The Canadian Institute of Chartered Accountants (CICA) Public Sector Accounting Board is responsible for setting the accounting and financial reporting standards for all levels of government in Canada. The CICA Public sector accounting handbook requires federal, provincial and territorial governments to prepare their financial statements in accordance with accrual accounting principles. The current local (municipal) government standards are based on a modified accrual accounting approach which does not require capital expenditures to be recognized as assets and amortized over their expected useful lives, but rather are expensed in the period(s) in which they are acquired.

The Public Sector Accounting Board (PSAB) proposes to issue a revised “Tangible Capital Assets, CICA Public Sector Accounting Handbook Section PS 3150 which is intended to apply to all levels of government, including local governments.

OPTIONS/DISCUSSIONS:

In 2003, the CICA released a research report “Accounting for Infrastructure in the Public Sector”. The study group that produced the report conducted an extensive review of international and Canadian practices of accounting for capital assets in both the private and public sector. The study group concluded that at the local government level, there was a gap between the financial information management and local councils’ need to manage their capital assets and the information they currently receive. The study group further recognized that comprehensive, cost based systems for services would not be possible in so far as the cost of infrastructure was not included in financial reports. Moreover, an information system that excludes infrastructure provides negative incentives for the development of such cost systems. The study group concluded that,

· Government financial statements should include financial information about infrastructure

· Infrastructure should be reported as an asset (not an expense)

· Infrastructure acquired in lieu of developer charges or other fees should be included in the stock of infrastructure

· The cost of using the infrastructure should be reported

· Infrastructure should be amortized over its useful life

· At acquisition, acquired or self constructed infrastructure should be measured at cost

· Information of the asset condition should be provided

Based on the guidelines available so far, the implementation process would include,

· Developing capital asset inventories

· Applying initial dollar values to those inventories (determine worth of the municipality’s capital assets based on historical costs)

· Depreciate capital assets over their remaining useful lives

The Ontario Municipal Benchmarking Initiative (OMBI), with funding support from the Province of Ontario, is in the process of testing through pilot projects, the methodology for accounting for tangible capital assets set out in its preliminary “Municipal Guide to Accounting for Capital Assets”.

The six municipalities currently conducting pilot projects are:

· Niagara Region

· City of Hamilton

· District of Muskoka

· County of Brant

· City of Thunder Bay

· Region of York

OMBI expects to publish a revised “Municipal Guide to Accounting for Capital Assets” in the spring of 2007, based on the findings and experiences of the pilot projects.

There has been some discussion within the municipal sector associations (Association of Municipalities of Ontario (AMO) and the Municipal Finance Officers Association (MFOA)) regarding the usefulness of reporting assets based on historical cost. It is generally felt by municipal finance staff that future replacement cost of major infrastructure is more relevant to councils than balance sheet figures reflecting “historical cost”. There is recognition, however, that developing the necessary capital asset inventories for the new PSAB reporting requirements will be a starting point for the more important analysis of future replacement cost implications to municipal budgets.

Town of Markham Position

The Town has developed a comprehensive inventory of capital assets during the Reserve Adequacy study which will partially form the basis of the capital asset inventories. However, further work is required in determining the asset classification, segmentation and aggregation, framing policies for thresholds for capitalization, the costing and pricing of services, budget implications, reporting implications and policies for subsequent acquisitions and disposals.

FINANCIAL CONSIDERATIONS:

Preliminary information communicated by the pilot project municipalities indicates that there are significant staff resources required for at least the early stages of the transition to capital asset accounting. The Town of Markham has an advantage as much asset inventory data has been accumulated over the last two years, however potential consulting services and/or additional staff resources will be brought forward for consideration during the 2007 Budget deliberations.

The structure of future municipal budgets will be changing. Amortization of capital assets will become a budgeted expense, rather than the asset itself. Fund accounting (operating, capital and reserves) as municipalities know today may disappear. Changes to the “Financial Information Return” (FIR) that municipalities submit to the Province of Ontario are also expected to reflect the new tangible capital asset accounting regime.

Staff will be providing Council with updates during the 2007 Budget deliberations and as work progresses.