Financial Instruments

Status: Re-exposure Draft being developed.

Background
Activities to Date
Next Steps
Related Information
Contact Information

Background

With the growth and availability of financial instruments, many governments and government organizations use financial instruments to manage their financial exposure such as foreign currency and interest rate risk.

The guidance provided in the PSA Handbook on financial instruments is limited to derivative financial instruments used for hedging of foreign currency items in Section PS 2600, Foreign Currency Translation.

The CICA Handbook – Accounting provides standards on accounting and reporting of financial instruments in the following Sections:

• Section 1530, Comprehensive Income;
• Section 3855, Financial Instruments ― Recognition and Measurement; and
• Section 3865, Hedges

PSAB issued Public Sector Guideline PSG-6, Including Results of Organizations and Partnerships Applying Fair Value Measurement, to provide guidance for governments in consolidating government organizations (including government business enterprises) that follow the CICA Handbook – Accounting.

Reasons for the Project
The growth in use of financial instruments by governments and the complexity of the transactions gave rise to a need for a public sector accounting standard for recognition, measurement, presentation and disclosure for financial instruments. Users need sufficient and comparable information to understand the extent and nature of financial instruments used by governments and their impacts on governments’ ability to provide services and meet obligations.

Based on the GAAP hierarchy in Section PS 1150, Generally Accepted Accounting Principles, public sector organizations that follow PSA Handbook are encouraged to consult other authoritative sources in areas that PSA Handbook does not address. Depending on a government’s use of financial instruments, applying the private sector standards can result in a significant impact on governments’ financial results. PSAB needs to assess how and to what extent the CICA Handbook – Accounting standards on financial instruments should apply to public sector organizations.

Issues
Transactions involving financial instruments are often complex. The variety of financial instrument products is growing and becoming more sophisticated. The challenges in accounting and reporting financial instruments in government financial statements include:

• criteria for recognition and derecognition of financial instruments;
• measurement bases for financial instruments reported in the financial statements (for example, historical cost, market or fair value, lower of cost and market); and
• the extent and timing of reflecting changes in value of financial instruments in annual results (for example, immediate recognition, recognition over time).

Objective
The objective is to issue an accounting standard that addresses:

• recognition and derecognition criteria;
• measurement bases and issues; and
• presentation issues and disclosure requirements unique to financial instruments.

Activities to Date

June 2010
PSAB reviewed two options to the proposals contained in the Exposure Draft (ED) issued in September 2009 — hedge accounting and an alternative presentation model. The Board requested the task force to draft a Re-exposure Draft with a presentation model that would report remeasurement gains and losses outside of the statement of operations for its consideration in September 2010.

March 2010
PSAB reviewed comments received on the ED. Discussion on the responses to the ED will continue at future meetings.

June 2009
PSAB approved an ED.

The main features of this ED include the following:

• Fair value measurement is required for derivatives and portfolio investments that are equity instruments quoted in an active market.
• A government can choose to report non-derivative financial assets and/or financial liabilities on a fair value basis if it manages and reports performance of these items on a fair value basis.
• A change in the fair value of a financial instrument should be presented in the statement of operations as a remeasurement gain and loss.
• Revenues other than remeasurement gains and expenses other than remeasurement losses should be separately presented in the statement of operations.
• The statement of operations should report the measure of surplus/deficit excluding remeasurement gains and losses for the period separately from the measure of surplus/deficit for the period, which includes remeasurement gains and losses.
• A government should disclose information that enables users of financial statements to evaluate the nature and extent of risks arising from financial instruments to which it is exposed at the reporting date.
• The proposed standard will be effective for fiscal years beginning on or after April 1, 2012. Early adoption is encouraged. Any adjustment to the carrying amount of applicable assets and liabilities at the beginning of the fiscal year the standard is initially applied should be recognized as an adjustment to the accumulated surplus/deficit at that date.

March 2009
PSAB concluded that an exposure draft should be developed based on recognition of financial instruments. Fair value measurement would apply to derivatives and portfolio investments that are equities traded in an active market. Presentation of any gains and losses resulting specifically from these items would be differentiated from revenue and expenses. Supporting materials will describe PSAB’s assessment of other alternatives.

November 2008
PSAB discussed the scope of financial instruments that should be reported on fair value, and alternatives of presenting unrealized gains and losses in governments’ financial statements.

March 2008
PSAB discussed the responses received to date on the Statement of Principles (SOP) issued in June 2007. Alternatives to respond to the issues raised relating to accounting for, and presenting information about, financial instruments in government financial statements are being considered.

March 2007
PSAB approved a second SOP on recognition and measurement of financial instruments and hedge accounting.
The principles proposed in this SOP include the following:

• Fair value measurement is proposed for derivatives and portfolio investments quoted in an active market.
• Hedge accounting treatment is permitted for certain documented hedging relationships where they are demonstrated to be highly effective.
• Flexibility to designate non-derivative financial assets and non-derivative financial liabilities to be reported at fair value is permitted in cases where more relevant information will result, as it:

  (a)	eliminates or significantly reduces a measurement or recognition inconsistency; or
  (b)	is the basis on which a group of financial assets, financial liabilities or both are managed and performance is evaluated, in accordance with a documented risk management or investment strategy.

• Two measurement categories are proposed for financial instruments:

  (a)	cost or amortized cost; and
  (b)	fair value (with gains and losses recognized in the statement of operations).

• Specific disclosure and presentation requirements for financial instruments are suggested.

June 2006
PSAB approved the development of a second SOP based on an Associates’ SOP, with the addition of hedge accounting and measurement of non-derivative financial instruments.
PSAB staff issued a request for information on hedging risks assumed by governments.

January 2006
PSAB approved:

• A Public Sector Guideline PSG-6, Including Results of Organizations and Partnerships Applying Fair Value Measurement; and
• An SOP on recognition and measurement of derivatives for Associates’ comment.

The principles proposed in this SOP include the following:

• Derivatives represent rights and obligations that meet PSAB’s definitions of assets or liabilities and should be reported in financial statements.
• Fair value is the only relevant measurement basis for derivatives.
• Only items that meet PSAB’s definitions of assets or liabilities should be reported as such on the statement of financial position.
• Special accounting for items designated as being part of a hedging relationship should be provided only for qualifying items.    

August 2005
PSAB approved a Draft Guideline, Including Results of Organizations and Partnerships Applying Fair Value Measurement.

April 2003
PSAB approved a Project Proposal.

Next Steps

PSAB expects to reach the following key steps at the dates indicated:

Related Information

Responses to Exposure Draft
Issues Analysis on Exposure Draft
Exposure Draft
Second Statement of Principles

Contact Information

Questions or comments on this project should be directed to:

Bob Correll, CA
Principal, Public Sector Accounting
Telephone: +1 (416) 204-3460
Fax: +1 (416) 204-3412

The Canadian Institute of Chartered Accountants
277 Wellington Street West
Toronto ON M5V 3H2 Canada