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2010-11 Financial Statements Changes

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  1. 2010-11 Financial Statements Changes Information Session for School Boards and External Auditors Financial Analysis and Accountability Branch Fall 2011

  2. Agenda • Legislative Changes • Government Transfers Standard • Deferred Capital Contributions • Accumulated Surplus/(Deficit) • Prior Period Restatements • Proceeds of Disposition • Assets Held for Sale • Asset Upload File • Notes to the Financial Statements • Form Changes 2007-08 Grants for Student Needs

  3. Legislative Changes 2007-08 Grants for Student Needs

  4. Purpose • The Ministry of Education (EDU) has introduced legislative changes to the accountability framework for the School Board Sector. • Ministry proposals were shared at previous information sessions. • Highlights changes most of which are effective September 1, 2010. 2007-08 Grants for Student Needs

  5. Education Act – S231 • The Ministry has amended legislation to update the budget requirements to: • Better align the financial accountability provisions with accounting policies of the province. • Establish new financial accountability controls on accumulated surpluses. • Establish new provisions related to multi-year deficit management strategies and recovery plans. • Section 231 of the Act has been amended to provide a new definition of balanced budget. • The new model measures budget compliance by measuring the amount that a board’s expenses exceed its revenues against the “1% threshold”. • The 1% threshold is the lesser of: • 1% of the board’s operating revenue for the school board fiscal year, and • the board’s accumulated surplus for the immediately preceding fiscal year. • The board’s deficit may be greater than the criteria above if the board has prior approval from the Minister. • The above provisions have been implemented starting with the 2010-11 estimates of school boards and are compliance requirements for estimates, revised estimates and financial statements. 2007-08 Grants for Student Needs

  6. Education Act – Recovery Plans • The Ministry has amended legislation to permit multi-year deficit management strategies and recovery plans. • A new division C.1 called Financial Recovery Plans has been added. • The section gives the Minister the power to trigger a recovery plan at any point a board’s expenses exceed its revenues for the fiscal year by an amount greater than the 1% threshold referred to in the previous slide. • A recovery plan would not be triggered if the board had prior approval from the Minister. • The board would be required to submit a recovery plan within a specified time period, after which the Minister could approve or change the plan as necessary to address the deficit. • The board would be required to comply with the recovery plan until the board eliminated its in-year and accumulated deficits. 2007-08 Grants for Student Needs

  7. Regulations – Surpluses and Deficits • Reserves concepts have been replaced with accumulated surplus or deficit. • Education Act amended to allow regulations prescribing exclusions/inclusions etc. in the determination of accumulated surplus/deficit and in-year surplus/deficit. • Ontario Regulation 488/10, Determination of Board Surpluses and Deficits, has been introduced. • Schedule 5 of the Financial Statements implements the provisions of this regulation. 2007-08 Grants for Student Needs

  8. Regulations – Restricted Purpose Revenues • Reserves concepts that have external restrictions are reported as deferred revenues. • Reserves regulation has been replaced with Ontario Regulation 193/10, Restricted Purpose Revenues. • Enveloping provisions on GSN revenues e.g. Special Education, Internal Audit that were previously in the GSN Regulation have been moved to this regulation. 2007-08 Grants for Student Needs

  9. Regulations – Restricted Purpose Revenues • Addresses restrictions on School Renewal, including the school renewal portion of the Pupil Accommodation Reserve as of August 31, 2010. • Includes a provision allowing the school renewal allocation to be applied against the amortization/DCC gap related to school renewal capital spending. • Restrictions related to School Condition Improvement, a new funding source provided starting in 2011/12 are addressed. It is similar to renewal except that expenditures must meet Code of Accounts and TCA Guide criteria. 2007-08 Grants for Student Needs

  10. Regulations – 2010-11 GSN • To implement amended section 231 of the Act, operating revenue is defined in section 12 of the GSN regulation (Reg 196/10). • New provision introduced, section 57 – Required spending, minor tangible capital assets. • Requires boards to use 2.5% of funding allocations against minor TCA first before using residual for other purposes. • This was implemented to be able to include funding spent on minor TCA in DCC. 2007-08 Grants for Student Needs

  11. Government Transfers Standard 2007-08 Grants for Student Needs

  12. Government Transfers Standard • In February 2011, PSAB released the revised Government Transfers standard (PS 3410). • This standard explains how to report transfers from a government. • Where a board has a liability due to a capital transfer received to acquire or develop a TCA to be used to provide services for a defined number of years, the liability would be reduced and an equivalent amount of revenue would be recognized as the liability is settled (PS 3410, paragraphs 23 and 25). • This liability is referred to as deferred capital contributions (DCC) in the following training material and EFIS worksheets. 2007-08 Grants for Student Needs

  13. DCC and Non-Depreciable Assets (ex. Land) • The treatment of non-depreciable assets (ex. land) in PS 3410 is different that what was implemented in the 2010-11 Revised Estimates. • Per the updated standard, capital transfers relating to non-depreciable assets would be recognized in revenue once the asset is acquired (PS 3410, paragraph 27). • The 2010-11 Financial Statement forms have been updated to exclude non-depreciable assets from DCC. • Regulations were updated to include revenues received for land in Accumulated Surplus - Unavailable for Compliance. 2007-08 Grants for Student Needs

  14. ICAO Technical Committee • On July 7, 2011, the Ministry of Education met with an Institute of Chartered Accountants of Ontario (ICAO) Technical Committee to discuss the implementation Government Transfers in the school board sector. • Memorandum 2011:B8 (Implementation of the revised government transfers accounting standard) includes the slides that were shared at the meeting, plus a description of one of the issues encountered. 2007-08 Grants for Student Needs

  15. Government Transfers Implementation • The majority of the Ministry’s implementation plan clearly conforms to the Government Transfers standard. • Boards have a liability with respect to past and future capital transfers for buildings and minor tangible capital assets (TCA). Therefore, PS 3410 can be applied and DCC recorded. • However, the treatment of property tax revenues that were used to fund the construction of depreciable assets (i.e. buildings and building additions)was inconclusive. • The implementation plan was the focus of the training sessions with the boards’ external auditors in early September 2011. • The following slides describe the issue of property tax revenues and provide a solution. 2007-08 Grants for Student Needs

  16. Capital funded through property taxes • Prior to 1998, some boards used property tax revenues to fund the construction of depreciable assets. • Generally, PS 3510 (Tax Revenues) would be used to determine how to account for property tax revenues. • The Province and school boards have a unique set of circumstances whereby the Ministry believes it is appropriate to include these amounts in DCC. • These circumstances were described in detail in memorandum 2011:B8. • The control structure changed significantly such that even pre-1998 assets became the responsibility of the Province. • The financial statements should reflect this. 2007-08 Grants for Student Needs

  17. Capital funded through property taxes (con’t) • From a cost-benefit perspective, it is not reasonable, nor necessarily possible, to calculate capital contributions received through property tax revenue, thus it is not possible to exclude this amount from the opening DCC balance. • In such instances, the standard would generally be applied prospectively; however, the Ministry instructed boards to implement the provisions of PS 3410 retroactively. This was: • To ensure that the Financial Statements are relevant, understandable to the user, and comparable over periods, consistent with PS 1000.24. • To be consistent with the implementation of TCA. • Boards have not had taxing power since 1998, so this is a transition issue only. • In consideration of the above, the Ministry believes it is appropriate to include the opening balance related to property tax revenue contributions in DCC. 2007-08 Grants for Student Needs

  18. Audit Report and Accounting Policy Note • The boards’ 2010-11 Financial Statements will be prepared under a special purpose fair presentation framework. • See sample audit report provided. • The financial statements will be prepared in accordance with the basis of accounting described in Note 1 to financial statements. • See sample Note 1 provided. 2007-08 Grants for Student Needs

  19. Deferred Capital Contributions 2007-08 Grants for Student Needs

  20. Agenda • DCC Recap • What goes into DCC? • What does not go into DCC? • Opening Balance Adjustment • Sinking Fund Interest • Third Party Contributions • Information Tracking 2007-08 Grants for Student Needs

  21. DCC Recap: What goes into DCC? • Government or non-government capital transfers that are to be used for depreciable assets will be recorded in DCC. • Rationale for government transfers was discussed earlier in the session. • Rationale for non-government transfers is explained in the slide deck attached to Memorandum 2011:B8 (Government Transfers: Implementation Discussion). • These are donations, which are generally non-material amounts. • The funding sources that go into DCC are shown on Schedule 3 (Capital Expenditure Budget. They are: 2007-08 Grants for Student Needs

  22. DCC Recap: What goes into DCC (continued)? • The “Other” category includes capital transfers that were not specified on Schedule 3. These amounts come from Schedule 5.1 (Deferred Revenue). They are: 2007-08 Grants for Student Needs

  23. DCC Recap: What does not go into DCC? • “Unsupported capital spending” is spending on depreciable TCA that has not been supported with capital contributions. • It equals to the value of the depreciable TCA less the DCC balance. • Examples of unsupported capital spending: • Accumulated surplus used to fund a depreciable capital project • Operating grants that are spent on depreciable capital • (Note that the school renewal grant, up to 2.5% of total operating allocation that is used for minor tangible capital assets, and any capitalized interest costs are designated as capital grants.) • Sinking fund interest • The resulting shortfall in DCC revenue is managed through a compliance adjustment. 2007-08 Grants for Student Needs

  24. DCC: Opening Balance Adjustment • The 2010-11 Estimate forms were based on the third Government Transfers Re-exposure Draft. • Between the 2010-11 Estimates and 2010-11 Financial Statements, there were some changes and corrections to the forms because of the release of the Government Transfers standard. • Due to these changes, the unsupported capital spending for September 1, 2010 calculated on the Capital Wrap-Up Template (CWT) was revised. • Boards received a draft revised CWT in mid-May 2011 detailing these changes, and will have received a final version in by the end of the training sessions. • For most boards, this will not impact the receivable from the Province significantly; however, for some boards, it may. 2007-08 Grants for Student Needs

  25. DCC: Opening Balance Adjustment (continued) Changes/corrections made for the September 1, 2010 unsupported capital spending calculation: • Excluded from DCC - Sinking fund interest expected to be earned during the life of the sinking funds per the sinking fund agreement. • Excluded from DCC – Capital contributions recognized for the purchase of land. • Excluded from DCC - Amounts committed from accumulated surplus in 2009-10 for capital that were to be spent on TCA by August 31, 2010. • Included in DCC – NPF related to supported capital spending using FDK and $120M Capital funding sources that was mistakenly excluded from DCC in the CWT. 2007-08 Grants for Student Needs

  26. Sinking Fund Interest • The Ministry reviewed the 2010-11 Estimates approach on sinking funds, and determined that the accounting treatment was not in line with PS 3100.13. • Interest earned on sinking funds should be recognized in revenue when earned. • The 2010-11 Financial Statement forms (and 2011-12 Estimates) have been changed to exclude sinking fund interest from DCC. • Interest earnings on the sinking funds will be included in accumulated surplus as internally appropriated. 2007-08 Grants for Student Needs

  27. Sinking Fund Interest (continued) • The compliance shortfall due to the exclusion of sinking fund interest from DCC will be managed from the interest earned by the sinking funds (Schedule 5.5). • Sinking fund interest earned in the early years of contributions may not be enough to cover the compliance shortfall, causing a in year compliance deficit • In later years, the interest earning will exceed the compliance shortfall, causing a in year compliance surplus • Deficits in the early years and surpluses in later years are just timing differences. • As most of the sinking funds have shorter life than that of the assets supported by the sinking funds, at maturity of the sinking fund, there is usually an accumulated surplus attributable to SF interest • This accumulated surplus will be used to cover the compliance shortfall after the sinking fund maturity • Any excess sinking fund earnings can be used for other operating purposes once the requirements to repay the sinking funds are met (on an aggregate basis). 2007-08 Grants for Student Needs

  28. Compliance and PSAB Impact SF Interest 2.5 1.5 DCC 0 (years) 40 25 (2.5) Amortization Note: Total contributions of $60 put into DCC, then amortized over 40 years. Yearly SF interest earned recognized in income over 25 years. ($) 2007-08 Grants for Student Needs

  29. DCC: Third Party Contributions • Two new lines were added to determine the portion of the DCC balance that relates to third party (Schedule 5.3, item 2.4) and non-third party capital contributions (Schedule 5.3, item 2.5). • Required for Ministry consolidation purposes • Third party amounts are: • federal government • school generated funds for capital • board level donations for capital • other third parties amounts specified by the board 2007-08 Grants for Student Needs

  30. DCC: Information Tracking • If DCC information for assets purchased pre-September 1, 2010 is available on an asset-by-asset basis, boards are encouraged to track the information on an asset-by-asset basis. • Starting September 1, 2010, board are required to track DCC additions, disposals and amortization on an asset-by-asset basis (including third party and non-third party capital contributions). 2007-08 Grants for Student Needs

  31. Accumulated Surplus/(Deficit) 2007-08 Grants for Student Needs

  32. Overview of Changes • CPP and EI Restatement has been removed • New line item 2.8.1, Committed Sinking Fund Interest, has been added • Committed Capital Projects moved from Unavailable for Compliance to Internally Appropriated • New Line 4.7 Revenue Recognized for Land • Line 4.9 from 2009-10 Financial Statements, Portion of Proceeds of Disposition Related to Net Book Value of Disposed Assets,” has been removed 2007-08 Grants for Student Needs

  33. Opening Balance Column • The September 1, 2010 opening balance column will be input based on the 2009-10 Schedule 5 closing balances except for the changes. 2007-08 Grants for Student Needs

  34. Summary of Changes • CPP & EI Restatement line has been removed • Transfer to 1.1 total operating accumulated surplus • Committed Sinking Fund Interest Earned • New line 2.8.1 • Data for this line comes from Schedule 5.5, List of Committed Capital Amounts Funded by Accumulated Surplus • Represents earning on sinking fund assets that will be used to pay off the associated debt as well as revenues earned to offset the amortization of the unsupported portion of the assets related to the sinking fund debentures. • Committed Capital Projects • In 2009-10 was included under Unavailable for Compliance item 4.10 • This year amount is line 2.8.2 under internally appropriated • Data for this line comes from Schedule 5.5 also • The amount is the committed accumulated surplus to support the unsupported portion of the project and to offset the amortization of the unsupported portion of the asset. 2007-08 Grants for Student Needs

  35. Summary of Changes - Continued • Revenues Recognized for Land • New line 4.7, Revenues Recognized for Land • Comes from Schedule 5.6A, Continuity of Revenues Recognized for the Purchase of Land • Schedule 5.6 was added due to a PSAB Government Transfers Standard (PS3410) • The standard allows for DCC relating to the purchase or acquisition of depreciable assets, this is not the case for non depreciable assets such as land • Prior to this Ministry included land revenues in DCC, however due to the release of the new standard, revenues received in the purchase of land will be excluded from DCC • The opening balance is adjusted to exclude land revenues and this amount is moved into accumulated surplus for compliance on line 4.7 in Schedule 5 2007-08 Grants for Student Needs

  36. Summary of Changes - Continued • Proceeds of Disposition • Line 4.9, Portion of Proceeds of Disposition Related to Net Book Value of the Disposed Assets) will be transferred to Schedule 5.1, deferred revenue, item 2.25 (School building), item 2.26 (prohibitive to repair) or item 2.27 (other) • Due to the implementation of DCC in 2010-11, the treatment of proceeds of disposition will be different • In 2009-10, only the gain on sale was transferred to deferred revenue on disposal of real property • In 2010-11, the gain and prior capital contributions will be transferred to deferred revenue on disposal of real property • For the restatement of the September 1, 2010 accumulated surplus balance, boards will transfer this amount out of accumulated surplus and into deferred revenue • The assumption under this transaction is that prior disposals were fully contributed (i.e. the DCC balance would have equaled the TCA balance) 2007-08 Grants for Student Needs

  37. Summary of Changes - Continued • Line 4.6 (Debt), 4.7 (Not Permanently Financed Amounts), and 4.8 (Receivable from Province) from 2009-10 are no longer on the schedule, the total of these amounts represents the unsupported debts in the old DCC calculation before the adjustments required to exclude land and sinking fund interest earned from DCC. • This amount is now split into 3 components, under four lines: • The adjusted DCC amount – line 4.5 (Net TCA less land) from Schedule 3C on TCA and line 4.6 (Unsupported Debt at August 31, 2010) from the approved CWT • Line 2.8.1 (Committed Sinking Fund Interest Earned) from Schedule 5.5 • Line 4.7 (Revenue Recognize from Land) from Schedule 5.6A 2007-08 Grants for Student Needs

  38. Schedule 5.5 • The name of this schedule has been changed to List of Committed Capital Amounts Funded by Accumulated Surplus. • It is used to track: • Depreciable committed capital projects (same as previous forms) • Interest earned on sinking funds (new). Sinking fund interest earned: • Recognized as revenues, not in DCC • Schedule 5.5 brings the sinking fund interest (earned and to be earned under the debentures agreement) into Available for Compliance over the average remaining service life (RSL) of depreciable TCA as at August 31, 2010 • The amount is to cover the amortization of the unsupported portion of the related assets (i.e. the difference between the assets amount and the total sinking fund contributions under the by-laws/debenture agreement) • Boards can modify the average RSL to reflect the RSL of the assets that are supported by the sinking funds. • Once the board meets their contractual sinking fund interest requirements, the excess earnings are unrestricted and made available for compliance. • This is calculated on an aggregate basis for all sinking funds held by the board. 2007-08 Grants for Student Needs

  39. Schedule 5.6A – Land revenues • This is a new schedule that tracks details of land revenues reported in Schedule 5. • These amounts were previously included in DCC (Schedule 5.3), but are now shown in Accumulated Surplus Unavailable for compliance on Schedule 5 at item 4.7. • In-year revenues for current year land expenditures is populated from Schedule 3. Boards need to report the in-year revenues for unsupported past spending on land • Once disposed, the revenues recognized for the disposed asset is removed from this line. • Boards can also commit a portion of its accumulated surplus for land purchase which will increase this line. 2007-08 Grants for Student Needs

  40. Schedule 5.6B – Land deficit • This is a new schedule that tracks the capital deficit on land. • The difference between the book value of land (under TCA and Financial assets, if applicable) and the revenues recognized in Schedule 5.6A equals to the land deficit • This amount will be used in the Capital Analysis Template. 2007-08 Grants for Student Needs

  41. Prior Period Restatements 2007-08 Grants for Student Needs

  42. Prior Year DCC Restatement Prior period comparative numbers are required for the Statement of Financial Position, Statement of Operations, Statement of Cash Flow and Statement of Change in Net Debt. With the implementation of DCC as at September 1, 2010, boards will have the prior period comparative DCC figure for the Statement of Financial Position. For the other three schedules, the 2009-10 DCC amortization (or DCC revenue) is required to restate the comparative numbers. As this amount was not required for 2009-10 Financial Statements, it will be calculated based on a reasonable assumption to facilitate the required comparative reporting. 2007-08 Grants for Student Needs 42

  43. Statement of Financial Position: DCC The 2009-10 column on the Statement of Financial Position will be restated to show the DCC balance at August 31, 2010. Boards did not have DCC in their 2009-10 Financial Statements, but boards do know the DCC value at September 1, 2010. To make the restatement at August 31, 2010, boards will move an amount from accumulated surplus to DCC. For example, assume a board’s DCC balance at August 31/September 1, 2010 is $50M. $50M will be moved from the A/S to DCC in the 2009-10 column. 2007-08 Grants for Student Needs 43

  44. Statement of Financial Position: Deferred Revenue The 2009-10 column on the Statement of Financial Position will be restated to show the deferred revenue (DR) balance at August 31, 2010. In the 2009-10 Financial Statements, when a board sold real property, only the gain on sale went into deferred revenue. With the implementation of DCC, the prior capital contributions also go into DR (journal entries shown elsewhere in the slide deck). In 2009-10, boards recorded this amount in accumulated surplus (A/S) on Schedule 5, item 4.9 (Portion of proceeds of disposition related to the net book value of disposed assets). It will be assumed that these disposals were depreciable and fully supported by capital contributions*. This amount will be moved from the A/S to DR in the 2009-10 column. * Sector-wide, this is a reasonable assumption. Please call the Ministry for guidance if this is a materially different case for your board. 2007-08 Grants for Student Needs 44

  45. Statement of Financial Position: Deferred Revenue For example, assume amount on Schedule 5, item 4.9 in 2009-10 equalled $3M. $3M will be moved from the A/S to DR in the 2009-10 column. 2007-08 Grants for Student Needs 45

  46. Prior Year DCC Restatement Calculation The DCC continuity is as follows: DCC at Sept. 1, 2009 + Revenue from Capital Wrap-Up (Note 1) - Disposals during 2009-10 - DCC revenue during 2009-10 = DCC at Aug. 31, 2010 Note 1: Since the capital wrap-up happened at August 31, 2010, this amount should not be included in the September 1, 2009 balance. It includes the additions made during 2009-10. 2007-08 Grants for Student Needs 46

  47. Calculation of Prior Period DCC Revenues For 2009-10, boards know their TCA amortization. Boards can also estimate the portion of the TCA that was supported by capital contributions (DCC) in 2009-10. To do this, the board would divide the September 1, 2010 DCC balance by the September 1, 2010 non-land TCA balance. The board would then multiply this percentage by the 2009-10 TCA amortization to estimate the 2009-10 DCC amortization. For example, assume the following information for a board: 2009-10 TCA amortization = $2,062,000 September 1, 2010 TCA balance (excluding land) = $51,500,000 September 1, 2010 DCC balance = $50,000,000 The percentage of TCA supported by DCC is calculated as $50,000,000/$51,500,000 = 97%. The estimated DCC amortization for 2009-10 is calculated as $2,062,000 x 97% = $2,000,000. This revenue will be included in the restated Statement of Operations. 2007-08 Grants for Student Needs 47

  48. Calculation of Prior Period DCC Revenues Assume this additional information: Revenue from Capital Wrap-Up in 2009-10 = $25,000,000 Disposals in 2009-10 = $3,000,000 The amount received for the Capital Wrap-Up in 2009-10 was a capital contribution representing current and prior period contributions; therefore, the amount was an addition to DCC in year of $25M. This revenue will be restated as an exclusion from the Statement of Operations since it will be in DCC. Depreciable real property disposed during the year totalled $3M, and it will be assumed that these disposals were fully supported by DCC*. That means that the board disposed of $3M of DCC in the year. The $3M DCC reduction caused an increase of $3M to deferred revenue. (The increase to DR has been explained onslide 44.) * Sector-wide, this is a reasonable assumption. Please call the Ministry for guidance if this is a materially different case for your board. 2007-08 Grants for Student Needs 48

  49. Prior Year DCC Restatement Calculation Using the example in the previous slides, one can extrapolate the opening DCC balance at September 1, 2009: DCC at Sept. 1, 2009 = DCC at Aug. 31, 2010 - Revenue from Capital Wrap-Up (assume $25M) + Disposals during 2009-10 + DCC revenue during 2009-10 = $50M - $25M + $3M+ $2M = $30M Therefore, the change in DCC from Sept. 1, 2009 to Aug. 31, 2010 is $20M. This will be used in the Statement of Cash Flow. 2007-08 Grants for Student Needs 49

  50. Statement of Operations Comparatives The 2009-10 column on the Statement of Operations will be restated to include the DCC revenue during 2009-10, and to exclude the revenues that were recognized for depreciable capital contributions. To make the restatement at August 31, 2010, boards will increase their DCC revenues, as calculated on the previous slide (ex. $2M). Boards will decrease their Provincial grants by the amount of their 2009-10 capital contributions (ex. $25M). 2007-08 Grants for Student Needs 50