Publications
Financial Management System (FMS) 2009
Chapter 8
Consolidated government finance
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8.01 Thus far this publication has described the application of the FMS to the production of statistics for a single government. Such a government may comprise a large number of accounting entities as set out in paragraphs 3.02 and 3.04, but for statistical purposes its activities are consolidated to present information as if the government was a single unit.
Beyond the primary consolidations, however, there are a number of other consolidations, which produce useful statistics. For example, because of the numbers and variety of local governments the full range of activities of this level of government within a sub-provincial region or within a province is only apparent when statistics for the many component governments of the region of province under analysis are consolidated. Secondly, there is the uneven delegation by provinces to local governments of provincial responsibilities under the Constitution, which creates noticeable differences in provincial and local government financial statistics. Integration of the two levels into a single consolidated unit provides a valid basis for inter-provincial comparisons. Some examples of the differences in the allocation of responsibilities are as follows:
- In Newfoundland and Labrador, the cost of police protection is borne almost entirely by the province whereas in other provinces and territories there are significant expenditures by both levels of government.
- In many provinces and territories, the school tax revenue, to be used for primary and secondary education, is raised by local governments, and local governments pay the expenditures. In New Brunswick, elementary and secondary schools are part of the provincial government structure. In the Yukon and Nunavut, the territorial government operates the schools. In the Northwest Territories, the territorial government also operates the schools with the exception of two school districts in Yellowknife.
- In Ontario, there are many locally owned residential care facilities that are part of the local government structure, while in other provinces and territories, most of the residential care facilities are at the provincial level.
- The allocation of responsibilities between the provincial and local authorities within a province can vary over time as well.
To create statistics that reflect the combination of provincial and local governments, it is necessary to first consolidate a host of provincial entities as mentioned earlier and a host of local government entities, and then combine the data for the two levels of government and eliminate the transactions between them. Sales of goods and services, transactions related to borrowing (interest) between governments, and transfers are transactions that occur between the two levels of government.
Finally, the financial impact of government on the social and economic life of the country can only be measured when data for all three levels of government – federal, provincial/territorial and local - are consolidated.
8.02 Intergovernmental transactions vary in form and nature. The most widely known are general and specific purpose transfers, purchase-sale transactions where one government buys goods or services from another government either to use or to distribute or sell to the population under its jurisdiction, as well as borrowing from another government and the payment of related interest. Provincial and territorial governments will sometimes purchase/sell goods and services or borrow/lend money among each other. These transactions are eliminated when consolidating all provincial and territorial governments in arriving at Provincial and Territorial Government - Canada Total. For example, to the extent that there are revenue and expenditure transactions among provincial and territorial governments, the Provincial and Territorial Government - Canada Total will be less than the sum of the revenue and expenditures of each provincial and territorial government since the inter-government transactions have been eliminated to avoid double-counting.
8.03 It is often difficult or even impossible to match the records of particular intergovernmental transactions in the accounts of the governments involved. These difficulties arise from many causes. The governments concerned may use very different terminology in describing a transaction between them or between them and their components. One government may record it as a single item and the other desegregate it into several transactions. The treatment of the transaction may vary widely due to different accounting systems. Finally, the timing of the recording of the transaction may differ sufficiently for it to be recorded in different reference periods, e.g., the federal government may show a transfer to a province near the close of a fiscal year but the province may not record its receipt until the following year.
8.04 Consequently, procedures have been developed to ensure that consolidated data reflect, as clearly as possible, only those amounts (inflows) received by the consolidated governments from other entities, e.g., the public, business, non-consolidated governments and only those amounts (outflows) disbursed by the consolidated governments to these entities. These criteria also apply to consolidated assets and liabilities.
8.05 These procedures are best illustrated by describing their application to the consolidation of the revenue and expenditures of two governments.
In many instances intergovernmental transactions can be identified in the records of both governments, but the amounts reported differ; even after adjusting revenues and expenditures of each government to a modified cash basis, these amounts cannot be reconciled. In this case the amount recorded by the higher level of government is generally deducted from the combined revenues and the combined expenditures of the two governments.
In the instance where the transaction can be identified in the statements of only one government, this amount is deducted from the combined revenues and the combined expenditures of both governments.
In both cases mentioned above, the categories "other revenues" and "other expenditures" are adjusted as necessary to account for the differences in the amounts reported. The consolidated deficit/surplus will be the sum of the surpluses/deficits of the components that are consolidated.
8.06 However, there are cases where intergovernmental transactions are not recorded as such in source documents; they are lumped together with related transactions occurring with entities outside the government universe. As current example is the payment (or receipt) of interest on intergovernmental loans which is recorded with total interest received or paid. As a result, the consolidated data may, and do, at times contain double counting in spite of all efforts to avoid such duplication. Also, transactions between governments relating to the payment of taxes are not eliminated on consolidation. For example, governments may pay payroll taxes or grants in lieu of property taxes to another government. These transactions are not eliminated on consolidation in order to be consistent with their treatment in the System of National Accounts (SNA).
8.07 Procedures similar to those for the consolidation of revenue and expenditures are used in the consolidation of assets and liabilities of two or more governments. As with revenue and expenditures, problems of differences or lack of identification in records of transactions among governments also arise. Where related receivables and payable are identifiable but irreconcilable the amounts acknowledged by the higher level of government as payable to the other are deducted from the combined receivables and combined payables. Remaining debit or credit balances in the intergovernmental receivables are transferred to "Other assets" or "Other liabilities." Similarly, where only one side of the transaction can be identified, that amount is deducted from both the combined receivables and combined payables.
8.08 Two additional problems can arise in the consolidation of assets and liabilities. The first occurs when one side of an intergovernmental asset-liability relationship is identified only by level of government, e.g., a province may list among its investments "Municipal debentures" without specifying which municipalities in which provinces issued the debentures. If the assets and liabilities of that province are consolidated with those of its local governments then this investment cannot be eliminated against the debt of the local governments since part, if not all, of the investment may consist of debentures of municipalities in other provinces which are not consolidated. However, when assets and liabilities of all provinces, territories and their local governments are consolidated, such unspecified investments and debt can be, and are, eliminated from the combined totals of securities held and of debt since they must be included in those totals.
8.09 The second problem arises when a government issues a debenture as security for a loan from another government. The loan is recorded as such by the lending government but the security is classified by the borrowing government as debenture debt rather than as a loan payable. Although in such cases the direct linkage between the lender's asset category and the borrower's liability classification is not immediately apparent, a consolidation elimination of loans receivable against debentures payable is made if the necessary information is available.
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