Chapter 1
Introduction

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1.01 The Financial Management System (FMS) is an analytical framework designed to produce statistical series which are both consistent and compatible. It encompasses the financial transactions and employment data of the public sector in Canada.

1.02 Since government financial reports are based on the organizational structures and on the accounting and reporting practices of individual governments, there is little uniformity. For example, one government may discharge a function through a departmental structure, while another prefers a crown corporation, a board, a commission, or an agency. Also, among governments, similar departmental titles do not necessarily mean similar responsibilities, and an individual government may regard a given operation as falling within one or several functions. Organizational structures change frequently as new programs are introduced, existing ones amended, and responsibilities are assigned or reassigned.

1.03 Moreover, governments employ different accounting conventions. Some report on a cash basis, others use the accrual approach, and others use a combination of both approaches. Adjustments can bring data produced under these various conventions to a common basis, but complete conversion to a single accounting base is not possible. Consequently, the FMS accepts the accounting conventions used by individual governments.

1.04 Complete intergovernmental comparability of the data presented by the FMS is hindered by several other factors. For example, intergovernmental transactions are not always reported at the same time by both parties involved, and fiscal year-ends may differ. In addition, responsibilities between levels of government are shared differently and varying levels of service is provided. No method exists for adjusting data to account for all discrepancies in service at any level or among levels of government. However, the consolidation convention of the FMS, which allows for the integration of two or more levels of government into a single consolidated unit, considerably reduces the impact of these discrepancies in service. Efforts are continuously directed toward making existing measures more useful through the development of consistent concepts, definitions, classification systems and framework. This publication focuses primarily on those issues.

1.05 It is difficult to make year to year intergovernmental comparisons of financial transactions without numerous adjustments to the basic data. The FMS was developed to replace the diverse formats of government financial reports by establishing statistical series that are consistent and allow valid comparisons from the various governments financial and non-financial reports.

1.06 The FMS universe goes beyond the entities presented in the Public Accounts (PA) to include other agencies or special funds that perform government functions. Thus the FMS data do not accord exactly with the PA and the equivalent reports published each year by the federal, provincial and territorial governments and by municipalities.

1.07 Over the past 65 years Statistics Canada (StatCan), in cooperation with representatives of all levels of government and with the academic and business communities, has developed the FMS. Throughout the years, the FMS has been continually updated and improved as public sector activities and user requirements for public sector financial and employment data have changed.

1.08 The links between the FMS, the Organisation for Economic Co-operation and Development (OECD) Tax Classification, and the Government Finance Statistics (GFS) of the International Monetary Fund (IMF) are also continually strengthened. Closer harmonization in 1997 between the Canadian System of National Accounts (CSNA) and the FMS's classification of government tax revenue data has improved similarity with the OECD's Tax Classification. The functional classification of government expenditures is the main link between the FMS and the GFS.

Both systems classify government expenditures according to the main purpose or function for which the expenditure is made. The FMS utilizes the Canadian functional classification (described in this manual) whereas the IMF utilizes COFOG, which is the Classification of Functions of the Government published by the United Nations (UN). Even though the definitions and content of the main functions of government (e.g., health, social services and education) utilized by both these systems are very close, some differences still exist in a number of functions, and in particular at the sub-function level.

1.09 The FMS was described in the first edition of this publication issued in 1972 with amendments in 1974 and 1984. Since then, suggestions for detailed improvements have been received from many sources, and requests for clarification or explanation have disclosed some weaknesses in the original publication and the subsequent sets of amendments.

1.10 In addition to the evolution of the FMS, three important events led to the present update of the FMS manual. Firstly, during the 1997 historical revision of the CSNA, the standards used for compiling public sector statistics as presented in the FMS and in the CSNA were further harmonized. This was necessary in order to eliminate some differences in concepts and to facilitate reconciliation with international statistical standards. Secondly, changes were necessary due to the implementation of the public sector universe throughout StatCan, and the need for expanded classification systems and more flexible procedures. Finally, the evolution of government finance over the last fifteen years has resulted in the incorporation of new types of financial activities and new types of government structures. This edition describes how these changes are dealt with in the FMS.

1.11 Chapter 2 describes the development of the FMS together with the major changes that were implemented during the 1997 historical revision of the CSNA. With the historical revision, the public sector universe was modified substantially and the modifications are described in detail in Chapter 3.

1.12 Chapter 4 provides information about the sources of information used to compile public sector statistics according to the FMS.

1.13 Chapter 5 describes the conventions used in the FMS, particularly the unification and gross conventions. The unification convention was established to ignore the demarcations between the government and its universe and boards, agencies or commissions, and to consolidate the separate entities into a single unit. The gross convention requires that transactions be reported on a gross basis i.e., revenue not to be netted against expenditures (and the opposite) and certain tax credits to be added back to both revenue and expenditures.

1.14 In Chapter 6, a complete review of the classification of government revenue by source and expenditures by function is presented while Chapter 7 contains information on the conventional accounting nomenclature used for assets and liabilities.

1.15 In Chapter 8, the reader will find a description of the concepts and the methodology used in the preparation of consolidated government revenue, expenditures, assets and liabilities.

1.16 The last two chapters deal with government business enterprises and with employment and wages and salaries. Chapter 9 is devoted to the conventions and classifications used for the compilation of the government business enterprise (GBE) data while Chapter 10 focuses on the concepts and definitions applied for the production of statistical data on employment and wages and salaries in the public sector.

1.17 The FMS data on public sector activities are stored on the StatCan Canadian Socio-economic Information Management System (CANSIM) database (see Text table 1.2). The main results are also available in publications (see Text table 1.1). Other data can be obtained on request.