Ottawa begins move to accrual accounting. No, really, this is important!

Treasury Board President Vic Toews just tabled 95 “Reports on Plans and Priorities”, known around Ottawa as RPPs. These are important documents for reporters and anyone interested in keeping a close eye on government because, as Toews says in his press release, they “are forward looking documents that provide expenditure plans over a 3 year period.”

Now bear with me for a moment and let me explain why this year's RPPs are extra-special.

For the first time, the government is moving ahead on a plan to report its financial position using “accrual accounting”. The government does a good job, I think, explaining what this means:

Accrual accounting refers to a method of accounting that records transactions to reflect revenue in the period in which it is earned and the consumption or use of goods and services rather than when cash is received or paid as it is in accounting on a cash basis.

One of the main benefits of accrual accounting is that it recognizes the life-cycle costs associated with assets.

For example, a department purchases a fleet of trucks for $1.2 million. The trucks have a useful service life of six years. Under the cash method, the full $1.2 million would be reported as expenditure in the first year, and nothing in the subsequent five years. However, under the accrual method, the accounts would record the same purchase much differently. The $1.2 million would be reported as an asset in the first year and, for each of the six years the trucks are in service, $200,000 in expense would be reported to reflect the use of the trucks.

Accrual information clearly presents a very different—but more accurate—picture of the organization's financial results and situation.

By providing RPP financial information on an accrual basis, parliamentarians are better able to compare departmental plans and priorities with the information in the Government's budget, in end-of-year results outlined in the Government's financial statements in Public Accounts and in Departmental Performance Reports, all of which are also presented on an accrual basis.

All RPPs will include financial information on accrual basis in two years.

It is important for parliamentarians—and by extension all Canadians—to understand what the government is doing, why it is doing it, and what results are being achieved. That is why the Government tables in Parliament a number of key documents that explain the Government's objectives and then reports on progress against those stated aims. This is known as the Estimates process.

RPPs are part III of the Estimates process. They provide further details on the information provided through the Main Estimates. Once the fiscal year is over, Departmental Performance Reports provide individual department and agency accounts of accomplishments against plans and expected results set out in their RPPs. These are normally tabled in the fall.

The government doesn't say this but let me say it: This is how most of the world accounts for things.

There has been a resistance at the federal government level to move to this kind of accounting for this reason: Governments in our parliamentary system can only spend if MPs in the House of Commons vote for that spending. “… [accrual accounting] does provide more information to us,” former Conservative MP John Williams once said — and Williams was, by trade, an accountant — “but remember we vote money on an annual basis. We don't vote money on an annual basis and if you have some left over you can carry it around and spent it another time.”

So what does that mean to everyday Canadians?

Well, let's go back to the example of the trucks. The way it works now is the government must spend and acount for the $1.2 million for trucks right now, this year. Government money only comes from one place — you and me. That means taxpayers in the current year have to come up with the full cost of those trucks right now even though taxpayers in future years will clearly enjoy the benefits — benefits that they don't have to pay for. Now, if the government goes into deficit to pay for those trucks, then taxpayers of future years get to pay for those trucks — plus interest! Taxpayers don't like deficits and so governments will tend to avoid buying the trucks and that, in turn, can have service consequences.

Now if the governnment could apply accrual accounting, then taxpayers today could acquire the trucks, the trucks show up as a government asset on the books, and taxpayers this year get “charged” $200,000″ for their use. Taxpayers next year, who are also enjoying the benefit of the trucks, also get charged $200,000, which must come from their taxes, and so on until the trucks have no asset value left. That, many think, is a more fair way for governments to acquire and pay for public goods which benefit many generations of taxpayers.

I quoted John Williams a minute ago and now I can tell you the context of the discussion he was having.

Public Works and Government Services Canada wanted to build a new office building for civil servants. Public Works looked at all the options so far as building and owning a new building or leasing a new building. PWGSC real estate managers concluded the best long-term course of action for taxpayers would be to build a new building rather than sign a lease agreement. But the government of the day was going to proceed with the leasing arrangement. Why? Building a new building would cost taxpayers now, say, $50 million and there was not $50 million in the current year's budget for such a big one-time expense. A 20-year lease for the same building would be about $5 millino a year and, yes, there was room in the budget for a $5 million expense. But of course, over 20 years, the government, had it owned the building, would have paid $50-million and then still had an asset with some value. Instead, over 20 years, it will pay $100 million in rent and have no asset to show for it at the end of that period.

So why don't we change the way Parliament does things? You'll love this answer: Because that would require changing the Constitution and that requires the agreement of the Provinces and, voila, we are into protracted and likely unsuccessful Constitutional negotiations.

Until that time, the government is going to try to, essentially, maintain two sets of books — the new accrual accounting and the old-fashioned parliamentary cash accounting. Accrual accounting's advocates hope that in showing how well accrual accounting can work and how policy decisions could be improved, perhaps the impetus will build for that constitutional change.