (what a recipient has to be or has to do to get the transfer) will impact expense and revenue recognition, while stipulations (all other terms to be met by the recipient) only impact revenue recognition (and only in some cases).

- Cash distribution details how payments will be made to the recipient; these terms may be

contained in a separate section, or could be included in the transferring government’s obligations. It is possible (common, even) for a transfers expense to be recognized before the cash is paid. The timing of cash payments will rarely impact the timing of transfer expense or revenue recognition (but remember – if the cash is paid – an expense must be recorded by the transferring government).

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- Financial reporting usually requires the recipient to provide updates to the transferring government during the term of the agreement. This form of accountability is a transfer stipulation, because it is a term to be met by the recipient subsequent to receiving the transfer. Stipulations never impact timing of expense recognition and this type of stipulation (an accountability measure) rarely (if ever) impacts the timing of revenue recognition.

However, in certain transfer agreements, reporting requirements will trigger a subsequent transfer. For example, a transfer agreement may specify that if evidence of meeting the original requirements is provided within a certain timeframe, an additional transfer will be provided. In this case, the reporting requirements would be stipulations for the first part of the transfer, but eligibility criteria for the second part. When reporting requirements are eligibility criteria, they impact expense and revenue recognition.

- Termination of agreement is usually available to each party under specific circumstances. The requirement of a recipient to return unused funds to the transferor at the natural end of an agreement would not be accounted for until that time. Termination is an event separate from the original transfer.

Transferring Government Assessing when an expense is recognized A transfer is recognized as an expense when it is authorized and all eligibility criteria are met. Authorization Questions to ask that may help identify the approval points for the transfer program:

- What legislation is applicable? What section provides the government the ability to make

the transfer? - Is the legislation in force? Are there any outstanding provisions? - Are regulations required? Are they in force? - Who in the government needs to okay the transfer?

o Cabinet? o Minister? o Deputy Minister? o Delegated authority?

- Has an agreement with the recipient been reached? Is it documented? And signed? - Are there different stages of approval set out in the process; e.g., program concept,

program design, and/or program delivery. At which of these points does a government representative sign off? Is there a point in any of these processes where it is clear that the government can no longer avoid making the transfer?

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Demonstrable commitment

If, at year end, the legislation that provides the government with legal authority to make a transfer is not yet in force, an assessment needs to be made as to whether the government has provided demonstrable commitment to authorizing the transfer.

- At year-end has the government taken steps to provide a transfer, for which there is not yet

legislative authority? - Has the legislation been introduced and received approvals at various stages? - Are there decision-items (e.g., Treasury Board or Cabinet) showing that the government is

moving forward with the program? - Is there a plan in place to deliver the program or provide the funding? - Does the recipient have a valid expectation that the transfer will be provided? - Is the legislation in force before the financial statements are completed? Eligibility Criteria If there are requirements in the transfer that need to be met by the recipient, consider these questions to identify whether the requirements are eligibility criteria or stipulations:

- Are there specific characteristics identified that the recipient must have before qualifying to

receive the transfer? For example: o have a certain amount of income; or, o be a specific organization or individual (e.g., municipality, recent immigrant to

Saskatchewan, post-secondary student). - Are there things that an individual or organization must do before it would be considered a

recipient? For example: o suffer a loss (e.g., flood damage); o incur eligible expenses (as in a cost-sharing arrangement); o provide a service to the public (e.g., a children’s sports program); or, o apply to receive the grant.

Recipient Government Assessing when revenue is recognized A transfer is recognized as revenue when it is authorized and all eligibility criteria are met, unless the definition of a liability is met.

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Authorization Questions to ask that will help identify the approval points for the transfer program: - What legislation is applicable? What section provides the transferring government (most

often, the federal government) the ability to provide a transfer? - Is the legislation in force? Are there any outstanding provisions? - Are regulations required? In force? - Who in the federal government needs to okay the transfer?

o Cabinet? o Minister? o Deputy Minister? o Delegated authority?

- Is there an existing federal/provincial agreement? - When does a government representative sign off and the transferring government can no

longer avoid making the transfer? Eligibility Criteria If there are requirements in the transfer that need to be met by the recipient, consider these questions to identify whether the requirements are eligibility criteria:

- Are there specific characteristics identified that the recipient must have? For example:

o have a certain amount of income; or, o be a specific organization or individual (e.g., municipality, recent immigrant to

Saskatchewan, post-secondary student);

- Are there things that an individual or organization must do before it would be considered a recipient? For example: o suffer a loss (e.g., flood damage); o incur eligible expenses (as in a cost-sharing arrangement); o provide a service to the public (e.g., a children’s sports program); or, o apply to receive the grant.

Stipulations If there are requirements in the transfer that need to be met by the recipient, after evaluating the eligibility criteria questions above, consider these questions to identify whether the requirements are stipulations:

- Are there any (additional) things that the recipient is required to do once the transfer is

provided? For example: o Use the funds for a specific purpose: make a subsequent transfer (e.g., to a municipality); provide a service to the public (e.g., a children’s sports program);

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construct or purchase an asset (e.g., a highway or medical equipment); or, conduct research on a particular topic (e.g., viability of organic farming or a medical

procedure). o Make use of the funds in a specified time: over a pattern of time (e.g., equally in each year over three years); or, over a specified period (e.g., not before this date or fully used by this date).

o Inform the transferring government on key issues: updates on the use of funds; any changes in key staff; or, any significant findings.

o Comply with the law; o Provide the transferring government with access to documentation; or, o Provide accountability reports.

Determining whether a liability exists If it has been established that there are stipulations in the transfer, an assessment needs to be made as to whether the government has a liability (as defined in PS 3200). A liability has three characteristics: it is the result of a past transaction or event where the government expects to make a sacrifice of economic benefits to others and the government has little to no discretion to avoid settling the obligation. Determining whether a recipient government has a liability in relation to a transfer would be influenced by: (a) the transfer stipulations; or, (b) those stipulations taken together with the actions and communications of the recipient

government before the financial statement date. Do the stipulations create a liability for the recipient government? It is unlikely that stipulations alone would create a liability. Stipulations need to be sufficiently strong enough or specific enough to limit the recipient’s ability to make independent decisions related to use of the funding. Unless the stipulations have some substance, no liability is met and revenue is recognized immediately. Consideration of the recipient’s own actions in relation to fulfilling the stipulations must be given (PSAB says actions would be “consistent with the substance and intent of the transfer stipulations”), particularly in determining whether discretion is lost. It may be appropriate for a recipient government to record a liability on the receipt of a transfer under a cost-sharing agreement. A liability may exist where a transfer is received by a recipient in advance of incurring an equivalent amount of eligible costs (as in a financing arrangement). The revenue would be recognized as the related costs are incurred.

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Outside of cost-sharing arrangements, it is less likely that the form of a transfer would allow for the recording of a liability. However, for any type of transfer, if the liability definition is met, a liability would be recorded and revenue would be recognized as the stipulations are fulfilled. In most situations, the stipulations of a transfer are unlikely to be so restrictive that the recipient no longer has discretion. Revenue from these transfers is immediately recognized. Assessment forms To assist in answering the question of when a transfer should be recorded as an expense or as revenue, templates have been provided that should be completed by all ministries for each transfer program in which it records a transfer expense or receives transfer revenue. The completed templates will form a summary of the accounting discussion and documentation required for each transfer program.

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Transferring government assessment - Determining when to record an expense Transfer program/name Related documents - Legislation - statute specific to the program; or

- ministry statute (where minister gets powers to act) combined with The Executive Government Administration Act (EGAA)

- Regulations - regulations specific to the program - may be enacted under specific legislation; or the EGAA

- Order in Council - required if grant >$50k made pursuant to s. 16(3) of the EGAA;

- may be required pursuant to specific legislation - Agreement - entered into under the Authorizing legislation (above) - Application form - completed by recipient - Transfer payment request form - MIDAS form - Communication to recipient - letter or memo Authorization - Authorizing legislation - Date in force - Wording of authorizing section;

does the section refer to “may” or “shall” make a grant?

- a government has less discretion when it is required to (shall) make a transfer

- List of documentation (internal and external) that requires signature of delegated authority

- What is the evidence to show that the exercise of authority has been made?

Eligibility criteria - Who does the recipient have to

be (specific individual/ organization/government) to qualify for the transfer?

- What is the individual/ organization/government required to do to become a recipient?

Summary - when to record an expense? - Financial statement date

(year-end or quarter-end)

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Transferring government assessment - Determining when to record an expense Transfer program/name - Authorization in place? - Eligibility criteria met? - To what extent? If recipient is eligible after incurring

costs (as in a cost-sharing agreement), then recipient may be eligible for certain percentage of costs (may need to estimate)

Record transfer expense? When the answer to both questions is “yes” record an expense to the extent that eligibility criteria have been met

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Recipient government assessment - Determining when to record revenue Transfer program/name Related documents - Federal legislation - if known - Federal regulations - if known - Order in Council - - Agreement - entered into under the Authorizing legislation (above)

and The Executive Government Administration Act provisions for federal/provincial agreements

- Application form - completed by recipient - Transfer payment request form - MIDAS form - Communication to recipient - letter or memo Authorization - Authorizing legislation - Date in force - Wording of authorizing section;

does the section refer to “may” or “shall” make a grant?

- a government has less discretion when it is required to (shall) make a transfer

- What is the evidence to show that the exercise of authority has been made?

Eligibility criteria - Who does the recipient

government have to be to qualify for the transfer?

- What is the government required to do to become a recipient?

Summary - when to record the transfer? - Financial statement date

(year-end or quarter-end)

- Authorization in place? - Eligibility criteria met? - To what extent? If recipient is eligible after incurring

costs (as in a cost-sharing agreement), then recipient may be eligible for certain percentage of costs (may need to estimate)

Record transfer? When the answer to both authorization and eligibility criteria questions is “yes” record the transfer to the extent the eligibility criteria have been met.

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Recipient government assessment - Determining when to record revenue Transfer program/name Recognize revenue? In most cases, revenue would be recognized in full when

the transfer is recorded. If the transfer agreement contains no stipulations revenue is recognized to the extent that eligibility criteria have been met.

Stipulations? - the things that a recipient

must do under the terms of the agreement that are not eligibility criteria

However, when transfers do include stipulations, a further assessment is required to determine whether the stipulations create a liability. - are there stipulations in the agreement? If yes,

complete stipulations and liability assessment sections. If no, recognize transfer revenue to the extent that eligibility criteria have been met.

Stipulations - What else does the government

(as recipient) have to do under the terms of this transfer?

- What has the government done to satisfy these additional terms?

Liability assessment Consider the requirements of the transfer. Are the stipulations strong and detailed enough so that the government has little discretion over what to do with the funds or assets received? Have we, as the recipient government, taken action in such a way that would establish a liability? Are the following characteristics of a liability met:

- Is there a duty or responsibility to others?

- Was there a past transaction or event?

- Will there be a future sacrifice of economic benefits?

Record liability? - If the answers to any of these three questions is no, there is no liability.

- If each question is answered yes the revenue should be deferred (i.e., a liability recorded).

Recognize revenue? - If there is no liability, revenue is recognized to the extent that eligibility criteria have been met.

- If a liability is recorded, the revenue is recognized as the stipulations are met.