Chapter 9
Government business enterprises (GBEs)

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Introduction
Income
Expenses
Unappropriated surplus
Assets, liabilities and net worth

9.01 The criteria used in establishing which government operations fall into the GBE statistical universe are outlined in paragraphs 3.03 and 3.04 and the sources of data for these enterprises are presented in paragraphs 4.06 and 4.07. Transactions between government and GBEs are described in paragraphs 5.41 to 5.45. This chapter deals with the statistical data published on GBEs.

9.02 The development of the FMS has been prompted primarily by the need for a framework for consistent and comparable financial statistics of government. This need arose from the lack of a single system of generally accepted principles of government accounting and financial reporting. Components of the GBE universe, however, (with a few minor exceptions) account for, and report on, their financial transactions in conformity with practices developed by professional accounting associations and, to a lesser extent, by the various industries in which they are evolving. In consequence there appear to be at least three national frameworks under which financial statistics of GBEs can be produced-the System of National Accounts (SNA), the FMS as it applies to the government universe, and the Generally Accepted Accounting Principles (GAAP) system used for business accounting.

9.03 While data for GBEs are incorporated in the various statistical series which together comprise the System of National Accounts, such highly aggregated statistics do not provide the type of information, or the level of detail necessary for analyzing the activities of individual enterprises or groups thereof. Problems of a different kind inhibit the use of the government framework of the FMS for GBE statistics. These problems arise from basic differences in the accounting objectives of the two universes.

Government accounting, whatever specific form it takes, is aimed primarily at presenting a report on stewardship, i.e., what monies did the government collect, who was responsible for spending them and were all expenditures properly authorized; the continued existence of the government is not in question. However, a demonstration of the present and future viability of the business is at the centre of business accounting. Viability is shown by the successful outcome of current operations and the provision of adequate resources for continued operations in the future; in turn, these two criteria imply good stewardship by the managers.

These conceptual differences produce practical problems, a prime example of which is the treatment of transactions affecting fixed assets. Assumption of a continuing existence removes the need for a government to distinguish between items, which will be completely consumed in current activities and those with a useful life extending into the future, i.e., current vs. capital expenditures. Adopting this financial management framework is consequently in direct conflict with the business approach where the separation of current and capital expenditures is of primary importance and where each class of expenditure is treated distinctively. It is worth mentioning, however, that discussions are underway to evaluate the establishment of capital accounts for government.

9.04 The conversion of data produced in accordance with GAAP framework is necessary for the non-commercial crown agencies that are classified to the government component of the public sector and which follow business accounting practices. The classification of GBE financial data into the FMS is difficult because GBEs activities cannot be related to government main functions. It can be argued that the consolidation of government and GBE statistics would permit the determination and consequent analysis of financial statistics for what is sometimes called the public sector. The chief object of such analysis, however, is likely to be the relationships of the public sector to the economy as a whole. However, this is better measured through the sectoral approach of the Input-Output, Income and Expenditure Accounts and the Balance of Payments and Financial Flows divisions of the SNA.

9.05 As mentioned previously, GBEs adhere closely to business accounting concepts, classifications and conventions. Government financial management terminology is used where it does not conflict with business usage, i.e., in many asset and liability classifications. GBE accounting framework stresses the identification of transactions of enterprises with their parent and other governments and with each other. The following paragraphs highlight the principal components of the enterprise framework.

Income

9.06 The income of GBEs is broken down into four categories. The amounts collected by enterprises on behalf of their parent governments, e.g., provincial liquor licences and permits collected by liquor authorities, are excluded from enterprise income (since the GBE is the intermediary for the collection of licenses and permits). Appendix E contains a detailed list of all the income and expense categories of the Canadian FMS.

(a) Sales of goods and services - They are reported net of rebates and discounts. Significant amounts of total sales made to an individual customer or group of customers, e.g., from a provincial power corporation to its municipally owned distributors, are separately identified wherever possible. Sales of goods and services include premiums earned by insurance corporations and exclude rental income. Rental income is included in investment income.

(b) Investment income - It comprises three sub-classifications: interest, rentals and other investment income. Interest, in turn, is classified by origin-government sub-sectors, govern-ment business enterprises and other sources. Amounts classified to the first two are further identified by level of government. The sub-classification "Rentals" is self-explanatory while "Other investment income" includes such items as dividends, profits on foreign exchange operations, gain on sale of investments and equity in net income of affiliates.

(c) Subsidies - Covers government assistance to offset certain current expenses or to supplement current revenues. Contributions from governments toward current costs of production (current year operating losses) to encourage certain types of production, to assist producers in areas of special difficulty, to protect producers against declines in the prices of their products or to support socially desirable activities are some examples. Contributions are identified by level of government. Payments in respect of prior year's losses are recorded in the statement of unappropriated surplus.

(d) Other income - Comprises all income not elsewhere classified, not related to income of prior periods and not of capital nature.

Expenses

9.07 GBE expenses comprise five principal categories:

(a) Cost of goods and services - Corresponds to the cost of material, labor, overhead and indirect taxes included in the goods and services sold. The cost includes the following elements:

• Salaries and wages - Includes total remuneration to employees for services rendered and the employer's portion of benefits.
• Materials and other purchases - Significant amounts of purchases from a single supplier, e.g., by a municipal electric utility from a provincial power corporation, are reported separately where identifiable.
• Insurance claims - Paid by insurance corporations.

(b) Debt charges - Payments for the use of funds raised through loans, bonds, short-term paper, notes and other debt instruments. Includes interest and other debt charges. Interest expense is identified in terms of the holders of the debt, i.e., governments, GBEs and others. The first two categories are sub-divided by level of government. Other debt charges are comprised of amortization of bond discount as well as bond issue and redemption charges.

(c) Grants in lieu of taxes - Consists of transfers, mostly to local governments, that GBEs pay in lieu of property taxes.

(d) Provision for depreciation and depletion - Is the accounting process whereby the cost of fixed and wasting assets is systematically allocated to current production operations. This category records the amount reported by the enterprise, regardless of the method of computation.

(e) Other expenses - Includes allowances for doubtful accounts, losses on foreign exchange transactions, provision for estimated liabilities, write-offs, write-downs of fixed assets, inventories and investments and expenses not classified elsewhere.

9.08 Income tax - Federal corporation income tax (but not provincial) is payable by federal proprietary corporations; these are identified in Section D of the Financial Administration Act. All other federal, provincial and local enterprises (except subsidiaries of such enterprises) are exempt from federal and provincial corporation income taxes unless they are less than 90% owned by the Crown. Subsidiaries are only exempt if they are owned 100% by enterprises which are themselves exempt.

Unappropriated surplus

9.09 The unappropriated surplus represents the portion of the earned surplus that is not restricted to any particular use. It includes the accumulation of profits or losses incurred (see Appendix E). It also summarizes those transactions which take place in the accounting period under review and which, while not classified as income or expenses (e.g., transfers and dividends declared), affect the surplus of an enterprise but cannot be directly assigned to appropriated or contributed surplus.

Assets, liabilities and net worth

9.10 The balance sheet classifications used for GBE statistics (see Appendix E) follow closely those developed for government statistics, with the modifications required to accommodate those transactions of a business nature which are peculiar to GBEs. The main items introduced are described below whereas those which are used for both government and GBEs have been described previously in Chapter 7.

9.11 On the asset side, the following additions have been made:

(a) Cash with provincial and territorial governments - This sub-category of "Cash on hand and on deposit" accommodates the practice of certain provinces which require their enterprises to deposit funds surplus to immediate requirements with the provincial treasury rather than in banks or other financial institutions.

(b) Accrued revenue and prepaid expenses - This category, particular to business enterprises, is also encountered, to a lesser extent, in the activities of government. No special description is needed since it is self-explanatory.

(c) Inventories - Inventories are tangible property held for sale in the ordinary course of business, in the process of production for such sale, or to be consumed in the production of goods and services for sale. The valuation set by the enterprise is used.

9.12 The items added on the liability side are as follows:

(a) Savings deposits - Identifies liabilities to depositors with provincial financial institutions, such as the "Treasury Branches Deposits Fund of Alberta."

(b) Accrued expenses and deferred credits - This is the counterpart of "Accrued revenue and prepaid expenses" on the asset side of the balance sheet.

(c) Minority interest - The portion of share capital recorded by an enterprise on which minority shareholders have a claim.

9.13 The statement of net worth identifies the capital stock and surplus of enterprises.

(a) Capital stock - Identifies reported ownership, i.e., level of government or GBE and private investors.

(b) Surplus - Comprises: "Unappropriated surplus," "Appropriated surplus" and "Contributed surplus." The nature and determination of "Unappropriated surplus" is described in paragraph 9.09. "Appropriated surplus" identifies the typical reserves established by GBEs (e.g., reserve for contingency and reserve for future expansion). "Contributed surplus" includes the transfer of physical assets and capital contributions provided for acquisitions. "Contributed surplus" further identifies the contributors by level of government, GBE and others.