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HomeMy WebLinkAboutAFC 2014-02-03 AgendaCorporation of the District of Maple Ridge Audit & Finance Committee February 3, 2014 8:00AM Blaney Room Chairperson: Councillor M. Morden Committee Members: Councillors: C. Bell; R. Masse; Mayor Daykin Staff: Chief Administrative Officer: J. Rule GM -Corporate & Financial Svc: P. Gill GM -Public Works & Development F. Quinn GM -Community Dev. Park & Rec K. Swift Manager of Accounting: C. Nolan Guest: External Auditor (BOO Canada LLP) B. Cox Recording Secretary: Amanda Gaunt AGENDA 1. Approval of agenda 2. Approval of minutes of November 12, 2013 3. 2013 Audit Update • Overview of 2013 audit by external auditor 4. Next Meeting • May 5, 2014 (tentative) "original signed by Catherine Nolan" Agenda submitted by: C. Nolan, CGA Manager of Accounting District of Maple Ridge Audit & Finance Committee Meeting Minutes November 12, 2013 The Minutes of the Audit and Finance Committee Meeting held in the Blaney Room of the Municipal Hall, 11995 Haney Place, Maple Ridge, BC on Tuesday, November 12, 2013 at 5:30 p.m. PRESENT Committee Members Councillor Morden, Chair Mayor Daykin Councillor Bell Councillor Masse Guests Councillor Hogarth Councillor Ashlie Councillor Dueck Municipal Staff J. Rule, Chief Administrative Officer P. Gill, General Manager, Corporate & Financial Services K. Swift, General Manager of Community Development, Parks and Recreation Services F. Quinn, General Manager of Public Works and Development C. Nolan, Manager of Accounting T. Thompson, Manager of Financial Planning K. Gormley, Manager of Business Systems A. Gaunt, Confidential Secretary F. Armstrong, Manager of Corporate Communications The meeting was called to order at 5:30 p.m. 1. Approval of agenda MOVED by Councillor Bell and SECONDED by Mayor Daykin that the agenda be approved as circulated. CARRIED 2. Approval of minutes of May 6, 2013 MOVED by Mayor Daykin and SECONDED by Councillor Bell that the minutes of May 6, 2013 be approved. CARRIED Note: Item 5 was deal with prior to Item 3 Audit & Finance Committee Meeting Minutes November 12, 2013 Page 2 3. PS3260 -Liability for Contaminated Sites Implementation The Manager of Accounting reviewed the report. The General Manager of Corporate and Financial Services advised on changes in accounting standards applying to the local government sector. He also advised that due to new regulations, third party expertise may be necessary in some cases for which one time funding may be required. The Manager of Accounting provided clarification on the standard requiring the District to review land holdings for possible contamination. 4. 2014-2018 Financial Plan -Preliminary Overview -discussion The General Manager of Corporate and Financial Services provided an update on the current status of financial planning. He reminded committee members of dates set aside for business planning and provided details on information which can be expected in the upcoming financial report to Council. He provided a slide which summarized information to be provided in the report, indicated that the final report will discuss significant items such as cost drivers and what can be done with these as well as how cutbacks may impact future generations. He provided an explanation on assumptions and addressed concerns pertaining to staffing levels. Note: Item 5 was dealt with prior to Item 3 5. Investments The Manager of Financial Planning reviewed the report. The General Manager of Corporate and Financial Services advised that the investment portfolio is being administered according to policy and that returns are better than average. 6. Next Meeting -to be determined Adjournment-6:38 p.m. Councillor Morden, Chair Brllish Columbia Corporation of the District of Maple Ridge Audit Planning Communication Report to the Members of the Audit Committee Prior to audit of December 31, 2013 fiscal year Tel: 604 688 5421 BDO Canada LLP Fax: 604 688 5132 600 Cathedral Place vancouver@bdo.ca www.bdo.ca 925 West Georgia Street January 22, 2014 Members of the Audit Committee The Corporation of the District of Maple Ridge 11995 Haney Place Maple Ridge, BC V2X 6A9 Dear Audit Committee Members: Vancouver BC V6C 3L2 Canada Direct Line: 604-443-4716 E-mail: bcox@bdo.ca Re: Audit of the Financial Statements of the Corporation of the District of Maple Ridge (the "District") for the year ended December 31, 2013 We have commenced our audit planning for the audit of 2013 fiscal year and take the opportunity of summarizing in this letter some of these plans along with other matters pertinent to the 2013 audit. We look forward to discussing any concerns that the Audit Committee may have to ensure that we understand what is important to you. This report is prepared for the purpose noted above and should not be distributed without our prior consent. We accept no responsibility to a third party who uses this communication. Anticipated Issues An important part of our audit planning process involves considering issues outside of the norm that could impact the financial statements or our audit. This part of the planning process never ends with much of our analysis being considered once we start the interim audit fieldwork. We also look to discussions with the Mayor and Council for other sources of information in this area. At this point, only one item has hit our radar screen: CUPE contract The CUPE contract expired March 31, 2012 and no agreement was reached at year end. Depending on the timing and outcome of the negotiation, if it is settled prior to the audit report date, and results in retroactive payments, it will be considered a subsequent event and disclosed in the financial statements. Management has made a budgetary allowance for this, in line with other regional settlements. Audit Approach We have been engaged to perform the audit of the financial statements of the District for the year ended December 31, 2013. We have adopted an audit approach that allows us to issue an audit opinion on the financial statements of the District in the most cost effective manner, while still obtaining the assurance necessary to support our audit opinion. BOO Canada LLP, a Canadian limited lfabllfty partnership, is a member of BOO International Limited, a UK company limited by guarantee, and forms part of the international BOO network of independent member firms. The Corporation of the District of Maple Ridge January 22, 2014 Page 3 of 21 Under the BDO Audit Approach, we use risk and assurance models to determine the evidence to collect and evaluate whether sufficient appropriate evidence was obtained to be able to draw reasonable conclusions to allow us to form an opinion. This approach focuses on obtaining sufficient appropriate audit evidence to reduce the risk of material misstatement in the financial statements to an appropriately low level. This means that we focus our audit effort in areas that we believe have a higher risk of being materially misstated and do less audit work in areas that are only low risk. To assess risk accurately, we need to have a clear understanding of the District's operations and the environment it operates in. Much of our understanding is obtained through discussions with management and staff. We would also appreciate any new information that you could provide to us about your operations, internal controls or anything else that you feel is important to the audit as it may corroborate what we have already learned from management and other sources, or it may be new information to us. We would also appreciate any insights that you could provide to us on what you perceive to be high risk to the District as that will make our audit more effective and efficient, which will benefit all concerned. The following sections provide more detail on our audit approach for the District for the current year. Audit Scope We anticipate the scope of our audit of the financial statements of the District and of those of its related organizations for the year ended December 31, 2013 to include the following: • An audit opinion on the financial statements of the District of Maple Ridge. Audit reports on certain schedules of the LGDE reporting to the Ministry of Community, Sport ft Cultural Development • A management letter report in regard to audit recommendations of significance. Overall Audit Strategy Changes in auditing standards now require auditors to document all significant manual and computer systems. Building on this, we plan to focus much of our review on transaction streams using "tests of controls" (compliance procedures) in combination with analytical review and testing. Balances will be tested using a combination of compliance procedures and substantive procedures (such as analysis of data and obtaining direct evidence as to the validity of the items). Higher Risk Financial Statement Areas Based on our knowledge of the District's operations, past experience with similar organizations, and knowledge gained from management and you, we have identified the following financial statements areas as having a potentially higher risk of material misstatement. These risks arise mainly because of the complexity of the accounting rules, the extent of estimation and judgment involved in the valuation of these financial statement areas, and the existence of new accounting pronouncements that affect them. We have also provided a brief summary of how we plan to audit these higher risk areas: Higher Risk Financial Statement Areas • Cash and investments • Employee Future Benefits • Accounts payable • Staff Salaries • Tangible Capital Assets and Accumulated Amortization Requests by Audit Committee The Corporation of the District of Maple Ridge January 22, 2014 Page 4 of 21 Proposed Audit Procedures • Confirmation of cash and investments • Review of reconciliations • Testing of investment transactions and investment rollovers • Review of actuarial calculations • Audit of significant assumptions • Review of usage reports • Third party confirmation • Computer audit testing • Cut-off testing • Computer audit testing • Analytical review of staff and salary levels • Systems testing and tests of controls • System testing and tests of 2013 additions • Reviewing formulas, calculations and useful life estimates In the course of your duties as the Audit Committee, you may be aware of additional areas of concern from an audit perspective that you would like us to address. We want you to know that we welcome discussion on any areas of audit concern that you may have. Materiality Materiality can be defined as follows: "A misstatement or the aggregate of all misstatements in financial statements is considered to be material if, in the light of surrounding circumstances, it is probable that the decision of a person who is relying on the financial statements, and who has a reasonable knowledge of business and economic activities (the user), would be changed or influenced by such misstatement or the aggregate of all misstatements. Misstatements in financial statements arise from departures from generally accepted accounting principles and include departures from fact, inappropriate determination of accounting estimates, and omissions of necessary information. Misstatements may arise from error or fraud, or from the consequences of an illegal act." Materiality in an audit is used as a guide for planning the nature and extent of audit procedures and for assessing the sufficiency of audit evidence gathered. It is also used in evaluating the misstatements found and determining the appropriate audit opinion to express. "Performance materiality" is an audit term describing a level set by the auditor at less than materiality for the purpose of sampling to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole. As you know, materiality in an audit is used as a guide for planning the nature and extent of audit procedures and for assessing the sufficiency of audit evidence gathered. It is also used in evaluating the misstatements found and determining the appropriate audit opinion to express. The Corporation of the District of Maple Ridge January 22, 2014 Page 5 of 21 Since the determination of materiality is a matter of professional judgment, it is primarily dependent on our evaluation of the relative importance of accuracy in the financial statements to the various users of those statements. We have identified Council, the Ministry and management as the most important users of the municipality's financial statements. Canadian generally accepted auditing standards require the use of both quantitative and qualitative factors in determining materiality. For the audit of the Corporation of the District of Maple Ridge for the year ended December 31, 2013, we have concluded that a materiality level of $1,900,000 based on 1.5% of current year's projected revenues, and adjusted by qualitative factors is appropriate for the purposes of the audit. Performance materiality, will be set at 75% of materiality or about $1,425,000 (this is the level used for statistical testing). Trivial errors will be set at 1% of materiality or $19,000 (we will not suggest that differences below this level be adjusted) nor will we report on such differences. Audit Team In order to ensure effective communication between the Audit Committee and BDO Canada LLP, we briefly outline below the key members of our audit team and the role they will play: • Bill Cox, CA, Engagement Partner -overall engagement management • Kristy Kwan, CA, Audit Senior Manager -fieldwork management • Limin Ruan, CA, Audit Manager -fieldwork supervision • Ming Hu, CA, -Audit Senior • Otto Sun, CA Student -Audit Staff • Marjorie Mercado, CA Student -Audit Staff Importantly, there is continuity of certain members of the prior year, which helps to minimize disruption to your staff. Reliance on an Expert In order for us to perform adequate audit procedures on employee future benefits, we will be relying on the work of, and the report prepared by, Mercer Health & Benefits. Canadian generally accepted auditing standards require us to communicate with the expert. We propose to discuss the following with Mercer Health & Benefits: • The objective and nature of the audit engagement and how we intend to use the expert's findings and report; • Our assessment of the significance and risk aspects of the engagement that will affect the expert's work; • The requirement to advise us if they have any relationship with the organization which could impair their judgment or objectivity in the conduct of their engagement; • The nature, timing and extent of the expert's work and our planned review of it, possibly including review of their working papers; • Confirmation that the assumptions used in their calculations are consistent with those used in the prior periods and with industry standards; • Their obligation to advise BDO Canada LLP of any matters up to the estimated audit report date that may affect their calculations and their report. We ask that the appropriate level of management review the data provided to Mercer Health & Benefits and that they also review the assumptions used and results reported by the expert for reasonableness. The Corporation of the District of Maple Ridge January 22, 2014 Page 6 of 21 Timing of the Audit We have tentatively set the following schedule with management for the conduct of the audit: • Interim audit fieldwork • Completed December 2 -5, 2013 without issue • Year-end audit fieldwork • March 10 -21, 2014 • Review of draft financial statements by staff at • TBD Council workshop • Audit Committee post-completion meeting • TBD • Finalization of financial statements • Immediately subsequent to Council meeting Communication of Results At the completion of our audit, or earlier if considered necessary, we will communicate to you matters arising from the financial statement audit. Our communication will include the following: • Matters required to be communicated to Council under generally accepted auditing standards ("GAAS") including possible fraudulent activities, possible illegal acts and significant weaknesses in internal control; • Matters that have a significant effect on the qualitative aspects of accounting principles used in the District's financial reporting; • Matters previously agreed with you to be communicated to Mayor and Council; • Whether there are any unresolved issues or disagreements with management concerning the District's internal controls, accounting policies, or disclosures in the financial statements; • Whether there were any material claims outstanding against the District in respect of which your lawyers have been retained on behalf of the District; • The extent and nature of small immaterial unadjusted differences encountered during the course of our audit; • Significant management judgments and estimates made in the course of preparing the financial statements; and • Other matters arising from the audit that, in our professional judgment, are important and relevant to the Audit Committee. At the completion of the audit we will also discuss matters that will be identified in our "management letter". The prior year's management letter is included in Appendix A. Part of our audit procedures will be to follow-up on the status of these points in the current year. Independence At the core of the provision of external audit services is the concept of independence. We are communicating matters that, in our professional judgment, may reasonably be thought to bear on our independence for the forthcoming audit of the District. The Corporation of the District of Maple Ridge January 22, 2014 Page 7 of 21 In determining which relationships to report, we have considered the applicable legislation and relevant rules of professional conduct and related interpretations prescribed by the Institute of Chartered Accountants of British Columbia covering such matters as the following: • holding of a financial interest, either directly or indirectly in a client; • holding a position, either directly or indirectly, that gives the right or responsibility to exert significant influence over the financial or accounting policies of a client; • personal or business relationships of immediate family, close relatives, partners or retired partners, either directly or indirectly, with a client; • economic dependence on a client; and • provision of services in addition to the external audit engagement. We have prepared the following comments to facilitate our discussion with you regarding independence matters. We are not aware of any relationships between the Corporation of the District of Maple Ridge and us that, in our professional judgment, may reasonably be thought to bear on our independence to date. We hereby confirm that we are independent with respect to the Corporation of the District of Maple Ridge within the meaning of the Rules of Professional Conduct of the Institute of Chartered Accountants of British Columbia as the date of this letter. Responsibilities of the Auditor It is important for Council to understand the responsibilities that rest with the District and its management and those that belong to the auditor. The audit of the financial statements does not relieve management or those charged with governance of their responsibilities outlined below: • Management is responsible for the preparation of the financial statements, which includes responsibilities related to internal control, such as designing and maintaining accounting records, selecting and applying accounting policies, safeguarding assets and preventing and detecting error and fraud. • The auditor's responsibility is to express an opinion on the financial statements based on an audit thereof. • An audit is performed to obtain reasonable, but not absolute, assurance as to whether the financial statements are free of material misstatement and, owing to the inherent limitations of an audit, there is an unavoidable risk that some misstatements of the financial statements will not be detected (particularly intentional misstatements concealed through collusion), even though the audit is properly planned and performed. The audit includes: The Corporation of the District of Maple Ridge January 22, 2014 Page 8 of 21 (i) obtaining an understanding of the entity and its environment including internal control in order to plan the audit and to assess the risk that the financial statements may contain misstatements that, individually or in the aggregate, are material to the financial statements taken as a whole; (ii) examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements; (iii) assessing the accounting principles used and their application; and (iv) assessing the significant estimates made by management. When the auditor's risk assessment includes an expectation of the operating effectiveness of controls, sufficient appropriate audit evidence will be obtained through tests of controls to support the assessment, but the scope of the auditor's review of internal control will be insufficient to express an opinion as to the effectiveness or efficiency of the entity's controls. The auditor will express an opinion as to whether the financial statements present fairly in all material respects, in accordance with Canadian generally accepted accounting principles, the financial position, results of operations and cash flows of the entity. Management Representations During the course of an audit, management makes many representations to us. These representations may be verbal or written and therefore explicit, or they may be implied through the financial statements. Management may provide representations in response to specific queries from us, or may provide unsolicited representations. Such representations are part of the evidence gathered by us to be able to draw reasonable conclusions on which to base the audit opinion. These representations are documented by including in the audit working papers memoranda of discussions with management and written representations received from management. Management's representations include, but are not limited to: • matters communicated in discussions with us, whether solicited or unsolicited; • matters communicated electronically to us; • schedules, analyses and reports prepared by the entity, and management's notations and comments thereon, whether or not in response to a request by us; • internal and external memoranda or correspondence; • minutes of meetings of the board of directors or similar bodies such as audit committees and compensation committees; and • a representation letter from management. Current Developments in the Profession There have been significant developments in the area of accounting and auditing this year. See Appendix B for details. Council's Fraud Awareness The Corporation of the District of Maple Ridge January 22, 2014 Page 9 of 21 Under Canadian Generally Accepted Auditing Standards auditors have a responsibility to consider the potential for fraud and fraud risks in all organizations that they audit. One of our audit procedures is to obtain written representation from management in respect to frauds or potential frauds. Direct communication with the Audit Committee is also necessary. To that end, would you please advise us if you are aware of any frauds or questionable activities that have occurred during the 2013 fiscal year or if you become aware of any frauds or questionable activities after today's date. You may contact us by e-mail at (bcox@bdo.ca) or by regular mail. Additionally, if there are any areas of the District's operations where a Council member feels that there is significant risk of fraud, please advise the writer directly by e-mail or regular mail. Conclusion We hope that this letter will provide you with an update on the current developments within the accounting profession, as well as clarify our independence, responsibility and audit approach. We look forward to discussing these issues with you. Please do not hesitate to contact us about any of the above items or other matters of concern to Council. Yours truly, 7L·. Bill Cox, CA Partner through a corporation BOO Canada LLP Chartered Accountants BC/ Appendix A-Prior Year's Management Letter April 23, 2013 Mr. Paul Gill, General Manager Corporate and Financial Services The Corporation of the District of Maple Ridge 11995 Haney Place Maple Ridge, BC V2X 6A9 RE: Auditor's Management Letter Direct Line: (604) 443-4716 E-mail: bcox@bdo.ca As your external auditors we are engaged to provide an audit opinion on your year-end financial statements. An external audit requires testing of transactions and balances and review of those internal control systems upon which we may place reliance. A positive opinion on the financial statements does not necessarily mean that your internal control systems are all operating effectively. This is because we review only those internal control systems where we feel that failure in those systems could result in a material error on the financial statements. With those systems that we do review, our focus is on the assertions necessary to meet our financial statement audit objectives. Our review of systems, transactions and balances as well as discussions with staff at various levels throughout the District gives us a unique insight into your operations. While conducting this work we make note of items that come to our attention where we feel that improvement could be made or alternatives could be considered. We are fortunate in that we work with a great number of clients and observe a wide variety of processes. We see firsthand any procedures that are emerging as best practices. As matters come to our attention we make note of these for subsequent follow-up. For minor matters we discuss directly with the staff involved. More important matters are brought forward in this letter (known as a "management letter"). It is always worth noting that we almost always come up with points for all clients. The existence of points does not mean that there are significant problems with your systems or staff. They are just recommendations to make good systems better. Status of Prior Year Recommendations The Corporation of the District of Maple Ridge January 22, 2014 Page 11 of 21 There were a few carry-forward points from the prior year's management letter. We track these points to ensure that recommendations are followed up and implemented. Recommendation Status Developer Contributed Assets We recommend that Finance review the controls over access and change in the GIS system. Lost and Found Items Management has considered our recommendation and this is currently in progress. Engineering reviewed the data in 2012, resulting in the need for some prior period adjustments. Engineering and Finance will continue to work together to ensure that data capture meets both departments' needs and that controls in place help ensure data integrity. We recommend that the District consider Management has considered our recommendation developing guidelines to help determine the and this was sufficiently dealt with in 2012. preferred disposition method for various categories and conditions of goods received. Current Year's Observations and Recommendations 1. Presentation of Investment Reports Observation During our audit fieldwork we noted the most recent presentation of investment reports was in June 2011. The District's Investment Policy #13 states that the Audit and Finance Committee will receive, at least quarterly, a report summarizing the investment holdings, returns and deviations from policy. This is an effective governance practice to monitor the District's resource allocation on a timely manner. Recommendation We recommend that the Investment Report summarizing the investment holdings, returns and deviations from policy be presented to the Audit and Finance Committee on a regular basis. Management Comments: Agreed. Investment reports will be provided to the Audit & Finance Committee on a regular basis. There were no deviations from policy as at December 31, 2013. 2. Deferred Revenue Tracking Observation The Corporation of the District of Maple Ridge January 22, 2014 Page 12 of 21 During our audit fieldwork we noted that included in the 2012 utility connection revenue, there is revenue previously deferred in the amount of $485,000 which should have been recognized in the past. This is due to the project completion reports not being made available to the Finance department until the current year. Recommendation We recommend that the Public Works and the Finance departments coordinate to ensure the Finance department has the updated project status and that the completion reports are forwarded to the Finance department upon project completion. Management Comments: Agreed. The process is already in place along with regular cross checking of records to minimize the risk of Finance not receiving completion reports in the future. 3. CRA Regulation 105 Observation This regulation from the CRA is not new but has recently shown up as a hot point in CRA audits. This regulation requires that any entity paying a non-resident person or company a fee in respect of services rendered in Canada must withhold 15% of the payment and remit this to the Government of Canada. Where this is seen most often is in training and in computer software installations. Often a Canadian entity may deal with a Canadian sales office and may not appreciate the trainer coming up from Florida or the computer installers from Washington are being contracted directly and should therefore be subject to withholdings. The duty of care lies with the Canadian entity and not with the non-resident service providers. The Canadian entity would be responsible for the withholdings and penalties and interest in situations where they did not withhold. Recommendation The point is more of an informational item than a suggestion that transactions have been handled incorrectly in the past. However, when dealing with any person or company providing services you should ensure that they are Canadian residents or else withhold 15% of the payment. In most cases, this would be obvious from review of the contract or the invoices but where uncertain you should dig deeper to ensure that you have met your responsibilities. The area does get complicated with services such as web-training so you may want to touch base with tax experts (such as ourselves) in any areas where you are uncertain. We received excellent cooperation from everyone at the District of Maple Ridge during the audit. We thank Catherine Nolan and all of the Finance Department staff for their assistance in making the audit process as efficient as possible. The Corporation of the District of Maple Ridge January 22, 2014 Page 13 of 21 Please do not hesitate to contact us should you wish to further discuss any of the matters discussed in this letter. Yours truly, BDO CANADA LLP Chartered Accountants Bill Cox, CA On behalf of Bill Cox, Inc. Corporate Partner of BDO Canada LLP BC/mkn c.c. Audit Committee/Council The Corporation of the District of Maple Ridge January 22, 2014 Page 14 of 21 Appendix B -Summary of New Accounting and Auditing Requirements The following summarizes the status of new standards and the changes to existing standards as at the fall of 2013. There is also a review of Exposure Drafts, Consultation Papers, Invitations to Comment, Issue Papers and Statements of Principles that provide information on the future direction of CICA Public Sector Accounting Handbook. NEW STANDARDS -PUBLIC SECTOR ACCOUNTING BOARD (PSAB) Section PS 1201, Financial Statement Presentation This Section revises and replaces FINANCIAL STATEMENT PRESENTATION, Section PS 1200. The following changes have been made to the Section: • Remeasurement gains and losses are reported in a new statement; • Other comprehensive income that can arise when a government includes results of government business enterprises and government business partnerships in its summary financial statements is reported in the statement of remeasurement gains and losses; and • The accumulated surplus or deficit is presented as the total of the accumulated operating surplus or deficit and the accumulated remeasurement gains and losses. The new requirements are to be applied at the same time as PS 3450 -Financial Instruments and PS 2601 -Foreign Currency Translation and for government organizations are effective for fiscal years beginning on or after April 1, 2012. In the case of governments, the new requirements are effective for fiscal years beginning on or after April 1, 2015. Earlier adoption is permitted. Section PS 2601, Foreign Currency Translation This Section revises and replaces PS 2600, FOREIGN CURRENCY TRANSLATION. The following changes have been made to the Section: • The definition of currency risk is amended to conform to the definition in PS 3450 - FINANCIAL INSTRUMENTS; • The exception to the measurement of items on initial recognition that applies when synthetic instrument accounting is used is removed; • At each financial statement date subsequent to initial recognition, non-monetary items denominated in a foreign currency that are included in the fair value category in accordance with Section PS 3450 are adjusted to reflect the exchange rate at that date; • The deferral and amortization of foreign exchange gains and losses relating to long-term foreign currency denominated monetary items is discontinued; • Until the period of settlement, exchange gains and losses are recognized in the statement of remeasurement gains and losses rather than the statement of operations; and • Hedge accounting and the presentation of items as synthetic instruments are removed. The Corporation of the District of Maple Ridge January 22, 2014 Page 15 of 21 The new requirements are to be applied at the same time as PS 3450, FINANCIAL INSTRUMENTS and PS 1201, FINANCIAL STATEMENT PRESENTATION and for government organizations are effective for fiscal years beginning on or after April 1, 2012. In the case of governments, the new requirements are effective for fiscal years beginning on or after April 1, 2015. Earlier adoption is permitted. Section PS 3041, Portfolio Investments This Section revises and replaces PORTFOLIO INVESTMENTS, Section PS 3040. The following changes have been made: • The scope is expanded to include interests in pooled investment funds; • Definitions are conformed to those in FINANCIAL INSTRUMENTS, Section PS 3045; • The requirement to apply the cost method is removed, as the recognition and measurement requirements within Section PS 3045. apply, other than to the initial recognition of an investment with significant concessionary terms; and • Other terms and requirements are conformed to Section PS 3045, including use of the effective interest method. This section is to be applied at the same time as PS 3450, FINANCIAL INSTRUMENTS, PS 2601 FOREIGN CURRENCY TRANSLATION and PS 1201, FINANCIAL STATEMENT PRESENTATION are adopted. Section PS 3410 -Government Transfers, revised The following changes have been made to the Section: • A transferring government recognizes an expense when the transfer is authorized and recipients have met the eligibility criteria, if any; • Authorization by the transferring government can occur either by the date of the financial statements or during the period between the date of the financial statements and the issuance of those statements provided that the exercise of that authority occurred at the financial statement date; • If a transferring government provides the financial or non-financial asset prior to the recipient meeting eligibility criteria, the transferring government cannot recognize a prepaid asset; • A recipient government recognizes the transfer as revenue when the transfer was authorized by the transferring government, unless a liability is created for the recipient; • For a recipient, the transferring government's authorization must be in place by the financial statement date; A liability related to the transfer for the recipient may result from: • receiving an asset prior to the recipient meeting eligibility criteria; • specific stipulations contained in the transfer agreement; and • stipulations that are unclear but the recipient creates a liability through its own actions and communications that are related to the terms of the transfer by the financial statement date; The Corporation of the District of Maple Ridge January 22, 2014 Page 16 of 21 • A liability may also result from the recipient's own actions and communication that are unrelated to the terms of the transfer by the financial statement date. In this case, an asset and revenue and a liability and expense would be recognized; and • Revenue is recognized as the liability is settled. The Section applies to all governments and those government organizations using public sector accounting standards. The Section applies to fiscal years beginning on or after April 1, 2012 and may be applied retroactively or prospectively. Earlier adoption is encouraged. Note that for any organizations that are part of the Province of BC reporting entity the application of PS 3410 needs to be considered in respect of BC Regulation 198/2011 which requires: "A restricted contribution ... for the purpose of acquiring or developing a depreciable tangible capital asset ... is to be reported as follows: a) It is to be treated as a deferred contribution; b) The associated liability is to be reduced, and the associated revenue recognized, at the same rate that amortization is recognized in respect of the asset; c) The reduction of the liability and the recognition of the revenue are to be accounted for in the fiscal period during which the asset is used to provide services." Because this regulation is worded differently than PSAB 3410, there can be situations where the two are not in agreement. An organization subject to the Budget Transparency and Accountability Act has no choice but to follow the regulation. However, this may impact on the auditor's ability to provide a "clean" fair-presentation opinion. Another area that could be impacted by the new PS 3410 is the recording of Gas Tax revenues. Most BC organizations that share in gas tax revenues with the Government of Canada currently defer recognition of such revenues until spent on qualifying projects. However, the Gas Tax agreements contain a stipulation that the project funded be used for ten years or else repayment is required on a sliding scale. It is likely that this stipulation could create a liability which would require a change in practice to instead recognize the revenue over the ten year period. The Corporation of the District of Maple Ridge January 22, 2014 Page 17 of 21 Section PS 3510, Tax Revenue This new Section establishes recognition, measurement, presentation and disclosure standards relating to tax revenue reported in financial statements. The main features of the new Section are as follows: • Tax revenue should be grossed up for transfers made through the tax system. • Tax revenue should not be grossed up for the amount of tax concessions (that are often referred to as tax expenditures.) • Tax revenue should be recognized when it is authorized and the taxable event occurs. • Tax revenue should be recognized by the government that imposes the tax except in flow- through arrangements. • Guidance is provided for identifying and distinguishing between tax concessions and transfers made though a tax system. The Section applies to fiscal years beginning on or after April 1, 2012. Earlier adoption is encouraged. NEW STANDARDS -PSAB (NOT YET EFFECTIVE) Section PS 3260 -Liability for Contaminated Sites This new Section establishes recognition, measurement and disclosure standards for liabilities relating to contaminated sites of governments and those organizations applying the CICA Public Sector Accounting Handbook. This section applies to government assets no longer in productive use and non-government assets for which the government is responsible. It does not apply to tangible capital assets (however, the PSAB GAAP hierarchy would require consideration of Asset Retirement Obligations in regard to tangible capital assets). The main features of the new Section are as follows: • A liability should be recognized when contamination exceeds an accepted environmental standard and the entity is directly responsible, or accepts responsibility for, the damage; • A liability should be measured at the entity's best estimate of the costs directly attributable to remediation of the contamination; and • Outstanding site assessments do not negate the requirement to assess whether a liability exists. This Section is effective for fiscal periods beginning on or after April 1, 2014. Earlier adoption is encouraged. For entities with a December year end this means that 2015 is the first year that the standard must be followed. Although that is seemingly a long time in the future, this standard is onerous and could require the collection of a great deal of information. An entity should begin to consider immediately how it will apply with this standard. Organizations are to apply PS 2120 if adoption of PS3260 results in a change in accounting policy. PS 3450 -Financial instruments The Corporation of the District of Maple Ridge January 22, 2014 Page 18 of 21 PSAB approved amendments to Section PS 3450, Financial Instruments, to align the reporting of income on externally restricted assets that are financial instruments with the requirements in Section PS 3100, Restricted Assets and Revenues. The amendments clarify the application of Section PS 3100 (paragraphs PS 3100.11 -.12) when accounting for: • A change in the fair value of a financial asset in the fair value category that is externally restricted • Income attributable to a financial instrument that is externally restricted; or • A gain or loss associated with a financial instrument that is externally restricted These amendments recognize the importance of the nature of restrictions and the terms of contractual agreements in reporting such transactions and events when externally restricted assets and income are involved. This new Section establishes standards for recognizing and measuring financial assets, financial liabilities and non-financial derivatives. The main features of the new Section are: • Items within the scope of the Section are assigned to one of two measurement categories: fair value, or cost or amortized cost; • Almost all derivatives, including embedded derivatives that are not closely related to the host contract, are measured at fair value; • Fair value measurement also applies to portfolio investments in equity instruments that are quoted in an active market; • Other financial assets and financial liabilities are generally measured at cost or amortized cost; • Until an item is derecognized, gains and losses arising due to fair value re-measurement are reported in the statement of re-measurement gains and losses; • Budget-to-actual comparisons are not required within the statement of re-measurement gains and losses; • When the reporting entity defines and implements a risk management or investment strategy to manage and evaluate the performance of a group of financial assets, financial liabilities or both on a fair value basis, the entity may elect to include these items in the fair value category; • New requirements clarify when financial liabilities are derecognized; The Corporation of the District of Maple Ridge January 22, 2014 Page 19 of 21 • The offsetting of a financial liability and a financial asset is prohibited in absence of a legally enforceable right to set off the recognized amounts and an intention to settle on a net basis, or to realize the asset and settle the liability simultaneously; and • New disclosure requirements of items reported on and the nature and extent of risks arising from financial instruments. The new requirements are to be applied at the same time as PS2601, FOREIGN CURRENCY TRANSLATION and PS1201, FINANCIAL STATEMENT PRESENTATION and for government organizations are effective for fiscal years beginning on or after April 1, 2012. In the case of governments, the new requirements are effective for fiscal years beginning on or after April 1, 2015. Earlier adoption is permitted. Standard to be adopted with prospective application except for an accounting policy related to embedded derivatives within contracts, which can be applied retroactively or prospectively. Government Not-for-Profit Organizations, Sections PS 4200 -4270 The Province of British Columbia has directed that the PS 4200 sections noted above not be used by any entity that is part of the Government of BC reporting entity. EXPOSURE DRAFTS -PSAB Amendments to the Introduction (Closed for Comment) PSAB proposes to amend the introduction to Public Sector Accounting Standards to clarify the applicability of the CICA PSA Handbook for various public sector entities. Related Party transactions (Closed for Comment) Exposure draft issued by the PSAB to propose the issue of a new section, RELATED PARTY TRANSACTIONS. The main features of the exposure draft are as follows: • Related parties include entities that control or are controlled by the reporting entity, entities under common control and entities that have shared control over or that are subject to shared control of a reporting entity; • Individuals that are members of key management personnel and close members of their family are related parties. Disclosure of key management personnel compensation arrangements is not required; • Determining which related party transactions to disclosure is a matter of judgment based on the assessment of certain factors • A related party transaction, with the exception of contributed goods and services, should normally be recognized by both a provider organization and a recipient organization on a gross basis; • A reporting entity may either disclose information about contribute goods and services or recognize a revenue and expense if those goods and services would otherwise have been purchased; • Related party transactions, if recognized, should be recorded at the exchange amount; and The Corporation of the District of Maple Ridge January 22, 2014 Page 20 of 21 • It may not be necessary or practical for the provider organization or recipient organization to disclose information about transactions undertaken by an entity as part of its operations. CONSULTATION PAPERS -PSAB Characteristics of Public Sector Entities (Consultation Paper 1) (Closed for Comment) The objective of this project is to review and amend, if necessary, the conceptual framework in PS 1000, FINANCIAL STATEMENT CONCEPTS, and PS 1100, FINANCIAL STATEMENT OBJECTIVES with respect to measurement of financial performance. This review could also affect PS 1201, FINANCIAL STATEMENT PRESENTATION. Measuring Financial Performance in Public Sector Financial Statements (Consultation Paper 2) (Closed for Comment) The objective of this project is to review and amend, if necessary, the concepts underlying financial performance in the existing public sector conceptual framework in FINANCIAL STATEMENT CONCEPTS, Section PS 1000, and FINANCIAL STATEMENT OBJECTIVES, Section PS 1100. This review could also affect FINANCIAL STATEMENT PRESENTATION, Section PS 1201. INVITATIONS TO COMMENT-PSAB Draft Strategic Plan 2013 -2016 (Closed for Comment) The strategic plan outlines the broad policy objectives that will guide the PSAB activities and outputs over the above period. STATEMENTS OF PRINCIPLES -PSAB Not-for-Profit Organizations (Open for Comments until December 15, 2013) This statement of principles provides 15 key principles in areas related to: • Revenue recognition • Long-lived assets • Controlled entities • Financial statement presentation Important principles in the area of revenue recognition include removal of both the deferral and restricted fund methods of accounting for revenue from contributions. Revenue would now be recognized as soon as the entity controls the related asset (note that this would preclude the recording of pledges receivable). The only exception to immediate recognition of revenue from contributions is when the transfer agreement contains a stipulation that creates a liability. In this case, revenue would be recorded as the liability is extinguished. Principles in the area of long-lived assets harmonize the approach to accounting for impairment of such assets. Private sector NPO accounting rules had an "all or nothing" approach meaning that a long-lived asset was either not impaired or fully impaired and written off. These principles would now harmonize private sector accounting rules with PSAB which allows for a partial impairment model. The Corporation of the District of Maple Ridge January 22, 2014 Page 21 of 21 Accounting for controlled entities will also be mostly harmonized between private and public sector NPOs. Private sector NPOs will have to consolidate all controlled entities with only two exceptions: • If there is a large number of individually immaterial controlled entities (such as Girl Guide groups) • If the controlled entity is profit-oriented (in which case it would be accounted for on the equity basis) Principles in the area of financial statement presentation require that both private sector and public sector NPOs would have to present their expenses by function in the Statement of Operations and by object in the notes to the financial statements. Public sector NPOs would use the "Net Debt" model of presentation on their Statement of Financial Position, but private sector NPOs would continue to use their existing model. Restructurings (Closed for Comment) This statement of principles defines a restructuring transaction and provides guidance on accounting for restructuring transactions including the assets and liabilities that were transferred in the restructuring transaction and the related disclosure. Assets, Contingent Assets and contractual rights (Open for Comment until Nov 29, 2013) This statement proposes to expose three new sections on assets, contingent assets and contractual rights. Part I of the statement will provide guidance on the definition of assets and disclosure of assets that are not recognized is required. Part II of the statement, defines contingent assets and requires disclosure of contingent assets when the confirming future event is likely. Part Ill of the statement defines contractual rights and when the disclosure of contractual rights is required. Revenue (Open for Comment until Feb 3, 2014) The PSAB proposes in this statement of principles to focus on two areas of revenue which are exchange and unilateral (non-exchange) transactions with the presence of performance obligations being the he distinguishing feature. Performance obligations are enforceable promises to provide goods or services. Revenue from an exchange transaction is recognized as the performance obligation is satisfied whereas unilateral transactions are recognized when there is the authority and past event that gives rise to a claim of economic recourses.